Treasury Backed Vaults

Treasury Backed Vaults: A CDP vault Savior module which automatically adds more collateral to a position when a liquidation is processed to prevent that liquidation. Funds for collateral can be easily pulled from a DAO treasury or elsewhere.

Overview

After research and a proposal made in February by the Arbitrum DAO Treasury Sustainability Group regarding an ARB-backed stablecoin that can avoid liquidations, Open Dollar has completed the first stage of research and a prototype of the idea with our own CDP model. Equipped with our unique CDP design, Open Dollar can add a “savior module” to protect against liquidations by automatically increasing the collateralization ratio through adding more ARB to a position. Open Dollar already accepts ARB as collateral so no further changes are required. 

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Motivation

Open Dollar has already built, audited, and launched OD, a CDP-backed stablecoin on Arbitrum, and would like to expand its capabilities to Arbitrum DAO. The OD stablecoin is already backed, in part, by ARB as it is already an enabled collateral type. As Arbitrum DAO has reiterated in multiple proposals about treasury management and diversification, they are interested in gaining exposure to stablecoins and making long term illiquid investments which might be better facilitated through stablecoins.

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By using a DAO-controlled, ARB-backed stablecoin, Arbitrum DAO can reduce the sell pressure it typically creates by giving ARB-backed stablecoins as grants instead of ARB itself, or use that capital for other investments. This way the DAO is granting fixed (rather than fluctuating) value and still experiences the upside in ARB. Given Open Dollar’s expertise with this particular stablecoin design and its singularity in the Arbitrum ecosystem, Arbitrum DAO could gain safe and scalable access to stablecoins with minimal investment through depositing in Open Dollar instead of building an entirely new stablecoin.

Implementation

Open Dollar integrates Treasury Backed Vaults into the existing stablecoin protocol as a Savior Module. The Savior Module simply adds an additional step between a vault being marked for liquidation and becoming liquidated. The module automatically pulls more ARB tokens directly from the treasury, adds them to the collateral of the position until it is raised above the liquidation threshold, and completely prevent liquidations from occurring. The module contract would be given an allowance of ARB tokens by the Treasury to spend, allowing the Arbitrum DAO to completely control and update the bounds of how many tokens can be pulled from the treasury.

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The current debt ceiling on Open Dollar for minting the OD stablecoin against ARB tokens is 5,000,000 OD. This limit can be raised by the Open Dollar DAO.

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As outlined in the research and proposal by the Arbitrum DAO Treasury Sustainability Group, if ARB’s price increases dramatically, collateral can automatically be withdrawn from the CDP and sold, financing the buyback of the stablecoin. 

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Open Dollar's stability system keeps the ARB-backed stablecoin at or floating near its $1 peg. The Arbitrum Treasury can then retain upside potential on ARB while giving out grants and making investments.

Future Research and Next Steps

The Open Dollar team intends to explore several important areas, among them: the impacts on the long-term stability of OD in relation to a DAO minting large amounts of OD backed by ARB, especially referring to certain black swan events. Researching what the optimal interest rate and collateralization ratio should be to ensure scalability of the protocol and to maintain balance and fairness. It's important that the rates be transparent and attractive. Finally, a research project should be started to build a special vault type that is dedicated to the Arbitrum DAO, enabling the DAO to issue OD against the DAO’s ARB. This could implemented simply through a special wrapped ARB token vault type, where only Arbitrum DAO has the ability to access the wrapping contract.

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Open Dollar will invest in audits of the Treasury Backed Vaults.

Summary

With an Open Dollar custom-built Treasury Backed Vault, the Arbitrum DAO would avoid paying premiums to builders, more safely access the capital in the treasury, deminish sell pressure through ARB grant programs by using stablecoins in their place, and hugely lower the risk of using CDPs.

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