September 24, 2020
Blair Bingham
Thought Leadership

Introducing ArCoin Keepers: A MCD Liquidity Enhancement

In my last blog post I discussed ArCoin’s use case as a bridge between real world financial assets and DAI, Maker’s decentralized stablecoin. As a recap, ArCoin is a digital share of the Arca U.S Treasury Fund issued through the blockchain. Although it served as a provoking theoretical piece, it is time to further discuss ArCoin’s implementation plan to fit into Maker’s Collateralized Debt Positions (CDP). Below I will delve into our proposal to be included as collateral for MCD and the proposed collaboration which will enable a ‘40 Act digital security (ArCoin) to function seamlessly in a decentralized ecosystem.

As part of Maker’s smart contract, liquidations occur when collateral backing a DAI denominated loan falls under the required collateralization ratio. One of the value propositions of Arca Labs’ proposal to use ArCoin for DAI collateral is the ability to offer a non-volatile asset reducing the risk of a CDP liquidation. In fact, the likelihood of Maker’s smart contract liquidating an ArCoin CDP is extremely low as ArCoin is backed by U.S. Treasuries and equivalents, which are traditionally limited volatility instruments. In addition, ArCoin offers holders transparency surrounding real time Fund auditing. Regardless of ArCoin’s benefits, Arca Labs believes it is important to plan for any liquidation scenario to protect the integrity and functionality of the Maker system.

ARCOIN KEEPERS OVERVIEW

In a Maker CDP liquidation scenario, Keepers play an important role by ensuring efficient and quick liquidation of undercollateralized vaults, thus limiting the price volatility of DAI.

We advocate implementing a unique process in the unlikely event of a liquidation of ArCoin CDPs on Maker’s platform. Arca Labs has proposed ArCoin Keepers to facilitate the liquidation of CDPs. ArCoin Keepers, under our proposal, are individuals or organizations that have been verified in the ArCoin portal and who can facilitate liquid markets within the Maker DAO ecosystem if an edge case does occur.

Potential ArCoin Keepers will be Maker community members that are approved by a transparent and community driven governance process. Working within Maker’s forum, individuals interested in becoming ArCoin Keepers will volunteer to be onboarded. ArCoin Keepers will then be required to go through a whitelisting process by registering for and undergoing AML/KYC at the Arca Labs Portal. Arca Labs will support the onboarding of initial Keepers to smooth this process and ensure successful completion.

THE LIQUIDATION PROCESS

As with any DAI collateral, ArCoin’s collateralization ratio will be determined by the community. Due to the historic performance of U.S. Treasuries, this collateralization ratio will most likely fall in line with the current stablecoin collateralization ratios. Since ArCoin Keepers would have previously been onboarded, the flow during a liquidation under our proposal would be the following:

  1. In the (extremely unlikely) event an ArCoin CDP drops below the collateralization ratio, the liquidation penalty (approx. 13%) would be applied and the collateral (ArCoin) would be put up for auction.
  2. The collateral (ArCoin) would then go to the highest ArCoin Keeper’s bid of DAI. 
  3. If an ArCoin CDP is liquidated, the ArCoin liquidator will receive ArCoin sans original purchasing costs.


This liquidation process will, in our theoretical edge case, ensure that the price of ArCoin and DAI remain aligned with their intrinsic values and that liquidation is smooth and effortless.

We are looking forward to collaborating with the Maker community on the liquidation process outlined above. Having already spoken with members of Maker’s community in support of our MIP6 brief we believe this process is the best approach to integrating real world assets into Maker’s decentralized system. 


Feel free to follow our progress approving and onboarding ArCoin as MCD and, as always, contact us with any questions at support@arcalabs.com


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