11 ms·

MakerDAO gets stress tested as ETH price plummets

146 points by tlrobinson 7y ago

nootropicat 7y ago
Given that this was a black swan event and the actual damage is minimal, DeFi has proven to be extremely durable.
- maccam912 7y ago
  Minimal? My understanding is someone was able to pull ETH out at near zero DAI. Nothing the contract didn't allow, but unforseen use of it which caused some people who had invested that ETH to essentially lose their life savings!
  - ComputerGuru 7y ago
    If there really are people that literally put their entire life savings into a single, unproven vessel then they almost certainly did so because they were gambling it would make them (an order of magnitude+) more money than a more reliable stable alternative. They won’t find much pity.
    - legionof7 7y ago
      I work in the crypto industry and I think this a failure of our community to properly inform people of the risks. These people weren't gambling for massive returns. They thought it would be a safe way of getting pretty good ones.
      - TylerE 7y ago
        Really? I've never seen a hive of more rampant unchecked greed.
        seibelj 7y ago
        You mean r/WallStreetBets and how they play with options in the traditional market? Don’t clutch your pearls too hard - greed is everywhere, not just crypto.
        roywiggins 7y ago
        I don't know if it's true, but my impression is that the same people who got really into complicated crypto trades also got into complicated option trades once it became accessible via app.
        mwill 7y ago
        My impression of /r/wallstreetbets in particular is that they seem to think particularly highly of crypto. There might be an overlap elsewhere but I don't think I've seen it on wsb personally
        deleted 7y ago
        [deleted]
      - cortesoft 7y ago
        Returns are always the inverse of risk. If you are getting "pretty good" returns, then you have pretty high risk.
        Acrobatic_Road 7y ago
        They thought they were risking 13% of their collateral in the event of a liquidation - not 100%. They were risking way more than they thought.
        vinniejames 7y ago
        No one lost 100% They lost their collateral and got to keep the loan the took out against it. If I stake $2000 of Ethereum, and in return get $1500 in a stablecoin, when my $2000 in collateral gets liquidated I still have 75% of that in the loan I took out and can walk away. The people with the 100% loss story are being deceptive
        ppf 7y ago
        That's not the complete story. They have lost one asset with a certain set of liquidity characteristics, and unexpectedly gained one with another set.
        vinniejames 7y ago
        There was nothing unexpected here. Users traded their eth X days ago for dai, with the full intention of adjusting their liquidity characteristics What happened here simply precluded the possibility of the reverse trade when the loan became under collateralized, this was not unclear to anyone involved
        ppf 7y ago
        Traded? You mean loaned. That was always the wording that was used to promote DAI, whatever the underlying transaction might be.
      - Aeolun 7y ago
        If someone invested in crypto thinking it would be a safe way of getting anything that’s still on them.
      - barkingcat 7y ago
        No such thing... better the return, higher the risk. Fact of life.
  - nootropicat 7y ago
    It's more complicated. Their collateral ratio has dropped below the liquidation level of 150%. So at best they would only get a fraction of their collateral back (any liquidation has a discount and a 13% penalty) - fundamentally they lost because their speculative bet didn't pay off. So yes, they lost more than they should, but describing it like they lost everything because of the liquidation problem alone is misleading. The "attack" was trivial in that there was only one bid at an auction - not enough people liquidating undercollateralized positions, but now so many people are looking at this it's never going to repeat again. It's an obvious risk only in hindsight.
    - wbl 7y ago
      Market makers face this potential problem every day in the real world. They get sophisticated about it or die.
    - nullc 7y ago
      > never going to repeat again So now it just needs a little help from miners to actively exclude all other bidders. My understanding is that in this case there were other bidders but they were drowned out by the winning bidder paying much more gas.
      - nootropicat 7y ago
        >So now it just needs a little help from miners to actively exclude all other bidders. A mining cartel that censors transactions is indeed a real risk. Fortunately, ethereum is switching to PoS where even an average person with a smartphone could realistically generate several blocks a day, as opposed to multiple megawatt (or even giga) mining farms, so it's only a temporary issue. >My understanding is that in this case there were other bidders but they were drowned out by the winning bidder paying much more gas. Most likely lack of liquidity and/or gas pricing misconfiguration. Even at an ultra-high 600 gwei (during the peak congestion, the market rate was ~200 gwei) the total fee was less than $10. Simply put: not enough people running liquidation bots. Example: https://etherscan.io/tx/0x239cc6ba8f28b7a3b66cd5e1b558b0c735641d3a44405afe5b28eb2e5ef37665 https://etherscan.io/tx/0x239cc6ba8f28b7a3b66cd5e1b558b0c735...
  - rolltiide 7y ago
    I dont think it was an unforeseen use. People that execute these smart contract dark patterns knew for a long time and didnt steer public discussions that way. The very foreseen problem was that people dont show up to governance decision in crypto. Yes you can use a blockchain for voting but nobody shows up. The real problem is that there are no alert protocols built into wallets and client side defi apps. Now people are discussing it. The bigger gamble was whether liquidation and auction could occur fast enough to prevent emergency shutdown. They did, one person showed up to the auction and bid $0. System worked. Everyone with dollar signs now is going to research that and bid $1 until the order book is populated and it never happens again. Software updates to overfit for this possibility would be worse.
    - perl4ever 7y ago
      "Everyone with dollar signs now is going to research that and bid $1 until the order book is populated and it never happens again." Not familiar with this, but your comments sound like "we have a proof of concept that this issue could be solved, therefore it is solved".
      - rolltiide 7y ago
        > but your comments sound like "we have a proof of concept that this issue could be solved, therefore it is solved". What? No. This is about more people showing up to a foreclosure auction because they heard about the guy that bid $0 by being the only person at the foreclosure auction, and flipped a property for $4mm. And then you have an actual market. The auction house itself doesn't need to be patched. The auction process doesn't need to be patched. If the auction house has sympathy for the people that got foreclosed on then they can do whatever they want to compensate them from their own pocket, they can automatically do that in case a reserve bid isn't met, but the fact that the auction occurred in a timely fashion is proper behavior.
        perl4ever 7y ago
        I just feel like it's a typical libertarian comment that markets solve things because they will probably react eventually. It's not wrong to expect the feedback, but in the meantime, havoc that affects people occurs. That legitimately can affect peoples' opinion of a process.
  - egdod 7y ago
    Imagine putting your life savings into shitcoins.
- 9nGQluzmnq3M 7y ago
  Black swans happen once a decade or so: dotcom bust, 9/11, GFC, now coronavirus. If the crypto can't deal with it, it's not much of an investment or a store of value.
  - bitcoinbutter 7y ago
    Well the solution is to have some sort of emergency fund which activates in black swan events to rebalance the portfolio. It's just something to factor in. Adds some costs to operations but only fractions of a percent.
    - deleted 7y ago
      [deleted]
    - vinniejames 7y ago
      There is an emergency fund, the governance allows the Maker token to be printed and sold to cover losses, diluting existing token holders
  - darawk 7y ago
    That's true, and it has dealt with it, is the point.
  - Itsdijital 7y ago
    Quite the opposite actually. At least to me it means that institutions actually have been holding crypto reserves, which I'd say gives it a fair amount of legitimacy. Crypto didn't sell off in a vacuum this time, it sold off with the market at a time when it should be selling off. I know what you're thinking, but that's not the case. Right now, same as in 2008, institutions are liquidating "store of value" assets to open up more liquidity. That $1.5T in fed repo? Well the fed doesn't take BTC as collateral. And since they don't nobody else is right now. Same with gold. Cash and T-bills are king, so liquidate everything else. Really this shows that crypto is at least starting to be folded into the main financial world. It actually for once has some degree of beta. TL;DR: This is good for bitcoin.
- arcticbull 7y ago
  Black swans seem to happen to crypto every few weeks.
- marcinjachymiak 7y ago
  If it can't handle the extremes, it's not durable. This is such a bullshit attitude. Financial systems need to work in the extremes. Period.
Jd 7y ago
There were a few products prior to MakerDAO that failed when their collateralized peg collapsed, most notably BitUSD and NuShares. MakerDAO is somewhat more sophisticated and holds way more capital but the fundamental problem is that you can't exclusively collateralize a dollar peg from a highly volatile unit of account with elastic demand or black swan events can wipe it out.
- chrisco255 7y ago
  Why not? DAI survived the bear market of 2018 and 2019 that saw ETH plunge from $1400 to $85. And it held with no more than 5% variance from $1 USD.
  - deleted 7y ago
    [deleted]
- daics 7y ago
  BitUSD had a different mechanism as it only allowed its own token as collateral. The Maker protocol doesn't use MKR as collateral, instead it serves as an efficient debt engine for other liquid assets and its holders collects fees on these debt positions almost like a bank. The interest fees collected stream in real-time from those who take debt(yes, this is possible on a blockchain) and a large portion is sent to depositors who hold on to the dollar stablecoin a savings rate in real time too. Ether is just the first asset being used to perfect the mechanisms needed for fully autonomous banking. Any real world asset can be tokenized to take advantage of this efficient lending protocol right now.
lalaland1125 7y ago
Most of the contracts in MakerDAO are currently holding collateral worth 300% of the loan amount. You won't see any widespread failures until either that changes or the price drops at least 66%.
