DIP-8: Prevent DEUS Hyperinflation and Introduce vDEUS Staking at 10/20% APR

In this revised proposal we suggest to modify the vDEUS redemption mechanism in order to prevent an impeding DEUS hyperinflation. All ecosystem participants will benefit from this proposal in the long run and get their originally promised returns.

The current trajectory and why it will almost certainly lead to loss of funds for redeemers: Redeemers received an instant payout of approx. $0.27 in USDC and a voucher (vDEUS) valued at approx. $1.8. Due do the high dollar value of the vDEUS part, people will market sell their vDEUS and create a negative feedback loop. As a result, the price of DEUS crashes and along with the tiered structure of cliff and vest periods, it will cause exponential inflation over time. With a hyperinflation, redeemers, especially in tranche 2, 3 and later have a high probability of not being able to exit their vDEUS positions at all, with tranche 1 suffering substantial losses. The underlying reason for this is that $27m worth of IOUs got issued with less than $2m of total DEX liquidity, which will shrink even more shortly before the vesting would start, due to LPs pulling their funds to preserve their capital.

The first version of this proposal took the TWAP from March 1st 2022 to May 15th 2022, which was $560.94, and applied a 20% discount to arrive at $448.75. After community feedback we are adjusting the price to $250, which seemed to resonate well with most people.

The vDEUS redemption will be based on that price and payouts will only trigger in incremental steps (fixed % of total DEX liquidity / day) after $250 has been reached, premature penalty-based payouts won’t be possible as those only enable negative feedback loops. Premature conversions from vDEUS to DEI/bDEI also won’t be possible, as those only shift the problem back and undo all the redeeming. The cliff and vest periods will no longer exist.

Once the $250 mark has been exceeded, DEUS equal to 2% of total DEX liquidity (only DEUS liquidity, not including the secondary token) will be proportionally released to all redeemers each day until an equivalent of ~$27m worth of DEUS (<100,000 DEUS) has been minted, which we estimate to take around 3-6 months after exceeding the threshold price. The payouts will only happen while the price is above $250 and will pause again should the price go below.

In a hyperinflation we’d experience a 5-20x increase in DEUS supply, liquidity drying up and virtually all redeemers not being able to unwind their vDEUS positions. As a result of that, systemic DEI instability & infeasibility will be the consequence, due to the fact that a DEI should always be redeemable for 80% USDC and 20% DEUS, but in a DEUS hyperinflation there would be no liquidity left and trust will be gone (even if that ratio is adjusted). With the proposed approach, only <100,000 new DEUS get minted and redeemers will receive their promised ~$1.8 return but over a more stretched-out time-horizon.

vDEUS staking: Redeemers will be able to lock their vDEUS at 10% APR or 20% APR by locking their vDEUS for 6 or 12 months, respectively, the interest is paid in DEUS. In any case, once the price reaches the $250 threshold price, the NFT can be withdrawn from the staking contract ahead of the lock period, in order to be able to start the redemption process. As a safety measure, there’s a max cap of DEUS per day which can be minted, which translates to the APR being promised at a minimum price of $40 per DEUS. In case DEUS go below that price, the APR will linearly decrease with price. This is to ensure to not cause hyperinflation with the yield program.

In case the $250 target cannot be reached, there will be two exit opportunities at 6 and 12 months.

Exit Opportunity 1 (6 months): If the $250 threshold isn’t reached within 6 months following the acceptance of this proposal, people are allowed to:

• claim back their original DEI amount at a 25% penalty and loss of airdrop privileges (paying back USDC and burning vDEUS required)
• or claim back their original DEI as 210-days locked bDEI at no penalty and no loss of airdrop privileges (paying back USDC and burning vDEUS required)
• or convert their vDEUS into 4-year locked veDEUS at a 1:1 ratio of their vDEUS value divided by DEUS market price at time of redemption and no loss of airdrop privileges

In all cases re-entry into vDEUS won’t be possible anymore.

Exit Opportunity 2 (12 months): If the $250 threshold isn’t reached within 12 months following the acceptance of this proposal, people are allowed to:

• claim back their original DEI without a penalty and no loss of airdrop privileges (paying back USDC and burning vDEUS required)

Re-entry into vDEUS won’t be possible anymore.

If the DeFiX (v3) infrastructure isn’t released before 30th November 2022, the 12 month terms start to apply at 6 months (request by Sterling).

Permanently Open Partial Exit Opportunities:

• Redeemers can at any time claim back 10% of their DEI by sending back 10% of the USDC and giving up 10% of their vDEUS claim
• Redeemers can convert 20% of their vDEUS dollar value into 4-year locked veDEUS at anytime

After the $250 threshold has been exceeded and sustained for 3 consecutive days, it triggers the closure of both exit options and a countdown of 180 days begins, after which the full outstanding vDEUS debt must be paid. If the debt cannot be completely paid out within those 180 days, people will have the right to claim back the delta of unpaid DEI at a 1:1 ratio at which it was redeemed.

There was clear feedback from the community and the Deus team that vDEUS owners should get a fair say in this proposal, along the actual governance token veDEUS. The team has already implemented vDEUS voting into snapshot.org.

The voting weight is calculated as follows: $16.26m worth of DEI has been redeemed, which we will value at $1 in this proposal, furthermore the USDC payback won’t be subtracted, both in favor of vDEUS voters. The most recent closing price of DEUS was $64.19, which leads to 252998 DEUS. With this proposal vDEUS is locked for 1 year as opposed to 4 years with veDEUS, so a reduction of voting weight to ¼ has to be applied. This leads to 100% of vDEUS representing 63249 veDEUS votes. This proposal exists twice on snapshot.org, once for vDEUS and once for veDEUS. The values for veDEUS and vDEUS will be different but they will be manually normalized so a vote count can be made.

In all cases, a dilution protection of any new future inflation must be guaranteed to all veDEUS holders.

Finally, we also request the implementation of better risk management by Deus Finance to increase trust in the decision-making process and prevent future hacks or unsound designs. For example, a council of at least 4 independent people with a 4 out of 4 approval requirement could be formed, which must check all new products or changes for security implications (except in case of emergencies). In all cases it must be 100% transparent, verifiable and public. After the acceptance of this proposal Deus Finance has to make a suggestion on how it will implement better risk-management, while it must consider ideas from the community and create a poll on all options. After voting is completed, Deus Finance must implement the changes.

Tl;dr

• change from TWAP to a price of $250
• Daily drip of 2% of total liquidity once $250 is reached
• no cliff/vesting periods
• 100% dilution protection for veDEUS holders
• Airdrop allocation to redeemers
• Adding a risk-management council
• added exit options at 6 months & 12 months
• added permanently open partial exits without penalties
• adding fairly weighted vDEUS vote exclusively for this proposal

To give meaning to this vote and in an attempt to gain back confidence from the community, the terms of this proposal must be upheld. In case of an unexpected disadvantageous future change that takes away options from any participant, participants must be granted a penalty-free exit for their original DEI amount (paying back USDC and burning vDEUS required). Positive additions that don’t change any terms of currently available options won’t be labeled as “disadvantageous”. Example: Deus Finance gets outside funding and offers to buy back all vDEUS (option to user). A change like this is additive and doesn’t negatively impact anyone.

Disclosure: The author of this proposal has redeemed around 110,000 DEI in the first tranche. This proposal doesn't represent investment advise in any way, shape or form.