BakerDAO Explanation III: Stability Fee(August 13, 2021)
Friday, August 13, 2021
What is the Stability Fee?
The Baker Protocol collects a Stability Fee on Bai that is generated from Baker Vaults. It is a variable-rate fee that changes when BKR token holders votes on proposals put forth by BakerDAO Risk Teams.
What is the purpose of the Stability Fee?
The Stability Fee is a Risk Parameter designed to balance the supply and demand of BAI.
Why does the Stability Fee Change?
The Stability Fee for each Vault type changes as a result of the decisions of BKR token holders who govern the protocol. These decisions are based on the recommendation of Risk Teams who perform risk assessments on Collateral used in the system. The Risk Teams may update their proposed Stability Fee when something fundamental changes about the underlying asset or the system as a whole.
When do I have to pay the Stability Fee?
Every time you return BAI to the Vault to repay the debt, you will be charged a fee that is a percentage of the amount of the returned BAI, which can be paid by BAI.
Do I have to pay the new fees on old debt in the case of a Stability Fee change?
No. Stability Fees are never applied retroactively. After a fee change, users will accrue a Stability Fee at the new rate from that point forward.
How is the Stability Fee calculated?
The stability fee is calculated based on compound interest. It is priced with BAI's annualized interest and can be paid with BAI. The stability fee is calculated because the Vault can borrow loans and calculate small amounts of interest very flexibly.
For example
assumed:
The Vault debt is 1000 BAI
Vault creation time is 30 days
The stable rate is 5%
User repays 50 BAI debt
Simple calculation
The stability fee generated by the Vault can be simply estimated on a daily basis:
Accurate calculation
Stability fee = ((BAI loaned*(1+annualized stability fee rate))^(Debt duration calculated in days/365))-BAI loaned
Now we have a stable fee denominated in BAI.
How does the stability fee adjustment affect interest calculation?
You can use the following simplified formula to calculate the stable fee payable under different rates:
Stability fee = ((BAI loaned*(1+annualized stability fee rate))^(Debt duration calculated in days/365))-BAI loaned
With a 31-day debt of 10,000 BAI and a stable rate of 5.0%:
The rate is 10.0%:
Is there a limit to the adjustment range of the stability fee?
The risk team will propose the range of stabilization fee adjustments (change rate, anchoring difference, number of samples, etc.), and the proposal will be approved by the BKR token holders.
As a Vault holder, how to reduce the risks brought by changes in fees?
Keep an eye on the stable fee adjustment proposal, corresponding to the management of treasury positions and interest costs.
You can look for hedging products for term loan interest in the market.
The best risk management is to participate in the governance process and vote.
What happens if the fee change proposal is not passed?
If the market is irrational for a long time, the price of BAI continues to fall, and the rate change proposal fails. The final guarantee of BakerDAO is global liquidation, which is used to return each BAI holder's 1:1 equivalent mortgage assets.
The voting mechanism itself, as a policy adjustment tool, is the main way of community management. There is no black-box operation and backdoor, and no one can unilaterally change the risk parameters in the system.
How often do Stability Fees change?
Stability Fee changes don’t happen on a regular schedule. They happen in response to changing market dynamics and risks. It is not possible to give an exact answer to how often Stability Fees change. Risk Teams approach any adjustments on a case-by-case basis.
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