- arcticbull 7y ago
  So well be seeing it shortly.
baby 7y ago
> leading to oracle’s price updates not going through with the gas price they chose wait so the thing relies on oracles? I always thought that MakerDAO was a decentralized stablecoin. Does this mean that it is centralized then? > This put the system in a $4 million deficit So is this proof that MakerDAO does not work in practice?
- vinniejames 7y ago
  The oracles are decentralized No
- deleted 7y ago
  [deleted]
- Benmcdonald__ 7y ago
  Yes they are centralised. You cannot have a truly decentralised price data
  - cdiddy2 7y ago
    You could use something like uniswap and use their ETH/USDC pool as a source of price data for ETH. This is a bad idea because its easy to manipulate that one price feed but that is technically a truly decentralized price feed.
Taek 7y ago
A lot of Ethereum DeFi (and cryptocurrency in general) has been pretty frustrating to watch, because it's a lot of people with big ideas and little understanding of how to build stable financial systems. In the case of Maker, what's interesting is that a stablecoin is actually possible. Maker has a really good core idea, several great elements to it: 1. The stablecoin is backed by collateral, typically a significant amount more collateral than the amount of stablecoin that has been issued. 2. People locking up collateral get greater exposure to Eth's volatility. So there's genuinely a reason to lock up collateral to issue stablecoins if you are bullish on Eth. But, this breaks down a bit. There's no way to instantly convert the stablecoin back into the collateral asset, you have to find someone with a CDP who is willing to buy the stablecoin from you. Similarly, there's no way to unlock your collateralized asset, you have to find someone who is willing to sell you the stablecoin in order to open up your vault and get your eth out. So on both sides of the equation, you have this liquidity risk that doesn't really need to exist. I could go on for a bit more, there are a bunch of other design decisions that are backwards and don't work well. But the fundamental ideas are actually pretty okay, and if you took a more traditional finance person and had them work through all the tiny details, I think you'd end up with something pretty powerful. In that sense, it's almost like encryption. The tiniest detail being incorrect can make the whole construction useless, even if as a whole the fundamentals are pretty solid.
- enjeyw 7y ago
  >So on both sides of the equation, you have this liquidity risk that doesn't really need to exist. I'd love to hear more of your thoughts on this. It's apparently big problem with the Maker protocol, and seems to be an inherent issue with the use of a perpetual (afaik we're seeing the price of DAI spike as a consequence), but I'm not aware of a simple fix.
  - Taek 7y ago
    A good fix requires the whole system to be re-imagined a bit. You want to start with the invariant that a stablecoin holder can liquidate to Eth at any point, and that a collateral issuer can extract their Eth at any point. Instead of having the collateral provider be the only one who can issue the stablecoin, you could build a system where anyone could acquire the stablecoin (Dai) by putting in an appropriate amount of Eth. Any extra Eth that gets put into the pool will issue a volatile asset, which I'll call Vai here for simplicity. Where Dai has no exposure to volatility, Vai has increased exposure to volatility. As the Eth price rises, the amount of Eth that Vai can be redeemed for increases, and as the Eth price drops, the amount of Eth that Vai can be redeemed for decreases (this is the opposite of Dai). At any time, Eth and Vai can be redeemed for Eth from the pool. As the price of Eth moves around, the pool becomes over-collateralized and under-collateralized. If at any point the pool becomes under-collateralized, all Vai becomes worth zero, and all Dai can redeem Eth proportional to the amount of collateral that there is. Meaning, in a "black swan" scenario, Dai holders become exposed at 1x to the price volatility of Eth. This is much better than the whole system melting down, and the Dai holders do get to dodge a significant amount of the downtrend while the Vai evaporates. (Dai holders see no exposure until all the Vai is gone). You can keep the pool balanced using interest rates. If you have a target collateralization level (say 150%), then any time the pool is under-collateralized, you can automatically drop the interest rate that Dai holders earn (going negative if necessary). If the pool is over-collateralized, you increase the interest rate. A lower interest rate encourages Dai holders to withdraw and Vai holders to enter. A higher interest rate encourages Dai holders to enter and Vai holders to withdraw. ----- The most important thing about the system above is that it is highly predictable. In all scenarios where the price of Eth moves, you can model what happens, and you have guarantees on how much Eth you can draw, and you can withdraw that Eth immediately (well, you'll need to pay blockchain fees and wait for a block, but you don't need a counterparty or any sort of system liquidity). The worst case for the stablecoin holders is that they get exposure to 1x Eth, but this only happens if Eth drops faster than people deposit Vai. There are a bunch of math tricks you can use to allow people to select different exposure levels (you could have some Dai targeting 250% over-collateralization, meaning it's very robust to huge drops in Eth price, and other Dai only target 15% over-collateralization, and these two assets could be fully fungible against eachother) for Dai holders and Vai holders, but we are getting beyond the scope of a single HN comment.
