This post is intended as a conversation starter and a temperature check on the relative weightings of the currencies in the capital pool and how the community sees transitioning to a longer-term state.
As a disclaimer, the post is a solo effort, so doesn’t in any way represent team views - in fact I’d encourage other full time contributors to lay out their thoughts below.
There’s been a few conversations about this, but no clear way forward has been established yet. With v2 approaching, this seems like an important topic to discuss, and given the widely differing views so far, I believe it’s worth having this conversation as early as possible.
Keen to hear whatever thoughts the community have.
While initially the majority of our covers were ETH denominated, this has moved to stables over time. About 75% of our cover value, or about ~$138m of exposure now is denominated in DAI (and until the recent ETH price rally, it was closer to 80-85%). Meanwhile DAI assets in the capital pool are ~$10m (under 5% of total capital pool), mostly converted in anticipation of FTX claims.
This situation could leave us exposed in large claim events that hit DAI liabilities, especially ones that lead to significant ETH price drops & force us to liquidate significant amounts of ETH at low prices to pay claims.
On the other hand, the significant size of the capital pool compared to exposure mitigates this somewhat, and a good portion of the membership base enjoy having ETH exposure as a feature of their position in NXM.
The mutual should eventually be operating at a better level of capital efficiency, with MCR driven entirely by cover amounts, and holding the amount of capital necessary to back claims.
In order to do back claims safely and avoid compounding potential large claim events when operating at maximum capital efficiency, we need the currency denominations of the assets backing the (probability-weighted) liabilities to largely match each other - this is standard risk management practice in insurance world.
Topics for discussion
Here are some topics for debate:
- Should we be selling ETH and transitioning into stables now?
- If not now, over what timeframe, or based on what triggers?
- Should we be targeting a specific ETH price for conversion?
- At what level of capitalisation do we feel uncomfortable with the current situation?
Some loose thoughts from me:
Long-term we have to be currency matched, so something has to happen eventually. I’m also sure that the community & tokenholders are largely bullish ETH, so selling in the middle of a bear market is unlikely to be met with huge support.
Therefore, a plan for increasing currency matching based on market ETH price, and possibly, levels of capitalisation, might be a good way to go.