Could Dai be short squeezed like Gamestop?

It seems that the amount of Dai owed will always be larger than the amount of Dai in circulation and the difference will always be increasing due to the stability fee. Let’s say person X mints 100 Dai with 6% stability fee and owes 106 Dai a year later. There is a 6 Dai deficit that can only be paid off by the introduction of another person Y who also generates more Dai. With each passing moment of stability fees being applied this deficit increases and can be sustained only by new Dai being minted. It seems like it wouldn’t be possible to pay back all Dai owed and there will eventually be a shortage as enough new Dai can’t be minted and people try to close out their Dai debt. This is all based off my limited understanding of MakerDao, and I would love to be told if and where my misunderstanding lies.

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Hi @peterssam and welcome to the forum!

DAI generated by SF is not taken out of circulation (at least long term) as it is at some point auctioned in a flap auction.

But before this happens, the surplus is collected in the Surplus Buffer (which is set to 30 MM since yesterday) - so you are right: for some time the collected fees are taken out of the market.

Nevertheless, we haven’t see a shortage in supply of DAI for quite some time. Since the PSM is online there is a big incentive on minting DAI as soon as the price goes >1 USD.

HTH

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You are right.

Moreover, there is a problem of DAI lost (sent to wrong addresses, keys forgotten, etc).

As you observe, this effectively might lead to higher demand for DAI. This, in turn, constitutes a pressure on the PEG with USD.

Indeed in the past we have seen that DAI was valued >1usd in the market.

Fortunately there are ways to fix this and keep the peg (and so, demand and offer) under control. The three most important are:

  1. Dai Saving Rate (DSR): this helps bring the peg back to 1:1 when 1DAI < 1USD. So not very relevant in the context of your question.
  2. Setting appropriate Stability Fees (SF), i.e., interests. If 1DAI > 1USD, by setting SF close® to 0, we incentivise DAI production, and so we increase supply, and therefore we reduce the price of DAI, and therefore we bring it back to 1:1.
  3. The two above, alone, proved to be insufficient/unsatisfactory. For this reason we introduced the PSM which is basically a 1:1 swap between DAI and USDC. This is a bruteforce atomic-bomb method to keep the peg 1:1. The negative side of this method, is that MakerDAO needs to embark USDC and this consitutes a third-party risk. But so far, it worked pretty well. And we have ideas for the future to mitigate this risk.
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But this also happens with the U.S. Dollar and every other currency–money gets lost, misplaced, and buried. I bet Pablo Escobar has a few Billion USD buried in the ground in Medellin & Cartagena, that will never be recovered. Also, DAI/Maker Community can always choose to de-peg from USD, just like Nixon did in 1971 with Gold.

true, but USD gets minted out of thin air w/o any collateral backing it. a few billion or trillion buried in the ground do not make a difference

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Thanks for the reply!

It seems to me that even if the SF stays in circulation this problem still exists. If Dai is only minted via creating debt and the debt is always growing denominated in Dai, it wouldnt be able to be paid off unless there is a way of creating Dai that does not require also creating debt.

While the flap auction seems to balance the accounting of the MakerDao system, it doesnt actually mint any more Dai but rather acquires it. If that Dai is used to pay off debt, the debt goes down but so does the amount of Dai in circulation, still leaving debt in excess of the circulating currency. This seems to be sustainable while there are more people/assets to create Dai and keep it pegged but eventually wont the space as a whole run out of assets that can be posted as collateral for Dai?

No.

Suppose you are the last owner of a Vault, with a total of 1000 DAI of debt.
Suppose also that there are no more DAI in circulation.

Question: How can you pay back your debt?
Answer: Use the PSM and “swap” 1000 USDC (in fact 1001 USDC due to the 0.1% fee) for 1000 DAI. Then pay back the debt.

So basically the PSM fixed the problem you are talking about.

To be clear, even without the PSM, this is not a problem.

@peterssam I think you’re missing a key aspect of the flap auctions.

While the flap auction seems to balance the accounting of the MakerDao system, it doesnt actually mint any more Dai but rather acquires it.

This is the description of a flop (debt auction). The mechanism you care about in this question is the flap (surplus auction).

The DAI for stability fee accumulation is indeed minted and exchanged for MKR in the flap auction. There is no need for any other Vault holders to participate.

In your example, we have 100 DAI of debt at a 6% SF. After a year you have the 100 DAI, but need to come up with 6 more DAI to pay down your debt and reclaim your collateral. If you were the only participant, and the surplus buffer was 0, you could purchase MKR on the market using any asset you like, and offer it to the system in a flap auction for the 6 DAI. You can now close your position and reclaim your collateral.

The books balance, and there is no need for some ponzi-style scheme where you require more Vault holders to create more debt. IMHO, the fact the books balance like this in a completely self-sustaining way makes DAI strictly better than USD. Combine that with the fact that 1 DAI is worth the basket of its collateral assets at Emergency Shutdown, and DAI is superior money to every other USD option on the market (including USD itself). Throw in a dash of anonymity, permissionlessness, and censorship resistance and you can see how we hope DAI becomes the worlds first unbiased global currency.

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Thanks for explaining this to me! I knew that I must have had some kind of misunderstanding. I will look more into the flap actions.

Without the PSM, if there is a Surplus Buffer and some lost DAI not everyone can repay their debt. You can read more on my accounting post.

With PSM and balance sheet manipulations, MakerDAO can own stuff that aren’t a loan (a promise to pay DAI from people). The PSM allows to own USDC. There is now more DAI than DAI loans to be paid.

Lost DAI are just 0% interest perpetual funding for Maker, quite a good deal.

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