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Dai maintained its peg through a 94% drop in the ETH price over the course of 2018, despite being backed only by ETH at the time.

magicalhippo 4y ago
So I'm not really into the crypto scene. How did Dai manage this?
- Cantinflas 4y ago
  Liquidating collateral below a certain margin, automatically and on chain
  - blitzar 4y ago
    Which does what to the value of the assets in the collatteral pool ... which then in turn triggers selling of assets in the collateral pool ... which then does what to the value of assets in the collateral pool ...
    - chrisco255 4y ago
      Each collateralized debt position is independent. They do not use one large pool of collateral for all DAI. Each CDP is independently liquidated as the value of the collateral drops. Can liquidations trigger price drops in ETH? Yes, and that can cause a cascade of liquidations as the collateral value falls on various CDPs. But that just wipes more debt as it cascades. MakerDAO has responsible thresholds (150%) for liquidations. It's not without risks but it's one of the good eggs.
      - Tostino 4y ago
        I wish there was a visualization of the likely outcomes with the rules they have in place, and a few variations with different assumptions.
        chrisco255 4y ago
        https://maker.blockanalitica.com/vaults-at-risk-simulation/ https://maker.blockanalitica.com/vaults-at-risk-simulation/ This is a nice table for that.
    - rglullis 4y ago
      There is a bit more to it, and this is the part that is covered by the MKR token: https://docs.makerdao.com/keepers/the-auctions-of-the-maker-protocol https://docs.makerdao.com/keepers/the-auctions-of-the-maker-...
  - deleted 4y ago
    [deleted]
- danielvf 4y ago
  DAI is over collateralized - you lock up as collateral more than the value of the DAI you get back when DAI is created. So let's say you deposit 20 eth at @ $1,000 USD per eth, which gives you a collateral value of $20,000. You create $10,000 DAI which you can then do what you want with. If the price of ETH goes down, and the value of your collateral drops to $14,500, less than 150% collateral, then DAI automatically holds an auction on your collateral, selling it to the highest bidder. Let's say it sells it for $14,000, that's a $500 profit for the purchaser, and a $4,000 profit to DAI. The looser here is you, who still has the $10,000 DAI, but has lost $14,500 in ETH. Next time, you'll either top up, or pay back your vault before it gets to this point.
  - bombcar 4y ago
    This works until you get a flash crash, or a situation where there no buyers can be found - then all hell breaks loose. Same thing happened with the mortgage backed securities - even if they had some value (and everyone admitted they did) nobody could be found to buy them - hence "toxic" so the government stepped in and became the buyer of last resort.
JumpCrisscross 4y ago
> maintained its peg through a 94% drop in the ETH price over the course of 2018, despite being backed only by ETH at the time That was a different market. We’ve experimented this with currency boards. Holding reserves in anything but your anchor currency is asking for trouble. Making public what your reserves are invites specific arbitrages. The added fun with crypto is that the monetary base of ETH is tiny compared to most reserve currencies. So the instability point for DAI is far smaller, in terms of triggering a fire sale, than for a real currency board. Side note: I guess we’re about 15 years out from 2008, the minimum term for a generational divide, and so I shouldn’t be surprised about people saying 150% collateral is pretty much safe again. Mortgages then. Ether now. Russian bonds before.
- DennisP 4y ago
  What specifically would you say was different in 2018 that made the DAI peg more workable?
  - JumpCrisscross 4y ago
    > What specifically would you say was different in 2018 that made the DAI peg more workable? Rates were low. There is less dumb money now. And its quantity will predictably decline over the coming 12 to 18 months.
    - blitzar 4y ago
      Total value in Dai in 2018 (it launched in dec 2017) was < USD200mil - in the period where ETH lost most of its value (Q1 2018) the total value of dai issued was ~ USD 50mil (to ETH's ~75bn market cap). Its ~ USD 7bn now (vs ETH 220bn market cap - and not the only stable coin holding eth ...). https://bravenewcoin.com/insights/maker-price-analysis-multicollateral-dai-released https://bravenewcoin.com/insights/maker-price-analysis-multi...
      - JumpCrisscross 4y ago
        > USD 7bn now (vs ETH 220bn market cap 3% is a large enough fraction of value to induce fire sales at less than a 50% price drop. (I don't know precisely where below 50%. Nobody does.) Every shaky currency board in the history of pegged currencies hobbled through attacks when hard currency was easy in the absence of a solvency crisis. Let's assume Tether doesn't de-peg and Celsius's ETH loan [1] doesn't spark a run. That leaves rates. In 2018, we had relatively easy money, taper tantrums aside. Today, we don't. And hard money is only getting tighter. [1] https://www.bloomberg.com/news/articles/2022-06-13/bitcoin-sinks-to-18-month-low-as-us-inflation-impact-spreads?srnd=premium https://www.bloomberg.com/news/articles/2022-06-13/bitcoin-s...

magicalhippo 4y ago

So I'm not really into the crypto scene. How did Dai manage this?

