[Discussion] cDAI/aDAI/yDAI collaterals as a peg enabler tool

The peg issue led to an emergency increase of the DC of all collaterals. Still most are not full. On the other hand, after this discussion, the base rate will likely be lowered to -4%. Governance is not at ease with either large amounts of ETH collateral (today’s meeting) neither large amount of USDC, neither not being compensated for all the risk taken. The near future promise just more of the same.

I hope all those actions will be enough, but I’m not sure. I think DeFi is more efficient than we assume. When a whale decide to stop using the USDC-A facility, I assume it follows our discussions. Getting to SF = 0% on USDC-A will bring $100k annually to the whale. $100k for checking a forum once a week. And if not this whale, there are other whales (3 whales were sinking 90% of the 80M DC of USDC-A).

Within this context, none of the actions (raising strongly DC and lowering base rate) are silver bullets. We will see. Let’s forgot this post for a year if the peg goes to 1 next week if you want.

But in any case, having all collateral with a SF of 0% is not sustainable. If we hope DAI to have greater adoption, demand will remain strong. M1 just for the US is 5 trillions. In a short timeframe, when USDT will fail, 10 000 M DAI will be needed. Okay I’m getting too far, you get the idea.

It will mean no interest rate to secure the system, pay for the operations and remunerate the MKR holders.

As I already tell, I think using stablecoin as collateral is crazy. Nevertheless, they can be a powerful policy tool (we will see when USDC-A SF will be 0%). It’s like the PSM which is unlikely to see daylight in the near future.

cDAI is not as real collateral, it’s more a financial leverage, a money multiplier or a better way to impact interest rates on money markets.

The nice thing is that we can keep a stability fee on first order collaterals (not DAI based) and set the cDAI stability fee as needed for the peg to stay around 1. It should be punishing rates in general, something like 90% of the average supply rate on compound…

Is it risker to have 200M ETH at risk or 100M ETH + 100cDAI ? I would argue that it would be twice less expensive to make ETH vault whole in the later.

I would also argue that central banks are doing just that. They are buying bills and treasuries, i.e. a $ lent for 3 months to 10 years, in repo operations to issue $ and add liquidity to the system.

I understand there are many points to analyze. Like how to proceed a recursive ES. What are the impacts of COMP farming on that. Are aDAI/cDAI the good way to express that. Maybe we should think the whole thing differently.

But it seems to makes sense from a real world financial policy perspective and it would have a more direct impact on the DAI peg. As a cherry, we would help, and take a cut of, all DeFi lego block we support (see Uniswap discussion as well ).

If there is interest, we can work the subject and later ask for a signal request. Let me know.


Completely agree that cDai and also curve tokens and other defi product tokens are great collateral in general, but especially well suited to deal with the current peg/imbalance issue.

The main downside is that they come with technical risk. The more cDai you enable, the more the Maker system and MKR holders are exposed to losses from a bug in the compound infrastructure. This speaks towards spreading the risk across as many different defi platforms as possible (which will take time since each collateral onboarding is a lot of work).


This is a very creative suggestion, but I am really worried about the technical risks.

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Please find below a capture of the last balance sheet of the Fed regarding the collateralization of dollar bills (federal reserve notes).

You can see that most of the collateral is US bonds which are promise to pay dollar bills in the future which is like aDAI/cDAI in a sense.


I gave the idea more thought.

Overall, I don’t see any problem except in the case of emergency shutdown. In such case, all DAI holder could redeem a basket of tokens with some aDAI tokens inside. Now those aDAI tokens could be used in Aave to get DAI that can be redeemed again. At the end, some aDAI will not be used (amount too small).

While not ideal, I don’t think it really matters if cDAI/aDAI remains below 25% of all the collateral (it would take 3 round to reduce the amount of cDAI/aDAI to 1.5% of the collateral received). But above that threshold, the recursion would be painful.

Therefore aDAI/cDAI can be a small multiplier (x1.3) with some drawbacks at the ES.

Any feeling on the topic ?

Discussion is great but this is an ask for forgiveness type scenario. I think it would be great if you or someone else created a MIP6 for these collateral types and then we could discuss the merits of them in their respective threads. Then at least we get the ball rolling on onboarding.

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Fair enough. This discussion is about the underlying concept of using an IOU of DAI as collateral and what are the implications on the DAI Credit System from a monetary perspective (among others). In fact, I made a lot of side research (not even crypto-related) to check if the whole idea was sound (it is).

But know it’s fine, I’m convinced. Let’s get the ball rolling then!

@SebVentures Yeah, the recursion isn’t that bad, and people can still trade DAI on uniswap for ETH instead of doing the unwrapping. Though it might be controvertial for some people.

One thing you could consider is yDAI, which is the yearn.finance (v2) basic yield switching coin. It’s been around for more than 6 months. One benefit is that it might be easier to integrate than aDAI. aDAI has streaming interest payments while for yDAI, the value will just go up.

yearn DAI - https://etherscan.io/address/0x16de59092dae5ccf4a1e6439d611fd0653f0bd01

Also, like to make a comment for cDAI. Would be better to get a wrapper on it. So that vault holders can earn COMP from their cDAI too.

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So another benefit, is that during Black Thursday, there was a massive liquidity crunch. Not only did the DAI supply drop, but M1/2 DAI supply also dropped, less deposits on secondary platforms. Interest rates on secondary platforms went up, some hit 50% interest rates. One benefit is that this is like open market operations, you inject real DAI liquidity onto the secondary platforms, when they’re demanding it (and we’re offpeg), yeah its a strong interest rate management tool, which can affect the peg.

Well, my secret plan was to have 90% DAI backed by such collateral. I’m a bit disappointed.

Adding yDAI on the list (way more protocol risk tho). aDAi will wait Aave v2 anyway.

yDAI-term (from the yield protocol) seems alive as well but no product, only whitepapers.

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As long as CRV is being distributed to people who lock up cDAI or yDAI into Curve.fi, I don’t think the economics would favor minting DAI. But maybe the landscape will be different in 3 years :smiley: