Preventing leverage on leverage?

I’ve been asking a bunch of questions as I learn about Maker and appreciate your patience with me!

I was wondering if the scenario below is possible to do on Maker. It creates significant risk for the borrower, but don’t know if it creates any unforeseen risk for DAI/MKR/the protocol too.

Say required collateral ratio is 150%. I deposit $150 worth of ETH in a vault and withdraw $100 in DAI. I then buy $100 in ETH and deposit that back in a vault to withdraw $66.67 in DAI, and so on. If I keep doing this, I would have built up a $450 position in ETH (so 2X leverage on my initial $150). Including stability fees and liquidation penalty, this would be disastrous for me if ETH price swings downwards significantly (a ~30% downward swing wipes out my capital). Does this create any additional risk for DAI (or MKR holders), though?

Thank you,
Paritosh

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I would characterize that as expected leveraging behavior which does not create any unexpected risks to Dai or MakerDAO.

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Notice that in your scenario, you have a total of $250 worth of ETH deposited and $166.67 of DAI drawn, which sets you exactly at 150% collateralization ratio, as required. From Maker’s point of view, it’s just a larger vault.

The only additional risk is that when the price of ETH drops, all of your collateral must be sold in the liquidation process. This is something that the Risk CU often looks at - will the keepers be able to liquidate vaults at a fast enough rate during a price crash to keep the protocol from taking on bad debt?

If the answer to that is no, then the solution is to cap the debt ceiling for the collateral type, raise stability fees etc. so that as a whole, the protocol is safe from taking on bad debt. Maker cannot prevent individual vault users from behaving in a risky way but we can ensure that the total risk is managed.

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Thank you @Spidomo @AstronautThis