[Action Required] State of the Peg

I agree that Maker can and will add collateral types (MCD was all about that right?!). The idea that this has priority over improving system mechanics and other important topics to my mind sends the following message to the community “well we did a few things to the system, we hope will work and stop other problems in the future” along with another message “don’t get liquidated you could lose it all” and oh btw “we are onboarding PAXG, LINK, and whatever else” just doesn’t seem prudent when one is looking at getting a bottom line here of profits needed to fund the DAO in the 5-10M minimum/yr by system DAI growth to approx $.5-1B DAI and a stable thriving community.

I completely agree with your “I’m worried we’re tossing levers just because we have them, without considering the long-term effects.” I will add I am worried we are basically leaving open huge holes in this system exposing not just DAI and vault holders, but the entire DeFI ecosystem and Ethereum itself to a financial risk event that literally lays waste to the entire ecosystem. Everyone will throw up their hands and start blaming everyone else. Personally I find the risk of such an event growing dramatically and steadily reducing my own exposure in this space to get out of the way.

I also agree with you that I wonder if people really are taking into account the macroeconomic picture here. I mean even if Maker could command 1% of all crypto capital this amounts to no more than 2B collateral at this time. At 300% LR this means maybe $.6B. We were pushing $140M just on ETH on perhaps 2% of all ETH before getting smacked down 40-50M DAI on approx 190K ETH and are at 1.66%.

I think I am just going to leave my whole - lets improve the system first - before jamming it full of other collateral and trying to grow it like mad by 10’s if not 100’s of collateral additions aside. My impression is many folks subscribe to a view that somehow magically adding collateral is going to fix any of the other larger issues here and nothing else really needs to be done other than that. My personal view is that if we fix what people percieve are the issues with the system currently we can grow much more with ETH, LINK and other correlated assets because the system will be ready and made more robust against these correlated asset moves… It is also my view that IF Maker as one of the most important DeFI participants can help provide the confidence in the crypto DeFI space that it could lead to a massive market cap growth phase in Ethereum based tokens as well as other coins creating the environment to safely and sustainably grow and support these protocols. Literally to get to where Maker wants to be we need a crypto market cap 5x to $1T and if Maker can be the leader in this - we will have 5-10% of all ETH ($5 -10B value at $100B ETH cap and $1T total cap) and god knows what ever other coins deposited in our most highly valued system for a most highly trusted and valued DAI stablecoin.

Sure IMHO, sure this is opinion, maybe or maybe not an expert in anything (sure people can toss that out if they want opinions vary). My real concern here is that instead of good solid steady growth of the entire crypo-economy people are going to push for the get it quick and drive this entire ecosystem and its participants into one or more thursdays that will be even blacker than 3/12-3/13 and last a hell of a lot longer. As I like to say. I will be happy to be wrong on this as this is how I usually learn something new and fortunately i am still learning. Unfortunately I keep learning over and over that usually when I think something is bad it usually is worse and not better.


Echoing some of the more recent posts here – from a long-term perspective, the current deviation from the peg is unfortunate and warrants attention, but the solution is not an emergency action.

I would urge us to fight the instinct to react too quickly and risk overreacting or compromising on fundamental principles. While it often seems that things move very fast in crypto, highly liquid, trusted, stable monetary systems are built on the scale of decades and centuries.

We are in the midst of what is likely a once-in-a-century economic event. Even the most stable monetary systems out there are being challenged. Only a handful of weeks have passed since Black Thursday – an event which posed unprecedented challenges to the core liquidation systems that are the key backstop of DAI. In such an environment of a sharply increased perception of risk, are we surprised that we are seeing challenges in DAI liquidity?

Over-focusing on the competition between DAI and USDC (or other centralized stablecoin) is not productive. From both the decentralization and liquidity perspectives, this is apples and oranges. If there are projects out there that are considering USDC over DAI for liquidity purposes, what they are really saying is that they are choosing to give up the decentralization benefits of DAI for the liquidity benefits of USDC. Fundamentally, DAI’s unique value prop is its value being backed by decentralized assets. With the thus far limited value captured by decentralized assets (compared to fiat systems), it should not surprise anyone that scaling liquidity continues to be a challenge. In the foreseeable future, both systems will continue to exist, and applications that require liquidity more than decentralization will likely increasingly pick centralized stablecoins.

