Monetary Policy Committee (MPC)

The reference price the MPC aims to maintain, often a peg to a fiat currency like USD. This is the primary goal of the monetary policy. The MPC adjusts other parameters to correct deviations from this target.

• Example: MakerDAO's DAI targets a $1.00 USD soft peg.
• Mechanism: If the market price is above the target, the MPC may increase supply; if below, it may contract supply or increase incentives.

The annualized interest rate charged on debt positions (e.g., vaults, CDPs) that generate the protocol's stablecoin. This is a primary tool for controlling supply and demand.

• Purpose: Increasing the fee discourages new debt creation (contracting supply), while decreasing it encourages borrowing (expanding supply).
• Impact: Directly influences the cost of minting the stablecoin, affecting its market supply and price pressure.

The maximum allowable debt that can be generated against a specific collateral type or for the entire system. It acts as a risk management and supply control parameter.

• Risk Limit: Prevents over-concentration in any single collateral asset.
• Supply Cap: A hard limit on the total possible supply of the stablecoin from a given source. The MPC votes to raise or lower these ceilings.

The minimum ratio of collateral value to debt value required to open and maintain a secured position. It is a key risk parameter for over-collateralized stablecoins.

• Function: A higher ratio increases safety but reduces capital efficiency. A lower ratio increases efficiency but raises liquidation risk.
• MPC Action: The committee may adjust this ratio globally or per asset type based on market volatility and risk assessments.

The fee applied to a position's debt when it is liquidated for falling below the required collateralization ratio. This fee incentivizes keepers and protects the system from undercollateralization.

• Purpose: Covers keeper incentives and system risk. A higher penalty increases the safety buffer for the protocol.
• MPC Role: Adjusts this fee to ensure liquidations are sufficiently attractive for keepers to execute promptly during market stress.

The interest rate paid to users who deposit and lock the protocol's stablecoin in a dedicated savings module (e.g., Maker's DSR). This tool manages demand-side pressure.

• Mechanism: Increasing the savings rate incentivizes holding and removing stablecoins from circulation, supporting the price during downward pressure.
• Counterpart: Often adjusted in tandem with the Stability Fee to balance supply expansion with demand incentives.

The MPC's primary function is to manage the protocol's token economics. This involves setting and adjusting critical parameters to achieve long-term stability and growth. Key levers include:

• Inflation/Deflation Rate: Controls the rate of new token issuance.
• Block Rewards: Determines the amount of tokens issued per block to validators.
• Transaction Fee Burns: Adjusts the portion of fees that are permanently removed from circulation.
• Reserve Management: Governs the use of a protocol's treasury or reserve funds for market operations.

MPCs operate under various governance frameworks that define how decisions are made and executed.

• On-Chain Governance: Token holders vote directly on policy proposals (e.g., changing inflation rates). Votes are executed automatically via smart contracts.
• Off-Chain Governance: The committee debates and decides through forums or multisig wallets, with changes implemented manually.
• Hybrid Models: Combine token holder signaling with a delegated council or expert panel for final execution. The choice of model directly impacts decentralization and agility.

Concentrated control over monetary policy introduces significant security considerations.

• Governance Attacks: An attacker acquiring a majority of voting tokens could enact malicious policies (e.g., hyperinflation).
• Multisig Compromise: If the MPC uses a multisig wallet, compromising the required number of private keys is a critical risk.
• Time-Lock Delays: A common security feature is a mandatory delay between a vote passing and execution, allowing the community to react to malicious proposals.
• Oracle Manipulation: If policy decisions rely on external data (oracles), manipulating that data could trigger incorrect adjustments.

For an MPC to be trusted, its operations must be transparent and accountable to the community.

• Public Voting Records: All committee member votes and rationale should be permanently recorded on-chain or in public archives.
• Policy Simulation & Reporting: Proposed changes should be modeled for impact, with results published before a vote.
• Performance Metrics: The MPC should report against clear objectives like price stability, network security budget, or treasury health.
• Member Rotation & Removal: Governance frameworks should include processes for rotating committee members and removing underperforming or malicious actors.

Different blockchains implement MPCs with varying structures and powers.

• MakerDAO (MKR): The Maker Governance module, voted on by MKR holders, controls critical DSR (Dai Savings Rate) and Stability Fee parameters for the DAI stablecoin.
• Compound Finance (COMP): The Compound Governance allows COMP token holders to propose and vote on changes to interest rate models and collateral factors.
• Cosmos Hub (ATOM): The Cosmos Hub community, via on-chain governance, votes on parameters like the inflation rate and how block rewards are distributed between validators and stakers.

The role and technology of MPCs are evolving to address early challenges.

• Progressive Decentralization: Many protocols start with a foundational team as the de facto MPC, with plans to gradually cede control to token holders.
• Automated Policy Rules: Some protocols are exploring algorithmic policy that adjusts parameters based on predefined on-chain metrics, reducing human discretion.
• Delegated Expertise: Models where token holders delegate voting power to subject-matter experts for specific policy domains (e.g., economics, security).
• Cross-Chain Coordination: For protocols spanning multiple chains, MPCs may need to coordinate policy across different governance systems.