dnprock 7y ago
When you are involved long enough with crypto, you'll see a lot of stupid ideas. DAI is one of them. For those who don't have time to get into the weeds, DAI is a "digital native" stable coin. It wants to create a 1-1 peg to USD using an underlying volatile asset, Ethereum. If you want to use USD, it's probably most efficient to go get USD. :) But for some ideological reasons (decentralization), DAI wants to be USD but also digital native. So they "lock" the underlying asset, Ethereum, and issue DAI coins. The premise is with intelligent computer algorithms, we can maintain 1-1 peg between a digital asset (Ethereum) and a real-world asset (USD). Digital assets are digital. Humans are the arbitrageurs. Humans are emotional. DAI is trying to create stability on top of Ethereum volatility. It's kinda like building a stable house on a shaky foundation. Your building will either collapse or you spend so much money patching the flaws of your shaky foundation. This is a laughable idea for those who live in reality. But I guess some computer programmers/investors live in alternative realities too long. They forget about reality. Whatever your algorithms are, you need to arbitrage risks. So you will always need to lock up more USD-ETH to account for risks. To be safe, maybe, you need 1.5 USD-ETH for a DAI USD. However, with digital scarce and volatile assets like Ethereum, there's a chance that 1.5 USD-ETH will drop to 0.9 USD-ETH. At that point, you will be underwater. Yesterday, it did. If you need to lock up 1.5 USD for 1 USD, you may as well go get 1 USD. It's a dumb idea to use 1.5 USD to get 1 USD. DAI has a lot of jargon and technology (more layers on top of the shaky foundation). These things make it look sophisticated and fool people. The basic problem is very simple. You only need elementary school arithmetic and logic to know its flaws and inefficiency.
- lalaland1125 7y ago
  > If you need to lock up 1.5 USD for 1 USD, you may as well go get 1 USD. It's a dumb idea to use 1.5 USD to get 1 USD. DAI locks up 1.5 USD of ETH, not 1.5 USD. There is an important difference. The main benefit/use of DAI is that it effectively lets you increase your leverage when you are betting long on ETH. The trick is that when you lock ETH in the contract you can then use the resulting DAI to purchase more ETH, lock up that ETH/etc. The end result is about 3X leverage for relatively minimal fees.
  - 7y ago
cryptica 7y ago
One of the main purposes of cryptocurrency IMO is to replace the concept of debt. So I find the idea of using blockchain to implement debt to be ridiculous. Why do you need debt if any group of people can create a cryptocurrency and raise money that way? Debt is an outdated concept and a dirty hack on the financial system, it allows one person to lend money to another person to run their business without owning any part of the business. In today's reality, there are two scenarios: - The business succeeds and the borrower can afford to repay their debt. The lender only gets back their principal plus interest even if the business no matter how successful the business was. If the lender had invested in the business instead, would have gotten more out of it. - The business fails and the borrower declares bankruptcy. The lender may lose all their principal; they may have gotten some interest payments if the business was running for some time but it typically doesn't come anywhere close to offsetting the loss of principal. Liquidating remaining assets likely won't cover it either. If the lender had invested in the business instead - In the event of business failure, they may still have been able to get similar returns because they could get a share of the value of remaining assets from liquidation. The only thing they would miss out on is preferential treatment in the event of liquidation... Which is the financial equivalent of travelling first class on the Titanic. So debt as a concept doesn't make sense from the lender's perspective. As a lender, if you win, your upside is limited. If you lose, your downside is not limited (not any more than it would have been if you had owned the shares outright and could benefit from asset liquidation in case the business had to shut down). Not only that, but forcing the business to constantly make debt repayments only makes it more likely that they will fail. The lender is setting themselves up for failure from the beginning. That's why only banks loan nowadays. It doesn't make sense. It just allows the Fed to keep giving free money to their cronies.
- Lldjjxnn 7y ago
  What planet do you live on? > If you lose, your downside is not limited Your downside is limited to the amount lent The other aspects which you see as deal breakers that make business impossible are actually all negotiated terms to maximize the likelihood of success for both parties.
- perl4ever 7y ago
  If there were no debt, how would that work for individuals? Would you sell a share of your income to pay for a car, instead of borrowing?
wildchild 7y ago
Stop shilling crypto scams here. When HN will start banning all this crypto scam junk?