IMHO, the path forward is to continue to focus on the fundamentals of building a decentralized stablecoin system, and to address the core problems illuminated by recent events. I don’t claim to have any answers, but here are some fundamental questions that should be the discussion going forward:

  1. What are the key improvements to the liquidation system that would prevent the kind of failure modes we’ve seen recently?
  2. Is there a mechanism for the system to provide a DAI liquidity backstop in extreme scenarios? How can the system more predictably handle sudden spikes in demand for DAI?
  3. Are there key metrics that could illuminate the overall nature of liquidity in the system, that would allow better modeling of risks around cascading liquidations on inability to acquire DAI to close CDPs?
  4. How does the system grow liquidity when being backed by risk-on assets in a generally de-risking macro environment?

We are very much in the early days for DAI, and several weeks of lessened confidence in the system will be but blinks of an eye when put in the context of the many years it will take to scale liquidity to billions. Attempting to add incremental liquidity by quickly onboarding potentially problematic new collateral types is, at best, kicking the can down the road on fundamental issues, and at worst, adding new types of risk into a system. The more quickly we can start addressing fundamental risks, the faster the system can restore and grow trust, and eventually liquidity.


Yeah I think your about right. Thanks for typing it out, not that I thought you didn’t have specific points to back it up, I just was curious.

Trust Trust Trust, so important. Its what alot of this boils down to.

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One thing that concerns me is the push to keep dropping the USDC SF. USDC is far riskier to the system than ETH, especially in light of the anti-stablecoin political climate, and the SF should reflect that. The system is vulnerable to state pressure to shut the adapter down, and I can’t iterate that enough.

In this scenario, there would be plenty of advance warning for people to wind down their CDPs or have them liquidated before the adapter was shut down. It would require a court order or new law to make this happen- not something that would occur overnight. A graceful wind down would be the only way to protect innocent users. So the main risk here is people needing to buy back the dai and having to find other sources of liquidity to keep the Dai price from going up again.

USDC was added as a way to provide liquidity to keepers in a crunch, and it served that purpose. Stablecoins are not the long-term solution to restoring/maintaining the peg

I don’t agree with this. Stablecoins are the only collateral that’s not correlated with ETH right now. USDC provides a great way to arb the peg (i.e. mint dai, sell for usdc, buy back dai when peg is reached) - its the only way to do it without worrying about the crypto markets. I could see easily getting another 10m DAI minted for this reason. Agree that we have to maintain a reasonable ceiling, but I don’t see risks to MKR holders higher than with ETH collateral in terms of black swan events that could result in a major loss of the collateral value.


Hi small MKR holder, first time poster. General comment on collateral options from perspective of stability.

As well as uncorrelated collateral it’s also important for collateral to have low volatility. The issue in crash across markets generally was correlations went to 1 AND volatility spiked (and has stayed high).

I’d push back on notion LINK is uncorrelated to ETH. i haven’t modelled but looks positively correlated to ETH to me, just very high volatility.

I think PAXG would be very useful collateral for stability as while gold does have higher volatility than usual right now it’s not like crypto levels of volatility.



how about unorthodox approach. Correct me if I’m wrong, but from technical standpoint it is possible to vote in by governance minting unbacked DAI.

How about minting let say 1 MLN DAI selling it off for MKR effectively changing amount of collateral behind each DAI to ~0.988 USD
(in case of Emegency shutdown)

and see if that will drive price down. This is a method commonly used by central banks (SNB defending EUR/CHF rate at 1.2 for years being one notable example)

maybe the real problem is in the fact, that

Amount Basking each DAI + Utility of holding DAI instead of collateral == Price of DAI

Amount Basking each DAI = Price of DAI

and You cannot have those two equal under all circumstances.

Sure expanding collateral base should to some extend push away a problem, but I guess problem itself is much more fundamental.

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I am definitely for minting unbacked DAI. I’m not sure what you would do with MKR and would the buying drive the price up.

If we assume that ETH will be i.e. $280 at some point, we could mint some DAI, buy ETH and deposit as collateral and then restore backing by selling ETH for $280 in a few months or whenever.

I don’t think $1M will be enough - maybe even $10M won’t be enough because the demand will rise again and borrowers are scared of black swan events. The minting should be followed by improving the liquidation process.

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Would this work:

  1. Mint 1M DAI with no collateral
  2. sell all DAI for ~5555 ETH (1 ETH=$180)
  3. deposit all ETH as collateral (DAI is now 100% collateralized)

scenario 1: ETH goes to $90: sell ETH and end up with 500k system debt
scenario 2: ETH between $90 and $180: do nothing (the system is undercollateralized)
scenario 3: ETH between $180 and $234: do nothing (the system is overcollateralized)
scenario 4: ETH reaches $234:

  • sell all ETH for 1.3M DAI (realize 30% profit)
  • burn 1M DAI, 300.000 goes to system surplus
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What You describe is quite interesting variation of what I suggested

My reasoning was that since MKR holders takes the risk they should also benefit from the operation (that is DAI used to buy MKR)

Your suggestion is quite different. What you are suggesting is for MKR governance to be market makers.

Generate DAI and sell it for ETH and put that eth as deposit to the CDP which is governed by MKR governance not by external actor. That is quite interesting proposal I have to say!

One thing is that here MKR holders take additional risk of bad debt defending the peg and not benefiting from it, so there is incentives misalignment.

In what I suggest there are both sides. carrot and a stick. I guess You can even build external system where every MKR holder can choose to lock MKR or not (let say for 12 months) and participate in both profits and possible loses (if DAI drops below the peg ) sure there is some complexity in finding when DAI needs to be buyed back and burned, but I guess it can be solved.

I don’t think it’s a good idea to create unbacked Dai, that’s the sort of thing that gives Tether a bad name. I think it would make more sense to generate mkr, sell that for eth, and use that eth to generate dai. That dai can then be used to buy another stable asset like paxg or even usdc to be held in reserve for buying back the dai or perhaps funding some project.

However I’m not too enthused with my suggestion because it will dilute mkr holdings even more when we just had a large sell a few weeks ago. I do however think it’s the more publicly acceptable option.


So, there’s 3.85m left of debt ceiling room for DAI from ETH (86.15/90m). (This might even be the limiting factor for migrating CDPs).

Even though there’s been no governance poll, it seems prudent to include an ETH debt ceiling increase for the friday executive. DAI minted from ETH is the most prefered way to restore the peg and we need debt ceiling room to do that.


Seconding Jiecut’s point that we should raise the ETH debt ceiling. A little surprised we all missed this one tbh. This very well could be a major contributor to the failure of dai to hold its peg.


The difference i see is that there exist MKR token and it should be dilute if things go south. But if they do not then MKR holders benefit from god governance action.

Building on my earlier suggestion to dilute mkr to generate dai. Would it be acceptable to use mkr as collateral to generate dai? This would still present a risk to us mkr holders but only if the price falls significantly and our vault liquidated. We could then sell that dai for some other asset eth, paxg, or usdc.


I don’t know if there’s been a proper analysis on this somewhere already, but it seems like allowing maker as collateral in vaults could have lots of negative consequences. Certainly if maker is ever added as collateral it should have very conservative parameters.

As far as unbacked dai goes… perhaps the dai would be minted, used to buy and burn mkr? This way the excess value in dai is stored in the mkr token. Also it fits well with the theme of minting or burning mkr in other areas of the protocol.


Sounds like chicken-egg problem probably it will increase MKR price swings in black swan events

I’m OK with your suggestion also. I just think that if ETH doesn’t reach new ATH then DAI and MKR will be dead anyway (other blockchains and stablecoins will be vastly more popular) so we might just bet on ETH now without much risk.

Please vote to increase the DAI from ETH debt ceiling, we are at 99.98% utilization.


Yes debt ceiling needs to be raised ASAP, probably to 120 million. Let’s go ahead and overshoot the peg to 99 cents and then we can get the interest rates normalized.