3 ms·

In terms of free capital flows with no fixed exchange rate, this is the "it works until it doesn't" part of the problem. DAI only survived the recent run becaus

by boc 4y ago

In terms of free capital flows with no fixed exchange rate, this is the "it works until it doesn't" part of the problem. DAI only survived the recent run because they had a rainy-day fund in their "PSMs" or Peg Stability Modules. The PSM takes your USDC and mints new DAI and gives it to you. When DAI is >$1 you can make an instant profit doing this. (take 1 USDC, trade it for 1 DAI that you can sell for $1.001.) The PSM takes your DAI and gives you USDC (while stocks last.) When DAI is >$1 you can make an instant profit doing this. (buy 1 DAI trading at $0.999, and swap it for 1 USDC worth $1.) Notice the issue? The PSM within DAI is contingent on having enough USDC (proxy for USD) to keep the peg. When that reserve runs out, the PSM mechanism breaks and the peg fails. To suggest otherwise is financial alchemy.

whimsicalism 4y ago
If the auctioning functions correctly, there will always be more reserves as compared to Dai. If the "reserves run out", then there would be no Dai to buy.
- boc 4y ago
  But DAI doesn't control USDC, which means that they cannot control the reserve piece of the equation. This is the independent monetary policy + free capital flow piece of the trilemma. The auction function doesn't work if USDC suddenly isn't worth 1 USD, because then you're facing down a reserve that isn't worth "more" than DAI, even though the algo still thinks it's in balance. Basically you've tied DAI to USDC, which in turn is tied to Coinbase, which in the event of a bank run/bankruptcy event will freeze assets and cause massive capital flight causing people to sell their USDC for less than 1 USD as they flee for safety. This causes DAI to become unbalanced because their reserve of USDC isn't actually worth what it should be in USD terms, causing DAI to also lose the peg in terms of real US dollars. I'm telling you, there isn't a way to make this stuff work. It's financial alchemy.
  - whimsicalism 4y ago
    That is a legitimate concern, but irrelevant to the trilemma you've mentioned. If USDC loses value, those vaults will be liquidated and the collateral will shift over to alternates - ie. eth. The scenario you are mentioning only plays out if USDC falls so much (and quickly enough that the auction bots don't respond) that it cancels out the overcollateralization from eth. given that dai is 166% collateralized, it wpuld have to drop a ton, which is difficult to imagine when it is credibly backed by real assets.
    - boc 4y ago
      But the liquidation of USDC represents the flow of real assets OUT of the ecosystem, thus rapidly inflating the price of ETH and any other cryptocurrency denominated in dollars. Aka if you start selling 2 USDC for 1 USD, then the price of ETH goes from $3000 to $6000 overnight. BUT those dollar signs in front of the price aren't US dollar signs, they are USDC dollar signs. Which means that I can engage in massive arbitrage between exchanges. Exchanges respond by sealing themselves off to protect their $3000 ETH from the $6000 fake ETH trade prices, thus creating a massive freeze in the market, thus wrecking the redemption system that underpins DAI. It's very, VERY important to realize that all of these things are interwoven. There's no such thing as "USDC collapsing" without it also taking all the crypto traded on Coinbase with it.
      - whimsicalism 4y ago
        ... no. The price of Ethereum in USDC is irrelevant. There is no arbitrage to be had. If the price of USDC falls, you have to spend more and more USDC to mint one Dai because Dai is tied to the price of the dollar, not USDC. Explain to me how you arbitrage USDC falling out of Dai? I really encourage you to read up more on this. There are real risks that come with Dai as a stablecoin (including eth or USDC collapsing very quickly) but they are not the risks that you are identifying.
        boc 4y ago
        My background is in international finance, and therefore when I promise you that DAI cannot defend a virtual peg without holding large amounts of actual underlying US treasuries or physical USD, I'm only making that promise because it's been true for every currency that has ever attempted to maintain a peg with the US dollar. Maybe it's "different this time" but I sincerely doubt it. I likewise encourage you to think about this from first principles and read up on the mechanics of a currency peg. You MUST be able to quickly sell T-bills on the market swiftly to defend your currency peg, otherwise you will see your currency break from the pegged range. DAI is shifting the reserves from directly holding USD or T-bills to holding USDC instead, which isn't the same thing as USD and WILL cause problems for DAI.

by boc 4y ago

whimsicalism 4y ago

If the auctioning functions correctly, there will always be more reserves as compared to Dai. If the "reserves run out", then there would be no Dai to buy.

boc 4y ago
But DAI doesn't control USDC, which means that they cannot control the reserve piece of the equation. This is the independent monetary policy + free capital flow piece of the trilemma. The auction function doesn't work if USDC suddenly isn't worth 1 USD, because then you're facing down a reserve that isn't worth "more" than DAI, even though the algo still thinks it's in balance. Basically you've tied DAI to USDC, which in turn is tied to Coinbase, which in the event of a bank run/bankruptcy event will freeze assets and cause massive capital flight causing people to sell their USDC for less than 1 USD as they flee for safety. This causes DAI to become unbalanced because their reserve of USDC isn't actually worth what it should be in USD terms, causing DAI to also lose the peg in terms of real US dollars. I'm telling you, there isn't a way to make this stuff work. It's financial alchemy.
- whimsicalism 4y ago
  That is a legitimate concern, but irrelevant to the trilemma you've mentioned. If USDC loses value, those vaults will be liquidated and the collateral will shift over to alternates - ie. eth. The scenario you are mentioning only plays out if USDC falls so much (and quickly enough that the auction bots don't respond) that it cancels out the overcollateralization from eth. given that dai is 166% collateralized, it wpuld have to drop a ton, which is difficult to imagine when it is credibly backed by real assets.
  - boc 4y ago
    But the liquidation of USDC represents the flow of real assets OUT of the ecosystem, thus rapidly inflating the price of ETH and any other cryptocurrency denominated in dollars. Aka if you start selling 2 USDC for 1 USD, then the price of ETH goes from $3000 to $6000 overnight. BUT those dollar signs in front of the price aren't US dollar signs, they are USDC dollar signs. Which means that I can engage in massive arbitrage between exchanges. Exchanges respond by sealing themselves off to protect their $3000 ETH from the $6000 fake ETH trade prices, thus creating a massive freeze in the market, thus wrecking the redemption system that underpins DAI. It's very, VERY important to realize that all of these things are interwoven. There's no such thing as "USDC collapsing" without it also taking all the crypto traded on Coinbase with it.
    - whimsicalism 4y ago
      ... no. The price of Ethereum in USDC is irrelevant. There is no arbitrage to be had. If the price of USDC falls, you have to spend more and more USDC to mint one Dai because Dai is tied to the price of the dollar, not USDC. Explain to me how you arbitrage USDC falling out of Dai? I really encourage you to read up more on this. There are real risks that come with Dai as a stablecoin (including eth or USDC collapsing very quickly) but they are not the risks that you are identifying.
      - boc 4y ago
        My background is in international finance, and therefore when I promise you that DAI cannot defend a virtual peg without holding large amounts of actual underlying US treasuries or physical USD, I'm only making that promise because it's been true for every currency that has ever attempted to maintain a peg with the US dollar. Maybe it's "different this time" but I sincerely doubt it. I likewise encourage you to think about this from first principles and read up on the mechanics of a currency peg. You MUST be able to quickly sell T-bills on the market swiftly to defend your currency peg, otherwise you will see your currency break from the pegged range. DAI is shifting the reserves from directly holding USD or T-bills to holding USDC instead, which isn't the same thing as USD and WILL cause problems for DAI.