146 points by tlrobinson 7y ago

nootropicat 7y ago

Given that this was a black swan event and the actual damage is minimal, DeFi has proven to be extremely durable.

maccam912 7y ago
Minimal? My understanding is someone was able to pull ETH out at near zero DAI. Nothing the contract didn't allow, but unforseen use of it which caused some people who had invested that ETH to essentially lose their life savings!
- ComputerGuru 7y ago
  If there really are people that literally put their entire life savings into a single, unproven vessel then they almost certainly did so because they were gambling it would make them (an order of magnitude+) more money than a more reliable stable alternative. They won’t find much pity.
  - legionof7 7y ago
    I work in the crypto industry and I think this a failure of our community to properly inform people of the risks. These people weren't gambling for massive returns. They thought it would be a safe way of getting pretty good ones.
    - TylerE 7y ago
      Really? I've never seen a hive of more rampant unchecked greed.
      - seibelj 7y ago
        You mean r/WallStreetBets and how they play with options in the traditional market? Don’t clutch your pearls too hard - greed is everywhere, not just crypto.
        roywiggins 7y ago
        I don't know if it's true, but my impression is that the same people who got really into complicated crypto trades also got into complicated option trades once it became accessible via app.
        mwill 7y ago
        My impression of /r/wallstreetbets in particular is that they seem to think particularly highly of crypto. There might be an overlap elsewhere but I don't think I've seen it on wsb personally
      - deleted 7y ago
        [deleted]
    - cortesoft 7y ago
      Returns are always the inverse of risk. If you are getting "pretty good" returns, then you have pretty high risk.
      - Acrobatic_Road 7y ago
        They thought they were risking 13% of their collateral in the event of a liquidation - not 100%. They were risking way more than they thought.
        vinniejames 7y ago
        No one lost 100% They lost their collateral and got to keep the loan the took out against it. If I stake $2000 of Ethereum, and in return get $1500 in a stablecoin, when my $2000 in collateral gets liquidated I still have 75% of that in the loan I took out and can walk away. The people with the 100% loss story are being deceptive
        ppf 7y ago
        That's not the complete story. They have lost one asset with a certain set of liquidity characteristics, and unexpectedly gained one with another set.
        vinniejames 7y ago
        There was nothing unexpected here. Users traded their eth X days ago for dai, with the full intention of adjusting their liquidity characteristics What happened here simply precluded the possibility of the reverse trade when the loan became under collateralized, this was not unclear to anyone involved
        ppf 7y ago
        Traded? You mean loaned. That was always the wording that was used to promote DAI, whatever the underlying transaction might be.
    - Aeolun 7y ago
      If someone invested in crypto thinking it would be a safe way of getting anything that’s still on them.
    - barkingcat 7y ago
      No such thing... better the return, higher the risk. Fact of life.
- nootropicat 7y ago
  It's more complicated. Their collateral ratio has dropped below the liquidation level of 150%. So at best they would only get a fraction of their collateral back (any liquidation has a discount and a 13% penalty) - fundamentally they lost because their speculative bet didn't pay off. So yes, they lost more than they should, but describing it like they lost everything because of the liquidation problem alone is misleading. The "attack" was trivial in that there was only one bid at an auction - not enough people liquidating undercollateralized positions, but now so many people are looking at this it's never going to repeat again. It's an obvious risk only in hindsight.
  - wbl 7y ago
    Market makers face this potential problem every day in the real world. They get sophisticated about it or die.
  - nullc 7y ago
    > never going to repeat again So now it just needs a little help from miners to actively exclude all other bidders. My understanding is that in this case there were other bidders but they were drowned out by the winning bidder paying much more gas.
    - nootropicat 7y ago
