[UNI-V1] Uniswap Liquidity Tokens as Collateral

Okay sorry, we’re actually in agreement on the monetary policy.

So while these holders could manipulate the # of liquidity tokens, they can’t really manipulate the book value of a liquidity token.

You can manipulate the book value of a liquidity token up by giving fees to liquidity token holders, but you can’t really manipulate it down.

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Maybe, but like i said it may be best to just poll the forums to just see which swaps people think make for suitable collateral. That also seems like the logical first step toward drafting the MIP around this. I can pretty much see 3 schools of thought in this thread:

  1. UNI-V1 tokens as collateral for any asset currently used by the protocol. (BAT, USDC, WETH, DAI, MKR)
  2. Any UNI-V1 token excluding the DAI swap (because we may not understand how that behaves in the event of ES)
  3. Only the UNI-V1 for the DAI swap.

Are there any others that I am missing? If not we could probably could just put up a poll to get some signal for which school of thought would be most favored by the community. Once we knew that we could probably start on a draft for MIP6 and go from there.

Nobody is advocating that. You can drain the ETH from an unsanctioned uni-v1 token by dumping shitcoins into it.

I don’t think anyone advocated that in this thread.

If that’s the case, I’ll officially advocate for it now. Assuming we can properly understand the risks involved it’s the best one to onboard (and we should start with one). The reasons for that over the others:

  • It incentivises the Dai-Eth pool on uniswap.
  • The Dai-Eth pool has more existing liquidity than ETH-BAT, ETH-WETH and ETH-USDC.

Sorry I was unclear. When i say “any” uni-vi1 swap i really mean any of the ones mentioned here (USDC / BAT / WETH / MKR) save the DAI swap.

The suggested pairs by liquidity (13/04/20):

  • ETH-DAI: $5.8m
  • ETH-USDC: $4.3m
  • ETH-WETH: $1.6m
  • ETH-BAT: $730k

As of today all four are in the top 10 Uniswap pools.


It looks like the next step is for an interested party to take initiative, MIP6: Collateral Onboarding Form/Forum Template

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Do we have enough alignment at this point on which collateral token we would be writing the MIP for? I’ve been trying to advocate for trying to move this process forward with the DAI/ETH swap but there seems to be some resistance to that idea.

If we agree with @LongForWisdom that we should be moving forward with one UNI-V1 token then IMO we should put a poll up ITT to gain alignment on which UNI-V1 token would be the most preferred. I think once that is agreed on we can probably work on the MIP at that point.

FYI: I managed to read this thread - some good discussion here. I have actually been a liquidity provider to Uniswap V1 and have watched how implied value moves particularly with the ETH DAI pair. I have to think about this somewhat since the real issue here is what happens if the DAI PEG is lost.

ETH/BAT - that one I know for a fact (since I have liquidity there) is pretty much flat - it trades basically as ETH and so I think we can understand better how to manage this one.

I am generally leary of the whole ETH/MKR pair. Mostly beause I would rather see MKR in governance than in uniswap but really we need MKR liquidity generally so I am mixed on this one. I think from a risk standpoing ETH/MKR generally trades together so would have a value mosty reflected by how ETH moves vs. MKR.

I think using the Uniswap tokens are an interesting idea. The ETH DAI uniswap was the most interesting for me since this one actually would move around a lot by definition and hence generated a lot of fees. I think I came out up like 5-6% overall over 3-6 months of being in that.

What is nice about these is that the pricing mechanisms for the base elements of the pair are rather well determined.

One thing about adding collateral - we have to have auction process on virtually everything. Given the low liquidity of the markets in these things and actual ability to add DAI (i.e. market caps really are tiny) I think we need to focus more on adding only a few bigger cap issues that can add materially to the ecosystem in terms of cap and DAI minted than adding tons of small cap stuff that basically has no liquidity.

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Application for the ETH-DAI token is now up: Uniswap v1 Eth-Dai Liquidity Token Collateral Application


I’m a litte confused about this idea of having DAI as collateral, so I’ll ask basic questions.

First, is it purely theoretical because there is no reason anyone would do it (except if we set the parameters to 0 fee 100% CR)?

Is adding a DAI-ETH liquidity token as collateral is (for Maker) simply a way of getting back some of that ETH which is currently sitting in a uniswap market as a source of DAI?

Are there circumstances where the flow: 1) put DAI+ETH in Uniswap 2) put resulting liquiduty token in a Vault 3) get Dai out would on net lower the total amount of DAI in circulation?

We’re only considering uniswaps for which the underlying collateral is already supported. A liquidator can redeem the liquidity for its underlying and use those markets.

It’s implicit in that we need to evaluate the underlying DAI in the uniswap liquidity for ETH-DAI.

