Evaluating pDAI Strategy Leverage

pDAI Collateral Factor

The current leverage on the pDAI is around 2 with 17mm in DAI in the jar.
The current APR of the DAI jar currently is around 9.9% with that given leverage.
All the following information is based on the following calculation app:
Compound Calculation

The following values in the table are an APR with no compounding from the jar.
These rates are lower than the actual jar performance will be.

Leverage APR
2 9.9%
2.5 12.3%
3 14.5%
3.5 16.8%
3.8 18%

Raw Strategy APR

Leverage APR Yearly Fees
2 7.7% 340k
2.5 8.91% 417k
3 10.51% 496k
3.5 12.18% 573k
3.8 13.05% 620k


The first chart is the raw strategy APR given the calculations from the COMP calculator.
The second chart is the jar APR minus the dev fees, with the yearly income expected from that strategy.

There has been discussion in the discord around increasing the leverage of the strategy so this threads is to discuss the merits of doing so. A few points I have to list myself:

Increasing Leverage

  • Increase in jar user and protocol earnings, up to a max of almost $300k a year.
  • Increase in chance of liquidation (many have pointed out even at 3.7x is very low)
  • Potential increase in TVL due to higher rates further compounding earnings

I would like to start a discussion here on what leverage will be suitable for the community and the pros and cons associated with that leverage option

This proposal is not my own but rather the collective voice of many on discord who would not otherwise have had a voice on the forums. Once we have had ample discussion I will attach a poll with options related to the outcomes of this discussion.


Thanks for putting this up @jintao

Fully support leveraging up pDAI, we are playing it too safe…this is DeFi after all :slight_smile:

Could you put up the liquidation risk levels for each leverage option? ie. How much of a swing in the underlying is needed?
Leverage is awesome and I love it, but it’s a double-edged sword so let’s be aware of the downsides.


The math supports going for the full 3.8. the liquidation chance is still well within our risk tolerance.


I’m in favor of maxing out the leverage once we can illustrate any potential risks!

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For those concerned about safety, I’ll re-write what I had in discord.

  1. Since this is a single assest for both borrow and supply, price flucuation should not cause a risk because it’s the same assest.

  2. The risk can come from having a borrow rate higher than supply rate. That would mean the COMP incentives are removed and if you look here:
    The biggest difference in rates I see is at the 92% utilization rate (16.10% supply - 18.62% borrow = -2.52%). So how long can we last on -2.52%?

  3. Based on my simple non-compounding math, here’s how much time we have to get out of the position IF the worst case senerio happens (no more COMP and -2.52% APY) based on collateral factor (CF):

CF 0.75 is 4x leverage - this is MAX from compound
CF 0.74 is 3.85x leverage - estimated liquidation is about 6 months
CF 0.73 is 3.70x leverage - estimated liquidation is about 13 months
CF 0.72 is 3.57x leverage - estimated liquidation is about 19 months

Someone with better math skills should check my numbers hahaha. My calculation was simply based on putting in $100, so at 3.85x leverage is would mean $385 deposit and $285 borrow. Then how long would it take to get $285 to $288.75 ($385*0.75=$288.75) at 2.52% annual interest.

So even at the highest proposed 3.8x leverage…we have 6+ months before liquidation. Would there be any other way to be liquidated beside neg interest rates since the underlying price shouldn’t matter?


Thanks for the detailed explanation - can someone look at this as well as I am unable to grasp the whole concept :smiley:

Just wanted to make sure we don’t risk liquidation…

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There were a couple of questions on discord about price and interest rates…

For price, I guess the question was really why does price flucuation not matter. Well, typically you supply one asset and then borrow a different asset. So price changes does matter since you have two different underlying assets that changes prices independently. Since we are supplying DAI and borrowing DAI, it does not matter because…it’s always the same price on both sides.

The other question was what happens if interest rates spike to 1000% in case of a black swan event. For that, I would refer back to: https://compound.finance/markets/DAI
This is compound’s published interest rates and as you can see, even if they went to 100% utilization, you can see exactly what rates they will give for supply and borrow (and 1000% is not in there). So unless compound votes to change their published interest rates, these rates are what we should expect.

There is one additional risk besides liquidation if we go with higher leverage and that’s widthdrawing/deleveraging during extremely high utilization times. If we have to do some type of emergency exit and there’s high utilization, then it could be hard to exit since there’s not enough DAI in compound to withdraw to pay back the borrowed DAI. This will be true for anyone borrowing, but more leverage does mean we need more DAI in compound to widthdraw to pay back what we borrowed.

Yearn and Defisaver gets around this issue by borrowing the DAI from flash loans to payback the borrowed compound DAI, and then widthdraw the DAI from the supply side to pay back the flash loan…but using flash loans is a whole new level of complexity.


Hey @0xpenguin, seeing as you are the designer of this strategy, could you give your input as to what you think is a sustainable and safe way to increase the leverage without risking liquidation ?

I feel like we are lacking the brainpower and knowledge to solve this topic on our own, so some input would be much appreciated.

Following off of what @ossu said, I think a good way to evaluate the risk is comparing to what other projects are doing and to what extent would we be more exposed to withdrawal risk that is detrimental to our image and motto of safety. I imagine there are ways to address the withdrawal risk by having some in-house factor that signals our position as a percentage of the liquid asset, or some measurement of volatility. Just brainstorming.

I have a sizeable amount in this jar and I am against increasing the leverage unless it can be shown the risk of liquidation is negligible compared to current strat.

I know everyone is excited to compete and grow TVL but slow and steady ain’t half bad. Maybe a “low risk” or “high risk” jar would be appropriate too idk.


@0xpenguin @BigBrainBriner thoughts from the dev here? :slight_smile:

@jintao @0xBoxer @Anoniminis

First of all thanks for getting the ball rolling on this discussion.

To a lot of y’all, a 0.65 CR is overly conservative. I would like to just remind everyone that APY spikes and liquidity crunches do happen, which results in cascading and unpredictable side effects.

  • DAI shortage in Compound, where we can’t withdraw ANY DAI. A serious liquidity crisis might prevent us from unfolding from our position unless there is a flashloan in place (currently there is not)
    • This happened in CREAM, but for WETH
  • DAI borrow APY sudden spike
    • Occurred during the peak of yield farming, where farmable crops were being borrowed at 1000% for a short period of time on Aave

That being said, after several lengthy discussions with the mods and a couple key community members, I propose increasing the CR to 0.71, a good balance safety and opportunity.


When there is a DAI shortage, I don’t think it matters what the our leverage is, high or low, all DAI is stuck, unless we use a flashloan.

The APY spike can only happen when Compound changes the interest rates. I think that would require a vote or at least they would give us a heads up before it is implemented. We will have enought time to update or exit the strategy before that happens.

I am in the DAI jar and I am in favour of a high leverage. We should though investigate how we can use a flashloans to retreive some DAI when there is a liquidity crunch.

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Is the pDai Strategy the one that was exploited? Given the progress and value, was the change to the strategy audited and by who? Can we employ someone for a post mortem of the actions taken so we can mitigate in the future.