      >So now it just needs a little help from miners to actively exclude all other bidders. A mining cartel that censors transactions is indeed a real risk. Fortunately, ethereum is switching to PoS where even an average person with a smartphone could realistically generate several blocks a day, as opposed to multiple megawatt (or even giga) mining farms, so it's only a temporary issue. >My understanding is that in this case there were other bidders but they were drowned out by the winning bidder paying much more gas. Most likely lack of liquidity and/or gas pricing misconfiguration. Even at an ultra-high 600 gwei (during the peak congestion, the market rate was ~200 gwei) the total fee was less than $10. Simply put: not enough people running liquidation bots. Example: https://etherscan.io/tx/0x239cc6ba8f28b7a3b66cd5e1b558b0c735641d3a44405afe5b28eb2e5ef37665 https://etherscan.io/tx/0x239cc6ba8f28b7a3b66cd5e1b558b0c735...
- rolltiide 7y ago
  I dont think it was an unforeseen use. People that execute these smart contract dark patterns knew for a long time and didnt steer public discussions that way. The very foreseen problem was that people dont show up to governance decision in crypto. Yes you can use a blockchain for voting but nobody shows up. The real problem is that there are no alert protocols built into wallets and client side defi apps. Now people are discussing it. The bigger gamble was whether liquidation and auction could occur fast enough to prevent emergency shutdown. They did, one person showed up to the auction and bid $0. System worked. Everyone with dollar signs now is going to research that and bid $1 until the order book is populated and it never happens again. Software updates to overfit for this possibility would be worse.
  - perl4ever 7y ago
    "Everyone with dollar signs now is going to research that and bid $1 until the order book is populated and it never happens again." Not familiar with this, but your comments sound like "we have a proof of concept that this issue could be solved, therefore it is solved".
    - rolltiide 7y ago
      > but your comments sound like "we have a proof of concept that this issue could be solved, therefore it is solved". What? No. This is about more people showing up to a foreclosure auction because they heard about the guy that bid $0 by being the only person at the foreclosure auction, and flipped a property for $4mm. And then you have an actual market. The auction house itself doesn't need to be patched. The auction process doesn't need to be patched. If the auction house has sympathy for the people that got foreclosed on then they can do whatever they want to compensate them from their own pocket, they can automatically do that in case a reserve bid isn't met, but the fact that the auction occurred in a timely fashion is proper behavior.
      - perl4ever 7y ago
        I just feel like it's a typical libertarian comment that markets solve things because they will probably react eventually. It's not wrong to expect the feedback, but in the meantime, havoc that affects people occurs. That legitimately can affect peoples' opinion of a process.
- egdod 7y ago
  Imagine putting your life savings into shitcoins.
9nGQluzmnq3M 7y ago
Black swans happen once a decade or so: dotcom bust, 9/11, GFC, now coronavirus. If the crypto can't deal with it, it's not much of an investment or a store of value.
- bitcoinbutter 7y ago
  Well the solution is to have some sort of emergency fund which activates in black swan events to rebalance the portfolio. It's just something to factor in. Adds some costs to operations but only fractions of a percent.
  - deleted 7y ago
    [deleted]
  - vinniejames 7y ago
    There is an emergency fund, the governance allows the Maker token to be printed and sold to cover losses, diluting existing token holders
- darawk 7y ago
  That's true, and it has dealt with it, is the point.
- Itsdijital 7y ago
  Quite the opposite actually. At least to me it means that institutions actually have been holding crypto reserves, which I'd say gives it a fair amount of legitimacy. Crypto didn't sell off in a vacuum this time, it sold off with the market at a time when it should be selling off. I know what you're thinking, but that's not the case. Right now, same as in 2008, institutions are liquidating "store of value" assets to open up more liquidity. That $1.5T in fed repo? Well the fed doesn't take BTC as collateral. And since they don't nobody else is right now. Same with gold. Cash and T-bills are king, so liquidate everything else. Really this shows that crypto is at least starting to be folded into the main financial world. It actually for once has some degree of beta. TL;DR: This is good for bitcoin.
arcticbull 7y ago
Black swans seem to happen to crypto every few weeks.
marcinjachymiak 7y ago
If it can't handle the extremes, it's not durable. This is such a bullshit attitude. Financial systems need to work in the extremes. Period.

