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StableSims: Optimizing MakerDAO Liquidations 2.0 Incentives via Agent-Based Modeling

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  • Andrew Kirillov
  • Sehyun Chung

Abstract

The StableSims project set out to determine optimal parameters for the new auction mechanism, Liquidations 2.0, used by MakerDAO, a protocol built on Ethereum offering a decentralized, collateralized stablecoin called Dai. We developed an agent-based simulation that emulates both the Maker protocol smart contract logic, and how profit-motivated agents ("keepers") will act in the real world when faced with decisions such as liquidating "vaults" (collateralized debt positions) and bidding on collateral auctions. This research focuses on the incentive structure introduced in Liquidations 2.0, which implements both a constant fee (tip) and a fee proportional to vault size (chip) paid to keepers that liquidate vaults or restart stale collateral auctions. We sought to minimize the amount paid in incentives while maximizing the speed with which undercollateralized vaults were liquidated. Our findings indicate that it is more cost-effective to increase the constant fee, as opposed to the proportional fee, in order to decrease the time it takes for keepers to liquidate vaults.

Suggested Citation

  • Andrew Kirillov & Sehyun Chung, 2022. "StableSims: Optimizing MakerDAO Liquidations 2.0 Incentives via Agent-Based Modeling," Papers 2201.03519, arXiv.org.
    • Handle: RePEc:arx:papers:2201.03519
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