⚓PID Failure Modes & Responses
How to react in different scenarios where the redemption rate is ineffective
Failure Scenarios
The following is a list of known PID failure modes and possible responses or fixes for each one of them. Note that in order to minimize the risk of the PID failing, governance should activate it only after the stableasset has a minimum, mandatory liquidity level on exchanges as well as plenty of users interacting with the system.
Market Manipulation
Although improbable (in case the PID is fed a TWAP feed for the stablecoin market price) after a stablecoin gets to scale, market manipulation is always a concern that can make the PID controller destabilize the system. In this scenario, governance has two options: pause the controller until there is more liquidity on exchanges or globally settle the system.
Lack of Liquidity on Exchanges
Governance must ensure at all times that there is enough stablecoins on exchanges vs stablecoins locked in other applications. This is why governance must specify two KPIs:
An absolute minimum amount of liquidity that must be on the exchanges from which the PID is pulling market price data
A minimum percentage of stablecoins out of the total outstanding supply that must be at all times on exchanges vs the percentage of stablecoins locked/used in other applications
In case the stablecoin liquidity drops below any of the two limits specified above, governance is advised to pause the PID and restart it only after the liquidity improves.
NOTE: lack of liquidity will increase the risk of market manipulation (as seen in Proto RAI).
Skewed Incentives
In case governance sets up a system to incentivize the growth of a stablecoin, these incentives may interfere with the PID's and cause the system to become unstable. In this scenario, governance should look at the following solutions:
Offer less growth incentives over a longer period of time
Pause the controller until the growth campaign/s end
Completely stop growth campaigns
Find a way to incentivize market making alongside growth
Negative Feedback Turning Positive
There are cases when, even if there is no market manipulation, no skewed incentives and there's plenty of liquidity on exchanges, the market might not react to the redemption rate incentives and the redemption price would continue to go in a single direction for a long period of time.
In this scenario there are three possible solutions:
Temporarily pause the PID and wait for the market to come closer toward redemption
Temporarily pause the PID and build a second controller that modifies the stability fee. In this scenario the redemption rate controller would only be used when the market price is consistently above redemption and the stability fee controller would be used when the market price is below redemption. Choosing this option means that governance may need to have long term control over the TaxCollector and there will need to be more governance over rate setting in general.
Trigger global settlement and allow the system to shut down using the redemption price.
Failure Prevention
In order to make market manipulation as expensive as possible, we propose the following liquidity thresholds for the H2O stablecoin:
There must be at least $2M worth of liquidity on the exchange/s that the H2O oracle is pulling a price feed from
At least 3% of the H2O supply must be on the exchange/s from which the system is pulling a price feed from
In addition to this, the PID controller should not be set to its full force right when H2O is launched as it may destabilize the system.
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