Jd 7y ago

There were a few products prior to MakerDAO that failed when their collateralized peg collapsed, most notably BitUSD and NuShares. MakerDAO is somewhat more sophisticated and holds way more capital but the fundamental problem is that you can't exclusively collateralize a dollar peg from a highly volatile unit of account with elastic demand or black swan events can wipe it out.

chrisco255 7y ago
Why not? DAI survived the bear market of 2018 and 2019 that saw ETH plunge from $1400 to $85. And it held with no more than 5% variance from $1 USD.
- deleted 7y ago
  [deleted]
daics 7y ago
BitUSD had a different mechanism as it only allowed its own token as collateral. The Maker protocol doesn't use MKR as collateral, instead it serves as an efficient debt engine for other liquid assets and its holders collects fees on these debt positions almost like a bank. The interest fees collected stream in real-time from those who take debt(yes, this is possible on a blockchain) and a large portion is sent to depositors who hold on to the dollar stablecoin a savings rate in real time too. Ether is just the first asset being used to perfect the mechanisms needed for fully autonomous banking. Any real world asset can be tokenized to take advantage of this efficient lending protocol right now.

lalaland1125 7y ago

Most of the contracts in MakerDAO are currently holding collateral worth 300% of the loan amount. You won't see any widespread failures until either that changes or the price drops at least 66%.

arcticbull 7y ago
So well be seeing it shortly.

baby 7y ago

> leading to oracle’s price updates not going through with the gas price they chose wait so the thing relies on oracles? I always thought that MakerDAO was a decentralized stablecoin. Does this mean that it is centralized then? > This put the system in a $4 million deficit So is this proof that MakerDAO does not work in practice?

vinniejames 7y ago
The oracles are decentralized No
deleted 7y ago
[deleted]
Benmcdonald__ 7y ago
Yes they are centralised. You cannot have a truly decentralised price data
- cdiddy2 7y ago
  You could use something like uniswap and use their ETH/USDC pool as a source of price data for ETH. This is a bad idea because its easy to manipulate that one price feed but that is technically a truly decentralized price feed.

Taek 7y ago

A lot of Ethereum DeFi (and cryptocurrency in general) has been pretty frustrating to watch, because it's a lot of people with big ideas and little understanding of how to build stable financial systems. In the case of Maker, what's interesting is that a stablecoin is actually possible. Maker has a really good core idea, several great elements to it: 1. The stablecoin is backed by collateral, typically a significant amount more collateral than the amount of stablecoin that has been issued. 2. People locking up collateral get greater exposure to Eth's volatility. So there's genuinely a reason to lock up collateral to issue stablecoins if you are bullish on Eth. But, this breaks down a bit. There's no way to instantly convert the stablecoin back into the collateral asset, you have to find someone with a CDP who is willing to buy the stablecoin from you. Similarly, there's no way to unlock your collateralized asset, you have to find someone who is willing to sell you the stablecoin in order to open up your vault and get your eth out. So on both sides of the equation, you have this liquidity risk that doesn't really need to exist. I could go on for a bit more, there are a bunch of other design decisions that are backwards and don't work well. But the fundamental ideas are actually pretty okay, and if you took a more traditional finance person and had them work through all the tiny details, I think you'd end up with something pretty powerful. In that sense, it's almost like encryption. The tiniest detail being incorrect can make the whole construction useless, even if as a whole the fundamentals are pretty solid.

enjeyw 7y ago
>So on both sides of the equation, you have this liquidity risk that doesn't really need to exist. I'd love to hear more of your thoughts on this. It's apparently big problem with the Maker protocol, and seems to be an inherent issue with the use of a perpetual (afaik we're seeing the price of DAI spike as a consequence), but I'm not aware of a simple fix.
- Taek 7y ago
  A good fix requires the whole system to be re-imagined a bit. You want to start with the invariant that a stablecoin holder can liquidate to Eth at any point, and that a collateral issuer can extract their Eth at any point. Instead of having the collateral provider be the only one who can issue the stablecoin, you could build a system where anyone could acquire the stablecoin (Dai) by putting in an appropriate amount of Eth. Any extra Eth that gets put into the pool will issue a volatile asset, which I'll call Vai here for simplicity. Where Dai has no exposure to volatility, Vai has increased exposure to volatility. As the Eth price rises, the amount of Eth that Vai can be redeemed for increases, and as the Eth price drops, the amount of Eth that Vai can be redeemed for decreases (this is the opposite of Dai). At any time, Eth and Vai can be redeemed for Eth from the pool. As the price of Eth moves around, the pool becomes over-collateralized and under-collateralized. If at any point the pool becomes under-collateralized, all Vai becomes worth zero, and all Dai can redeem Eth proportional to the amount of collateral that there is. Meaning, in a "black swan" scenario, Dai holders become exposed at 1x to the price volatility of Eth. This is much better than the whole system melting down, and the Dai holders do get to dodge a significant amount of the downtrend while the Vai evaporates. (Dai holders see no exposure until all the Vai is gone). You can keep the pool balanced using interest rates. If you have a target collateralization level (say 150%), then any time the pool is under-collateralized, you can automatically drop the interest rate that Dai holders earn (going negative if necessary). If the pool is over-collateralized, you increase the interest rate. A lower interest rate encourages Dai holders to withdraw and Vai holders to enter. A higher interest rate encourages Dai holders to enter and Vai holders to withdraw. ----- The most important thing about the system above is that it is highly predictable. In all scenarios where the price of Eth moves, you can model what happens, and you have guarantees on how much Eth you can draw, and you can withdraw that Eth immediately (well, you'll need to pay blockchain fees and wait for a block, but you don't need a counterparty or any sort of system liquidity). The worst case for the stablecoin holders is that they get exposure to 1x Eth, but this only happens if Eth drops faster than people deposit Vai. There are a bunch of math tricks you can use to allow people to select different exposure levels (you could have some Dai targeting 250% over-collateralization, meaning it's very robust to huge drops in Eth price, and other Dai only target 15% over-collateralization, and these two assets could be fully fungible against eachother) for Dai holders and Vai holders, but we are getting beyond the scope of a single HN comment.

