Hedging protocol exposure during LB3

TL;DR:

The DAO should commit 10,000 OVL tokens (0.125 % of token supply) to taking the other side of any imbalanced market where funding is greater than 0.75% per day. If the DAO wins OVL on these offsetting trades, the extra OVL will be burned.

This will

1. reduce funding payments for users;
2. insure the protocol against inflation risk.

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Long version:

A large open interest imbalance (everyone on a certain market is long, say) represent risk for the protocol, because the market could pump and everyone wins at the same time, increasing the currency supply and diluting passive OVL holders.

The original risk framework directly addresses this in a brilliant way. It was built up around basis trades offsetting protocol risk when there were large open-interest imbalances.

However, there were some technical issues with implementing the basis trade, and it has not yet been fully coded into the protocol. Rather than wait for perfection, the team has wisely decided to launch and upgrade the airplane while it is flying.

These imbalances can be handled in a different way for the time being, so that the risk of a large print of OVL is completely mitigated. This is particularly important in the early days of the protocol, when people are just learning about it. We need to protect the little plant in its earliest days, when it is most vulnerable to being stepped on.

Thus, we propose that the DAO should commit 10,000 OVL tokens, which is 0.0125% of the total token supply, to taking the opposite side of any markets where funding is larger than 0.75% per day (i.e. 273% per year), with the goal of bringing funding down to 0.75% or less.

If the DAO loses, then it does not have 10,000 tokens anymore, but fewer. If the DAO wins, it will have 10,000 + X tokens. The DAO will agree to burn the X tokens to assure that the currency supply does not change.

In this way, the currency supply of OVL will be protected from large shocks in the early days. It may go down quickly, but it will not go up quickly. The DAO and all passive OVL holders should approve of this.

Furthermore, this proposal will also improve UX by lowering funding rates. Several users have already complained about losing on their trades even though their trades were good. This happens because of large funding payments.