Introduction
After careful consideration and digesting community feedback since the initial V2 article release, the Labs team has evolved how to launch the new V2 features and fees. As the Indigo DAO prepares to vote on the upgrade of the Indigo Protocol to V2, one key goal is to have a seamless and strategic transition from V1 while implementing the new parameters and fees as soon as possible. As with any major system upgrade, the transition phase can cause rippling effects on its market and user base. In an effort to mitigate any such ripple effects a gradual and deliberate rollout has been planned with an emphasis on the short-term and long-term changes that prioritize iAsset price pegs being restored on the AMM DEXs.
The Gradual Implementation Strategy
(Parameters will be voted on by the DAO roughly one week following the release of Indigo Protocol V2)
Maintenance Ratio
Ahead of the planned V2 upgrade, the DAO will be voting on the mission-critical V2 features including the Maintenance Ratio. This ratio is crucial as it determines the level of collateralization required for users to mint more iAsset on new or existing CDPs. By implementing this, the DAO can balance the need for stability with the usability of the protocol. At launch, this ratio should be higher in order to aid peg being regained and limit cheap leverage; that will disincentivize the minting of new iAsset debt until peg is restored for users under the MR threshold. This feature essentially acts as a debt mint limit in the system for some users until their CR is equal to or higher than the MR. Because of this, we can effectively lower the Liquidation Ratio for individual iAssets while increasing MR; lowering the risk of liquidation while preventing excessive debt minting.
Setting the Redemption Margin Ratio aka RMR
At the launch of V2, the Redemption Margin Ratio will be set equal to the LR or Liquidation Ratio. This alignment means that the price at which users can redeem iAssets is the same as the price at which these iAssets risk liquidation. This effectively disables the redemption feature at launch until the Indigo DAO determines an appropriate RMR based on the market dynamics post-V2 upgrade. While this might seem counterproductive, it’s important to introduce redemption cautiously and slowly as peg restabilizes to prevent a wave of redemptions taking place at time of V2 upgrade. This intentional approach will ensure the system is safeguarded from mass redemptions upon upgrade deployment. The RMR can of course be changed later by the DAO.
Interest Fee Mechanism
Perhaps the most significant change comes with the introduction of an interest mechanism. The Labs team feels that interest rates will be a crucial tool for peg management of iAssets and that it will provide a new revenue stream for the DAO to help fund various initiatives and other new features and mechanisms. Interest rates will begin low in order to reduce the barrier for entry, and will be applied to ALL CDPs. Interest rates will go into effect simultaneously with the V2 launch.
Summary
The V2 implementation strategy — encompassing the Maintenance Ratio, the setting of the Redemption Margin Ratio, and the introduction of an Interest Mechanism — has been designed not just for the smooth integration of new features but also for reinforcing the protocol’s resilience to handle the growth. With the benefit of now ~15 months of data from V1 of the Protocol, V2 introduces more mature and right-sized feature and fee structures. The initial conservative settings for these features for V2 — a higher Maintenance Ratio and an idle-state RMR feature — are strategic moves aimed at ensuring system stability and preventing major market disruptions during the transition phase.
As the Protocol gradually stabilizes, these parameters can be adjusted to more dynamic settings, guided by the collective insights of the Indigo DAO. The introduction of the feature/fee suite in V2 represents a significant innovation in the Protocol’s economic design, which should aid in maintaining pegs and also open up new avenues for DAO revenue generation.
Indigo Protocol V2 is poised to set another new standard in the DeFi space for how major upgrades can be executed with community involvement and careful planning. As we all step into this new era with V2, we hope that everyone will embrace the changes and agree with us that these changes are well structured toward a more balanced and sustainable future for the entire Indigo ecosystem!
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