PCV(Protocol Control Value)
PCV (Protocol Controlled Value) Protocol is a way to stabilize the price. In short, if demand falls faster than the amount of burning captured by direct incentives, the Taichi Protocol will reduce collateral for that period. By using the PCV to buy and burn TAI, Reweights will be involved in to restoring the price of TAI. In the event of a serious crisis, Taichi Dao may need to step in and restore a healthy mortgage ratio by minting FED tokens and burning TAI as well as making recapitalization.
In most DeFi products, users deposit funds with an IOU attached. For example, users could be issued tokens representing the pro rata percentage of the supplied assets. These assets are part of the Total Value Locked (TVL). The protocol would define a utility around how these funds are deployed. The contract may offer incentives to keepers to close unhealthy price positions. There may even be some dividends which accrues to stakeholders or a reserve. This value does not belong to the protocol in any meaningful sense, but rather to the users and owners of the protocol.
This lack of ownership creates the "capital loyalty" problem, where capital flows only to directions with high yield, evident in all user owned TVL-based mechanisms. For example, Uniswap LP tokens and Aave aTokens are redeemable for the underlying assets. During periods of high APYs or incentives, the TVL would increase. As soon as those rewards dry up, the capital will move on to the next best opportunity, perhaps SushiSwap or Compound.
The key innovation behind the Taichi Protocol's mechanism is PCV, and the protocol outright owns the assets with no IOU. PCV opens up a new design space for DeFi protocols beyond what can be achieved with the "user-owned" model, which can influence market conditions in fundamental ways that are not necessarily profit-motivated. Since there are no users to redeem to, these benefits are guaranteed on the contract level.
The clearest use case of PCV is to have the protocol be a liquidity provider (LP) on an Automated Market Maker (AMM) like SushiSwap. At sufficient volume, the protocol would essentially control the exchange rate of the trading pair. It can use its PCV to rebalance the price by executing trades against the market and locking or burning excess tokens. For example, let's say there is a SushiSwap market denominated in TAI/USDC. The current liquidity depth is 1100 TAI and 1000 USDC. In this example, Taichi Protocol owns 90% of the liquidity. Taichi Protocol can atomically execute the following trade:
Withdraw all liquidity (990 TAI and 900 USDC);
Swap 5 USDC for 5 TAI (remaining liquidity is 105/105 TAI/USDC);
Resupply 895 TAI and 895 USDC at the 1:1 exchange rate.
Results of the above transactions: the protocol spent 5 USDC to restore the pegged price, and the exchange rate between TAI and USDC was still 1 (1000 TAI: 1000 USDC).
This design aligns perfectly with the TAI Protocol use case. This is a marked improvement over models in which all the TVL is user-controlled and frozen as collateral. PCV could also be used to deposit and borrow on lending markets like Compound and Aave.
Considering how the PCV is funded, the protocol requires the issuance of tokens or the provision of services to obtain the PCV. We take a more rational approach to Genesis than the TAI Protocol.
Last updated