dnprock 7y ago

When you are involved long enough with crypto, you'll see a lot of stupid ideas. DAI is one of them. For those who don't have time to get into the weeds, DAI is a "digital native" stable coin. It wants to create a 1-1 peg to USD using an underlying volatile asset, Ethereum. If you want to use USD, it's probably most efficient to go get USD. :) But for some ideological reasons (decentralization), DAI wants to be USD but also digital native. So they "lock" the underlying asset, Ethereum, and issue DAI coins. The premise is with intelligent computer algorithms, we can maintain 1-1 peg between a digital asset (Ethereum) and a real-world asset (USD). Digital assets are digital. Humans are the arbitrageurs. Humans are emotional. DAI is trying to create stability on top of Ethereum volatility. It's kinda like building a stable house on a shaky foundation. Your building will either collapse or you spend so much money patching the flaws of your shaky foundation. This is a laughable idea for those who live in reality. But I guess some computer programmers/investors live in alternative realities too long. They forget about reality. Whatever your algorithms are, you need to arbitrage risks. So you will always need to lock up more USD-ETH to account for risks. To be safe, maybe, you need 1.5 USD-ETH for a DAI USD. However, with digital scarce and volatile assets like Ethereum, there's a chance that 1.5 USD-ETH will drop to 0.9 USD-ETH. At that point, you will be underwater. Yesterday, it did. If you need to lock up 1.5 USD for 1 USD, you may as well go get 1 USD. It's a dumb idea to use 1.5 USD to get 1 USD. DAI has a lot of jargon and technology (more layers on top of the shaky foundation). These things make it look sophisticated and fool people. The basic problem is very simple. You only need elementary school arithmetic and logic to know its flaws and inefficiency.

lalaland1125 7y ago
> If you need to lock up 1.5 USD for 1 USD, you may as well go get 1 USD. It's a dumb idea to use 1.5 USD to get 1 USD. DAI locks up 1.5 USD of ETH, not 1.5 USD. There is an important difference. The main benefit/use of DAI is that it effectively lets you increase your leverage when you are betting long on ETH. The trick is that when you lock ETH in the contract you can then use the resulting DAI to purchase more ETH, lock up that ETH/etc. The end result is about 3X leverage for relatively minimal fees.
- 7y ago

cryptica 7y ago

One of the main purposes of cryptocurrency IMO is to replace the concept of debt. So I find the idea of using blockchain to implement debt to be ridiculous. Why do you need debt if any group of people can create a cryptocurrency and raise money that way? Debt is an outdated concept and a dirty hack on the financial system, it allows one person to lend money to another person to run their business without owning any part of the business. In today's reality, there are two scenarios: - The business succeeds and the borrower can afford to repay their debt. The lender only gets back their principal plus interest even if the business no matter how successful the business was. If the lender had invested in the business instead, would have gotten more out of it. - The business fails and the borrower declares bankruptcy. The lender may lose all their principal; they may have gotten some interest payments if the business was running for some time but it typically doesn't come anywhere close to offsetting the loss of principal. Liquidating remaining assets likely won't cover it either. If the lender had invested in the business instead - In the event of business failure, they may still have been able to get similar returns because they could get a share of the value of remaining assets from liquidation. The only thing they would miss out on is preferential treatment in the event of liquidation... Which is the financial equivalent of travelling first class on the Titanic. So debt as a concept doesn't make sense from the lender's perspective. As a lender, if you win, your upside is limited. If you lose, your downside is not limited (not any more than it would have been if you had owned the shares outright and could benefit from asset liquidation in case the business had to shut down). Not only that, but forcing the business to constantly make debt repayments only makes it more likely that they will fail. The lender is setting themselves up for failure from the beginning. That's why only banks loan nowadays. It doesn't make sense. It just allows the Fed to keep giving free money to their cronies.

Lldjjxnn 7y ago
What planet do you live on? > If you lose, your downside is not limited Your downside is limited to the amount lent The other aspects which you see as deal breakers that make business impossible are actually all negotiated terms to maximize the likelihood of success for both parties.
perl4ever 7y ago
If there were no debt, how would that work for individuals? Would you sell a share of your income to pay for a car, instead of borrowing?

wildchild 7y ago

Stop shilling crypto scams here. When HN will start banning all this crypto scam junk?