No. The vault would hold the liquidity token.

Yeah but basically this is yet another collateral type that will require liquidators and DAI to support. In the case of the ETH-DAI pair - interestingly the liquidator automatically gets DAI and only needs to sell ETH. In the case of the ETH-BAT pair a liquidator needs to deal with 2x liquidation strings after the tx to uniswap to cycle DAI… It adds to the overall network load footprint by 2x potentially. Where as the ETH-DAI pair doesn’t.

Also again. what is the total $$ value of liquidity one could even hope to command here. How much DAI (at what a lower LR?) does one think will be minted. Right now this pair commands $6M in total liquidity. Even if we get 1/2 of that it is $3M at LR of 150% that is what 2M minted (MAX) in reality to stay away from Liquidation we’d want to see 300% - so this would be $1M.

Everyone here seems so hot to just start adding tons of small cap collateral types - that virtually are all correlated. For what kind of return. even at a SF of 5% this is 50K DAI/year to support the whole system with collateral vault, liquidation, system governance activity.

While I have grave reservations about growing this system before we actually work out the issues in the existing one. I still want concpetually to be able to grow this system when we are ready.

Literally would need 1000 different collateral types at $1M DAI each to get to $1B. This conceptually looks like a complete nightmare vs. finding ONE single collateral type that can grow us to $1B.

Frankly we burned 200K of ETH through liquidations - this is $20M( at $100ETH) that could mint at 300% 6M of DAI. Fixing this problem so instead of $20M we liquidate $2M and maybe make a higher SF, and make people feel better about the stability and robustness of this system FAR more rewarding than adding 6 collateral types that mint $6M of DAI and making the system less robust and stable.

If we are really going to talk about collateral types why don’t we start talking about centralized costody and whether the community is ready for some of these or not. BTC is still highly correlated to ETH but it does have a cap that is attractive. PAX or some of the gold related tokens also interesing, Even the real-estate tokens are interesting.

While I think uniswap is interesting - going beyond ETH-DAI seems pointless. MKR/ETH seems hazardous - but has some appeal because liquidating MKR may finally create at least some idea of a MKR liquidation market through the UNI-V1 MKR/ETH pair. Maker could also use some of the surplus DAI as a kind of fund to purchase MKR/ETH at liquidation auction prices for burn - creating a more effective burn market and potentially a small liquidity backstop to the Uniswap MKR/ETH auction pair.

My point. Lets talk about best approach to adding a few key collateral types, but focus on ones that could add forms of stability and real value (via depositable cap + DAI growth + SF) to the system not a piecemeal bit approach to growing the system. $1M at a time.

I want to hear ideas about whether we can finally take on the 100B gorilla in the room BTC honestly.
Everything else feels like chump change. And I really don’t want to burn our $20B ETH market participants either like I feel like we have been doing lately with this laise faire approach to how our key users (ETH owners) got hammered borrowing in Maker recently. If we fix this for them - the rest will come naturally and easily. Maker alone could exist on $1-2B ETH deposits and perhaps 10-30M DAI SF revenue a year.


So slightly offtopic, but wow this made it click for me. I had no idea what you meant by quadratic vs linear. I thought you meant a different bonding curve but that wasn’t changed.

I can see how multi asset liquidity pools have better network effects than uniswap v2.

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:sweat_smile: Thanks I’m not sure what I was thinking.

For DAI/X pairs, could the CR be derived from the CR of X? Overall I don’t see any issues with adding uniswap tokens – as you mentioned, as long as the underlying assets are already accepted collateral.

So if you used a 130% CR for the DAI/X pair. You’d be protected from a -40.8% drop in X, equivalent to X having a collateralization of 169%. (If X drops by 40.8%, the DAI-X Liquidity Token drops by 23.1%)

DAI/X CR of 125% = 156% CR of X

If you want a formula CR of DAI-X = 1 / [ SQRT [ 1 / (CR of X) ] ]

CR of X = 1 / [ [ 1 / (CR of DAI-X) ] ^ 2]

But it’s a bit more complicated than that to decide on a collateralization ratio. There’s the liquidation penalty, slippage assumptions…


For some further discussion on risk parameters: the stability fee on ETH-DAI Liquidity Tokens.

So one interesting thing is that DAI is being minted while partially backed by non-DSR DAI. That DAI sitting as collateral is earning stability fees for Maker from another vault.

The ETH-DAI liquidity token includes 50% DAI. And with a 130% collateralization ratio, each DAI minted is actually backed by 65% DAI.

So it seems important to give a stability fee discount for this vault. 50% is conservative, governance/risk could decide on something higher.



Looks good to me. It would be great if we could decide on a formula so we don’t have to poll and vote on it.

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See my comment here