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I did, and it doesn't. The mechanism behind Maker DAO simply doesn't work. That's why it lost the peg so badly, and for so long. There simply wasn't any work
by KirillPanov 5y ago
I did, and it doesn't.
The mechanism behind Maker DAO simply doesn't work. That's why it lost the peg so badly, and for so long. There simply wasn't any working mechanism to deal with the situation where the price rises above one dollar.
When people create ETH-collateralized DAI and sell them they are basically doing so in order to go leveraged-long on the ETH/USD pair. So when you use ETH to buy DAI from one of these people, you're basically making a (collateralized) margin loan to somebody who wants to increase their leverage. In return you get something sort of like the ability to short the ETH/USD pair (not exactly due to liquidations, but it's pretty close). All of this actually works as advertised: Maker pairs up people who want to go long with people who want to short. But what if there aren't equal demands for both sides of that trade?
If there aren't enough people who want to make margin loans (i.e. go quasi-short) Maker can raise the margin loan interest rate (i.e. stability fee) to make lending more attractive.
The big problem is if there aren't enough people who want to increase their long leverage. There will be too few DAI-sellers and the DAI price (in ETH) will go up above the USD price (in ETH). That's what happened. And kept happening.
The solution was to capitalize Maker DAO with centralized stablecoins -- Coinbase's USDC and Tether.
As a result, Maker DAO is effectively no more than an "index fund" of centralized stablecoins. It absolutely is not trustless.
It is trust laundering.
- thebean11 5y ago> There simply wasn't any working mechanism to deal with the situation where the price rises above one dollar. ..inflation?
- mypastself 5y agoNot sure if you’re joking or not, but the entire purpose of this type of token is to be pegged to the price of dollar or some other real-life asset. It stops fulfulling that role if the price expressed in its peg currency varies (hence the name “stablecoin”). Any type of inflation or deflation separate from the dollar breaks the token’s utility.
- thebean11 5y agoThe price is pegged to the dollar, not the quantity in circulation. My point is that if the price is over a dollar, you mint more of them to pull the price down. To me, DAI going over USD just indicates supply not meeting demand.
- KirillPanov 5y ago> you mint more of them to pull the price down No, in order to pull the price down you need to mint more of them and sell those new DAI into the market. Doing this saddles the minter-seller with a long USD/ETH position: they have to lock up a bunch of collateral in order to mint new DAI, and if USD/ETH drops enough their collateral will be vaporized. If no sellers believe that USD/ETH is going to rise, none will be willing to take that risk. DAI doesn't work like Tether. DAI aren't really "quasi-dollars". They're margin loans owed by other people. To bring them into existence, you need to find somebody who wants a margin loan in order to go long.
- thebean11 5y agoWho is the mint seller, the minter or the one buying the minted coin? It wouldn't be any entity minting these new DAI, it would be the Maker smart contract giving out new DAI loans for collateral (ETH, WBTC, WhateverTokens). If DAI is trading at $2, and I believe it will hit the peg again in the future, I'm very highly incentivized to borrow it and sell it for $2, pulling the price down! I then pay back my loan with DAI I buy for $1.