I am writing about an ongoing poll to include cDai as collateral. So far only 11 people have voted on it. You can see a well written proposal from SebVentures at [cDAI] MIP6 Collateral Onboarding Application
I think this collateral would carry substantial risk for Maker, most of which was not recognized in the original proposal. I hope I can convince you to vote not to prioritize this collateral. This argument will also be applicable for other interest bearing DAI account tokens (such as aDai), but I’ll focus on cDai here, since that is the one most at risk of being accepted.
At first glance, this seems like an excellent form of collateral. In the short term and in some ways in the long term, this would give us greater control over the DAI interest rate. By setting an interest rate on this collateral type that is lower than the rate found on Compound, we would immediately see the interest rate on Compound drop to the interest rate we set, since an arbitrager would borrow DAI to get cDai to lock until the interest rates matched. This would likely lower the price of DAI helping us to restore the peg and is the most compelling reason in my mind to go forward with the proposal. This reason was listed in the original proposal.
If cDai is accepted as acollateral, I’ll assume it is accepted with a lower interest rate than the rate seen on Compound, since if that is not the case, the addition should have no affect at all. Thus, I’ll be assuming that it will carry the benefits outlined above and the risks outlined below.
Some might also hope that they could profit from this arbitrage (that Maker and Compound would collectively pay for). Unfortunately, that arbitrage will probably get paid out immediately to someone with a single transaction and a flash loan and probably not to the person that writes that transaction, but to a frontrunner looking at items in the mempool. (But these details are not too important.)
There are a number of substantial risks associated with cDai collateral. As stated earlier, cDai will either be extremely popular (to arbitrage the interest rate) or not used at all. If it is extremely popular and sees use, there would be a number of downsides. Most importantly, lenders would naturally prefer to use Compound to borrow DAI than to use Oasis. This is because Compound would have the same interest rate and it provides incentives on top, including interest on collateral. That means cDai collateral would actually cannibalize other forms of collateral, including ETH, which most people in the community would agree to be a more valuable form of collateral than cDai. cDai could cannibalize literally any form of collateral that both Maker and Compound accept. This would mean that collateral would get centralized in cDai and Maker would be essentially selling its ability to choose collateral types and debt ceilings to Compound, since cDai is backed by whatever Compound is willing to borrow. This would add substantial risk to Maker if anything ever happened to Compound. These risks would obviously be mitigated by whatever debt ceiling we imposed on cDai, but that doesn’t really address the problem. Making something less bad doesn’t make it not bad. Wherever we set the debt ceiling would simply determine how much wealth we were transferring from Maker to whoever front-runs the transaction(s) to arbitrage Maker and Compound.
In addition, though a lesser concern, coupling ourselves to Compound like this would give some of the DAI policy control over to Compound. For example, shocks to DAI interest rates and supply could occur as Compound changes their incentive structures. This would give Maker less control over the peg in the longer term.
Finally, increasing our coupling with Compound would increase the chance of both protocol risk (as was acknowledged in the original proposal) and the risk of finding ourselves in the middle of a flash loan exploit (like what happened to Fulcrum).
For these reasons (mainly the first one), I think substantial risks to Maker went unnoticed and we should avoid adding cDai (and similar tokens) as collateral for DAI.
Please vote against cDai being prioritized as a collateral here.