Cantinflas 4y ago
Liquidating collateral below a certain margin, automatically and on chain
- blitzar 4y ago
  Which does what to the value of the assets in the collatteral pool ... which then in turn triggers selling of assets in the collateral pool ... which then does what to the value of assets in the collateral pool ...
  - chrisco255 4y ago
    Each collateralized debt position is independent. They do not use one large pool of collateral for all DAI. Each CDP is independently liquidated as the value of the collateral drops. Can liquidations trigger price drops in ETH? Yes, and that can cause a cascade of liquidations as the collateral value falls on various CDPs. But that just wipes more debt as it cascades. MakerDAO has responsible thresholds (150%) for liquidations. It's not without risks but it's one of the good eggs.
    - Tostino 4y ago
      I wish there was a visualization of the likely outcomes with the rules they have in place, and a few variations with different assumptions.
      - chrisco255 4y ago
        https://maker.blockanalitica.com/vaults-at-risk-simulation/ https://maker.blockanalitica.com/vaults-at-risk-simulation/ This is a nice table for that.
  - rglullis 4y ago
    There is a bit more to it, and this is the part that is covered by the MKR token: https://docs.makerdao.com/keepers/the-auctions-of-the-maker-protocol https://docs.makerdao.com/keepers/the-auctions-of-the-maker-...
- deleted 4y ago
  [deleted]
danielvf 4y ago
DAI is over collateralized - you lock up as collateral more than the value of the DAI you get back when DAI is created. So let's say you deposit 20 eth at @ $1,000 USD per eth, which gives you a collateral value of $20,000. You create $10,000 DAI which you can then do what you want with. If the price of ETH goes down, and the value of your collateral drops to $14,500, less than 150% collateral, then DAI automatically holds an auction on your collateral, selling it to the highest bidder. Let's say it sells it for $14,000, that's a $500 profit for the purchaser, and a $4,000 profit to DAI. The looser here is you, who still has the $10,000 DAI, but has lost $14,500 in ETH. Next time, you'll either top up, or pay back your vault before it gets to this point.
- bombcar 4y ago
  This works until you get a flash crash, or a situation where there no buyers can be found - then all hell breaks loose. Same thing happened with the mortgage backed securities - even if they had some value (and everyone admitted they did) nobody could be found to buy them - hence "toxic" so the government stepped in and became the buyer of last resort.

JumpCrisscross 4y ago

> maintained its peg through a 94% drop in the ETH price over the course of 2018, despite being backed only by ETH at the time That was a different market. We’ve experimented this with currency boards. Holding reserves in anything but your anchor currency is asking for trouble. Making public what your reserves are invites specific arbitrages. The added fun with crypto is that the monetary base of ETH is tiny compared to most reserve currencies. So the instability point for DAI is far smaller, in terms of triggering a fire sale, than for a real currency board. Side note: I guess we’re about 15 years out from 2008, the minimum term for a generational divide, and so I shouldn’t be surprised about people saying 150% collateral is pretty much safe again. Mortgages then. Ether now. Russian bonds before.

DennisP 4y ago
What specifically would you say was different in 2018 that made the DAI peg more workable?
- JumpCrisscross 4y ago
  > What specifically would you say was different in 2018 that made the DAI peg more workable? Rates were low. There is less dumb money now. And its quantity will predictably decline over the coming 12 to 18 months.
  - blitzar 4y ago
    Total value in Dai in 2018 (it launched in dec 2017) was < USD200mil - in the period where ETH lost most of its value (Q1 2018) the total value of dai issued was ~ USD 50mil (to ETH's ~75bn market cap). Its ~ USD 7bn now (vs ETH 220bn market cap - and not the only stable coin holding eth ...). https://bravenewcoin.com/insights/maker-price-analysis-multicollateral-dai-released https://bravenewcoin.com/insights/maker-price-analysis-multi...
    - JumpCrisscross 4y ago
      > USD 7bn now (vs ETH 220bn market cap 3% is a large enough fraction of value to induce fire sales at less than a 50% price drop. (I don't know precisely where below 50%. Nobody does.) Every shaky currency board in the history of pegged currencies hobbled through attacks when hard currency was easy in the absence of a solvency crisis. Let's assume Tether doesn't de-peg and Celsius's ETH loan [1] doesn't spark a run. That leaves rates. In 2018, we had relatively easy money, taper tantrums aside. Today, we don't. And hard money is only getting tighter. [1] https://www.bloomberg.com/news/articles/2022-06-13/bitcoin-sinks-to-18-month-low-as-us-inflation-impact-spreads?srnd=premium https://www.bloomberg.com/news/articles/2022-06-13/bitcoin-s...