---
# System prepended metadata

title: 'MIP103: The Stability and Liquidity Scope Framework'

---

# MIP103: The Stability and Liquidity Scope Framework

## Preamble

```
MIP#: 103
Title: The Stability and Liquidity Scope Framework
Author(s): @rune
Contributors:
Tags: endgame, scope-framework, constitution-mip-set
Type: General
Status: Accepted
Date Proposed: 2023-02-06
Date Ratified: 2023-03-27
Dependencies:
Replaces:
Ratification Poll URL: https://vote.makerdao.com/polling/Qmbndmkr
Forum URL: https://forum.makerdao.com/t/mip103-the-stability-and-liquidity-scope-framework/19675
```

## Sentence Summary

The Stability and Liquidity Scope Framework provides the core principles, rules and regulation regarding Dai stability, peg and the liquidity and minimum returns of collateral.

## Paragraph Summary

MIP103 establishes the Stability and Liquidity Scope Framework. This includes Asset Liability management and Dai Savings Rate and Stability Fee Base Rate adjustments. All rules for Stability and Liquidity for the DAO are contained in this framework, including the procedures of the The Stability and Liquidity Scope Framework Advisory Council.

## Component Summary

**MIP103c1: Preamble**
Contains the Preamble to the Stability and Liquidity Scope Framework.

**MIP103c2: Scope Framework Articles**
Contains the Scope Framework Articles for the Stability and Liquidity Scope Framework.

**MIP103c3: Stability and Liquidity Facilitators**
Contains details on the Stability and Liquidity Facilitators for the Stability and Liquidity Scope Framework.

**MIP103c4: Scope Framework Articles Modification Subproposal Process**
Contains details of how the Stability and Liquidity Scope Framework can be amended.

## Motivation

The Stability and Liquidity Scope Framework is necessary to define the Scope as per the Maker Constitution.

## Specification

### MIP103c1: Preamble

The Stability and Liquidity Scope Framework provides the core principles, rules and regulation regarding Dai stability, peg and the liquidity and minimum returns of collateral. This includes Asset Liability management and Dai Savings Rate and Stability Fee Base Rate adjustments.

### MIP103c2: Scope Framework Articles

#### 1: The Stability Advisory Council

The specifications of the Stability Advisory Council are contained in *Decentralized Collateral 1*, and covers, in addition to its other tasks, advisory work related to the improvement of the elements in the Stability and Liquidity Scope.

#### 2: The Implementation of the Stability and Liquidity Scope Framework through Software

The Stability and Liquidity Facilitators must in collaboration with the CVC Subcommittees, periodically review possibilities of integrating DAO toolkit innovation into the processes and content of the Scope Framework.

#### 3: The general Asset-Liability Management model

##### 3.1: The general Asset-Liability Management model definition

The ALM model governs the overall duration risk of the Dai collateral portfolio, and its contents are implemented practically in the Decentralized Collateral Scope Framework and the Real World Asset Scope Framework. The high level requirements specified in the sections act as the boundaries for how the Dai collateral portfolio must behave. Broadly, there are two categories of collateral in the Asset-Liability Management model: Stability Collateral, and Yield Collateral. Stability collateral are stablecoins and highly scalable and liquid assets that are used directly by the Maker Protocol to support the Dai peg and the Dai Savings Rate in the market place, while Yield Collateral are low risk, but less liquid assets used to generate yield above the Dai Savings Rate as surplus for the Maker Protocol.

##### 3.2: ALM Rules for Stability Collateral

Stability Collateral covers a few types of stablecoins and RWA exposure that the Maker Protocol interacts directly with, based on the exact specifications provided in this section. The purpose of Stability Collateral is to directly enforce the Dai peg in the market place, and to provide very low risk, scalable collateral deployment opportunities that enable the Maker Protocol to maintain the Dai Savings Rate regardless of the level of incoming Dai demand.

* **3.2.1:** Cash Stablecoins are stablecoins that have very high liquidity and are used as a direct target for the Dai peg. As a result the Maker Protocol must maintain a large amount of Cash Stablecoins available for direct on-chain exchange with Dai for minimal fees or spread.
  * **3.2.1.1:** The ALM model targets an exposure to Cash Stablecoins equivalent to 10% of the Dai Collateral Portfolio.

