Summary

This proposal is to deprecate v1 vaults on Polygon. By deprecating the v1 vaults QiDao will be able to repeg MAI to $1.00 on Polygon and profitably maintain the peg moving forward.

Abstract

This QIP establishes two options for offboarding Polygon V1 vaults.

Option 1: If this option is chosen, Polygon V1 vaults will be deprecated by adjusting the collateral factor on each vault by 20 percentage points each week until it reaches 0%. This collateral factor adjustment schedule will be announced and initiated as soon as the proposal passes. The liquidation penalty on all v1 vaults will be reduced to only 1% to lessen the potential impact on any v1 vault users.

Option 2: If this option is chosen, the collateral factor on all Polygon V1 vaults will be set to 0% exactly 2 weeks after the proposal passes. Liquidation penalties will be set to 1% for all vaults to lessen the potential impact on any v1 vault users.

Motivation

As of writing this, MAI on Polygon is trading at $0.83 USD. 17% below peg. 221 QIP was successful in removing the bad debt from Polygon. However, there is not enough revenue being generated on Polygon to drive enough demand for MAI to repeg to $1. Now that the bad debt is gone, the path to repeg MAI can be straightforward. As the largest chain for QiDao by TVL and the 3rd largest by circulating MAI, Polygon needs to maintain a healthy peg for QiDAO to experience healthy growth. The peg issue on Polygon is negatively impacting both current investors' and potential investors' sentiment and trust in MAI/QiDAO and therefore negatively impacting the DAO's ability to grow, even on other chains.

The DAO cannot profitably maintain the peg for MAI on Polygon because there is $4.3M circulating MAI and most of the TVL/collateral that was used to mint that MAI is not generating any revenue for the protocol. Because there is not sufficient revenue generation relative to the amount of MAI circulating, creating enough demand for MAI to maintain the peg is very challenging. Deprecating the v1 vaults is necessary so that the protocol can repeg MAI and then maintain that peg, profitably.

Additionally, the PSM strategy has proven to be very successful and profitable on Base and Linea. By establishing the peg on Polygon, it would allow QiDao to deploy a PSM for Polygon.

Rationale

Deprecating the v1 vaults has been actively discussed within the community and Discord for a long time now. Ultimately two ideas emerged through those discussions. A "Zapper" to help migrate deposits from v1 to v2 vaults and schedule to decrease the CF of the v1 vaults until it is 0% on all v1 vaults. For this proposal, building a zapper was excluded as part of the solution for three reasons: 1) It would require dev resources and take significant time to build. 2) It could create smart contract risk 3) It is generally believed that those 0% interest loans have been benefitting from no interest for a long time and now the QiDao should at least get the 0.5% repayment fee, rather than provide them with a fee-free way to exit the position. Current v1 vault users will be able to exit their v1 positions and open new v2 vault positions if they desire. To minimize the negative for any v1 vault users that ultimately get liquidated, the liquidation penalty should be set to 1%. It should not be set to 0% because there needs to be an incentive to liquidate the vaults even when MAI is trading at $1.00. Because liquidity for MAI on Polygon is relatively thin, peg would be achieved relatively quickly.

Technical Specification

The collateral factor (CF) will be adjust according to the option chosen by voters. Typically this is stated in terms of 'minimumCollateralPercentage' for MAI. Converting CF to minimumCollateralPercentage and vice-versus can be done as shown below: CF = 1/minimumCollateralPercentage minimumCollateralPercentage = 1/CF

Configurable Values

minimumCollateralPercentage gainRatio