[UNI-V1] Uniswap Liquidity Tokens as Collateral

The Uniswap liquidity token is essentially 50% ETH and 50% another token that does well while Uniswap volume outpaces volatility.

The two largest Uniswaps by ETH are DAI and MKR, so these would be good sources of collateral. It’s easy to oracle the value of uniswap liquidity tokens based on their underlying assets.

Uniswap MKR has 344 holders and a market cap of about $3.5mm

Uniswap DAI has 752 holders and a market cap of about $2.7mm.

Uniswap WETH never made sense to me but people still use it. 112 holders and a market cap of $2.5mm.

If we accept WBTC as collateral, the WBTC Uniswap would also be a good candidate, being 50% ETH and 50% BTC and having 55 holders and a market cap of $870k.


Seems interesting, and it also seems like good incentives to add liquidity to the uniswap dai contract.

They’re a good source of collateral and holders will have good incentives for using it as collateral and paying stability fees.

Just to layout the risk of the collateral. It’s a bit more risky than 50% ETH, 50% DAI, as the eth price falls, dai is converted to eth. This snowballs but it’s still safer than holding 100% eth and there being a big crash.

Another issue might be Uniswap MKR. You might not want to allow using MKR as collateral.



Possibly, but probably not.

Having MKR as collateral (even in diluted form) causes incentive changes that start affecting core aspects of the system. I’m actually not 100% against MKR as collateral at some point in the future (to a very limited degree), but it’s a fundamental and important change that has wide reaching consequences. If we are to include MKR as collateral, it should be explicitly, not as part of a Uniswap token.

The Dai/Eth token is much more interesting to consider. I can see pros and cons there, but I still feel that the cons are pretty huge. @Jiecut lays out some great points (welcome to the forum, Jiecut!) as to the nature of that collateral. Likewise the WETH market is an interesting thought. Like you, I have no idea why people are trading it rather than wrapping it themselves, but it seems to be a proven phenomena.

I wouldn’t be against a risk analysis for Dai/Eth and Weth/Eth as collateral types. But there is definitely some complexity. The circularity of the Dai/Eth token worries me.


The common denominator is that we should consider uniswap tokens for assets we already accept as collateral.


Interest on UNI-V1 has been strong lately. UNI-V1:DAI earns 34% APR according to uniswaproi.com. Such collateral could support a high DSR.

Uniswap ETH-DAI would lower in value slower than ETH alone so it is safer in that sense

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The interesting thing is that this has a different return characteristic than Ethereum. Say if Ethereum went completely sideways, it’d have an expected return of 0% while the ETH-DAI Uniswap LP token could have an expected return of 10%.

So this difference in return profile should be very attractive to Maker. When demand to mint ETH is low, this will be a more attractive option. (like now)

Does feel like it’s worth exploring. I’m still worried about the circularity of backing Dai with Dai. Balancer seems like it could be worth look into as well.

Are there any good uniswap pairs that we can use that don’t include Dai or MKR as one of the assets?

I believe Uniswap 2.0 will permit arbitrary assets pairs. So yes

Backing DAI with DAI doesn’t really seem like a problem. It’ll be overcollateralized too.

It’s a big difference from the ETH-USDC pair. DAI actually has less risks because of the circulatory factor. You just end up with the slightly different ETH risk, but you have the benefit of a different return characteristic too.

Now with cDAI, that gets a bit more interesting.

Also the other big benefit of the ETH/DAI Uniswap LP is that you’re incentivising liquidity to the ETH/DAI pair, and we’re earning stability fees while doing so.

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I don’t see any problem with ETH-DAI though.

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Seriously? What is DAI goes off peg? It works great until it fails catastrophically.

1 DAI = 1 DAI
The only asset for which it is not a problem for DAI to go off the peg is DAI.

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In emergency shutdown, DAI holders would not benefit from a claim on DAI collateral. Accepting DAI as collateral dilutes DAI holders.


DAI will still have value after an emergency shutdown.

In ES, DAI becomes a claim on the underlying collateral backing the debt. So if x% of the collateral backing DAI is DAI, wouldn’t that share of the collateral just be a claim on the remaining non-DAI collateral assets? I don’t see how this wouldn’t result in a haircut for DAI holders

Edit: oops this is not correct


Yeah, I agree. It does result in Dai not being fully backed at ES, which is annoying because otherwise it’s probably a good collateral type.

Edit: I’m totally wrong, see below.

To clear the issue of DAI not being fully backed at ES.

Say there was 100 DAI minted. The collateral pool is 90 USDC and 10 DAI.

At ES there will be 90 DAI in circulation with a collateral pool of 90 USDC and 10 DAI. There is enough collateral to back all claims.

You can think of DAI backed by DAI as being out of circulation, and the collateral backing the old DAI is backing the new DAI.

Another way of thinking of it. 100 DAI minted. Collateral pool is 90 USDC and 10 DAI at ES.

You hold the 90 DAI in circulation. You can use it to claim 81 USDC and 9 DAI.

You hold 9 DAI. Collateral pool is 9 USDC and 1 DAI. You could use it to claim 8.1 USDC and 0.9 DAI. …

At ES, DAI holders are fully backed even with DAI in the collateral pool. It might be a bit more complicated but you could always sell your DAI instead.

So if at ES, 10% of collateral is DAI backing minted DAI, and 90% of the collateral is ‘real assets’, it’s fine because there’s only 90% of DAI in circulation that needs to be backed.


This makes sense, it’s hard to wrap my head around how this would work with liquidity pool tokens. Definitely worth investigating.

Yeah, I just spent a little while talking to @Jiecut and I understand it now too. We should definitely look into using the Eth/Dai uniswap liquidity token more deeply.