---

* **3.2.2:** Liquid Reserve Collateral is scalable collateral that provides yield and can be converted to Cash Stablecoins within a short amount of time, and at very large throughput.
  * **3.2.2.1:** When exposure to Cash Stablecoins is in excess of the exposure target defined in *3.2.1.1*, the excess Cash Stablecoins must be converted to Liquid Reserve Collateral through an automated smart contract.
  * **3.2.2.2:** When exposure to Cash Stablecoins is below the exposure target defined in *3.2.1.1* any available Liquid Reserve Collateral must be converted to Cash Stablecoins at a high throughput based on an automated smart contract.

---

* **3.2.3:** The Stability Collateral Benchmark Yield is equivalent to the average yield, weighted proportionally to target relative exposure, of the Liquid Reserve Collateral.

---

* **3.2.4:** Secondary Stablecoins are stablecoins that do not have enough liquidity to serve as Cash Stablecoins, but are strategically selected for incubation and subsidy through direct exposure as Stability Collateral in order to promote their adoption and maintain them as potential fallback solutions in case of risk to the Cash Stablecoins.
  * **3.2.4.1:** Secondary Stablecoins cannot exceed 10% of the Dai Collateral Portfolio, and their exposure must be restricted unless they provide a yield competitive with the Stability Collateral Benchmark Yield.

##### 3.3: ALM rules for Yield Collateral

Yield Collateral is the portion of the Dai Collateral Portfolio that is not directly used to enforce the Dai peg, and can instead be deployed to generate higher yield that results in a surplus to the Maker Protocol. Yield Collateral have multiple tiers broken down based on their duration. The ALM rules are designed so that it is always possible to substitute a longer duration asset with a shorter duration asset.

* **3.3.1:** The ALM model targets an exposure of at most 80% of the Dai Collateral Portfolio to collateral of ALM Tier 1 or higher.
  * **3.3.1.0:** *If all higher tiers are at their targeted exposure, the allocation that is exclusively available for tier 1 collateral is 15%.*
  * **3.3.1.1:** ALM Tier 1 collateral must be repayable as Dai within at most 2 weeks with slippage of at most 5% when required by the ALM model.
  * **3.3.1.2:** ALM Tier 1 collateral must be repayable as Dai within at most 6 months with no slippage when required by the ALM model.

---

* **3.3.2:** The ALM model targets an exposure of at most 65% of the Dai Collateral Portfolio to collateral of ALM Tier 2 or higher.
  * **3.3.2.0:** *If all higher tiers are at their targeted exposure, the allocation that is exclusively available for tier 2 collateral is 15%.*
  * **3.3.2.1:** ALM Tier 2 collateral must be repayable as Dai within at most 1 month with slippage of at most 5% when required by the ALM model.
  * **3.3.2.2:** ALM Tier 2 collateral must be repayable as Dai within at most 6 months with no slippage when required by the ALM model.

---

* **3.3.3:** The ALM model targets an exposure of at most 50% of the Dai Collateral Portfolio to collateral of ALM Tier 3 or higher.
  * **3.3.3.0:** *If all higher tiers are at their targeted exposure, the allocation that is exclusively available for tier 2 collateral is 37.5% of the Effective Dai Collateral Portfolio.*
  * **3.3.3.1:** ALM Tier 3 collateral must be repayable as Dai within at most 6 - 12 months, with an average of 9 months, with no slippage, when needed by the ALM model.

---

* **3.3.4:** The ALM model targets an exposure of at most 12.5% of the Dai Collateral Portfolio to collateral of ALM Tier 4 or higher.
  * **3.3.4.0:** *As there are no higher tiers, the allocation that is exclusively available for ALM Tier 4 collateral is 12.5% of the Effective Dai Collateral Portfolio.*
  * **3.3.4.1:** ALM Tier 4 collateral must be repayable as Dai within at most 1 - 3 years, with an average of 2 years, with no slippage, when needed by the ALM model.

---

* **3.3.5:** *Yield Collateral Benchmark Yield*. Yield Collateral is highly diverse and is deployed in many different ways. The Yield Collateral Benchmark Yield is a tool for Maker Governance to control the overall risk of Yield Collateral through a single, simple parameter that influences various incentives and rules throughout the Scope Frameworks.
  * **3.3.5.1:** Initially, the Yield Collateral Benchmark Yield is based on the 3-month US Government Treasury Bill. The standardized specification of the Yield Collateral Benchmark Yield is contained in *3.3.5.1.1A*, and this is the parameter that will be used in practice as the Yield Collateral Benchmark Yield. If the standardized specification deviates significantly from its intended value, it can be changed through the Weekly Governance Cycle by a proposal from the Stability and Liquidity Facilitators, the Decentralized Collateral Facilitators, or the Real World Asset Facilitators.
    * **3.3.5.1.0:** *This element is meant to be improved to become a long term self sustainable, automated algorithm based on both endogenous values and external oracle input over time.*
    * **3.3.5.1.1A:**
¤¤¤
The standardized specification of the Yield Collateral Benchmark Yield is:
4.7%
¤¤¤

**3.4: Artificial Intelligence and Machine Learning Application in ALM Model**

Artificial intelligence and machine learning have a potential to support the mitigation measures for the ALM model targets. Following the succesful deployment of *MIP106 Section 10, the Core Artificial Intelligence System (CAIS)* a well-prepared further application of artificial intelligence, machine learning, deep learning and big data analytics can have further positive impact, especially on the following risk management areas: credit, market, liquidity, operational risk, and other ALM model related areas.
* **3.4.1** Careful implementation of new AI and ML tools, combined and compared with the standard ALM model tools and techniques which Maker already uses:
  ¤¤¤


#### 4: The Dai Savings Rate and Stability Fee Base Rate

##### 4.1: The Dai Savings Rate and Stability Fee Base Rate Definition

The Dai Savings Rate is a yield available to Dai holders that deposit their Dai into the Dai Savings Rate smart contract. The Stability Fee Base Rate is a global variable that is applied on top of the stability fee of all Variable Rate Core Vaults, and used to fund the Dai Savings Rate.

##### 4.2: The Dai Savings Rate parameter

During normal conditions the Dai Savings Rate is set as 90% of the Stability Collateral Benchmark Yield specified in *3.2.3*.

##### 4.3: Dai Savings Rate and Stability Fee Base Rate changes in demand shocks

The Stability and Liquidity Facilitators, Decentralized Collateral Facilitators and the Real World Asset Facilitators can use the urgent governance cycle to propose changes to the Dai Savings Rate and the Base Rate in case of risks to the peg stability of Dai.

#### 5: The long duration asset haircut model and process

##### 5.1: The long duration asset haircut model and process

If there is significant risk to the Dai peg, the Stability and Liquidity Facilitators, Decentralized Collateral Facilitators and Real World Asset Facilitators may propose a fire sale to Maker Governance using the urgent governance process. A fire sale sells long duration assets at a potential slippage and haircut. The expected haircut, and other context including the current risk to the Dai peg, must be clearly explained as a part of the decision making process.

#### 6: Smart Burn Engine management

##### 6.1: Smart Burn engine definition

The Smart Burn engine is the smart contract system that uses excess Dai in the Surplus Buffer to improve the liquidity of MKR to boost the its ability to act as a backstop for Dai and improve the Stability of the Dai Stablecoin. It initially is implemented through the Elixir Module defined in *Protocol Engineering 5.2.1*.

##### 6.2: Smart Burn Engine parameters

The amount of Dai in the Surplus Buffer that causes the Smart Burn Engine to activate, and the rate at which it uses the Dai to improve MKR liquidity, are determined by two parameters defined by the following subelements.

* **6.2.1:** The Surplus Buffer Excess Level determines the amount of Dai necessary for the Smart Burn Engine to activate.
  * **6.2.1.1:** The Surplus Buffer Excess Level is 50 million Dai.
* **6.2.2:** The Rate Of MKR Accumulation determines how much Dai is used to accumulate MKR per unit of system time. Since the Elixir Module pairs the accumulated MKR with Dai directly from the Surplus Buffer, the effective rate of spending from the Surplus Buffer is approximately twice the Rate Of Accumulation.
  * **6.2.2.1:** The Rate Of MKR Accumulation is 100 million Dai per year.