I do not think it is a good idea to sell MKR to buy DAI. In effect all the system needs to be able to do is just Mint DAI - MIP14 the DAI out to another account to buy assets (how and who does this is a real question but it will be needed eventually). MKR by definition is already pledged to make up the difference. Running a negative surplus literally means the assets backing DAI are NOT 1:1 but if we buy say stable coin assets it will. Just the surplus will read negative -$XM DAI while another account with have surplus +$YM stablecoins (USDC and the like). This literally IS a DAI direct injection mechanism controlled by MKR through MKR governance backed in the end by MKR and probably the only solution to manage this.
As I look at it unless the stablecoin values really change this would still create roughly 1:1 DAI backing but still create DAI to inject via the asset buying mechanism. I would limit buying only to stablecoins though as we don’t want to drive asset prices but simply DIRECT INJECT DAI liquidity based on minting DAI running a negative DAI surplus against a + stable coin account. Not as a decentralized model or DAI facility for everyone to use but directed by governance the MKR holders that are going to back this with their MKR in the end.
The reasoning here is that governance won’t have to pay a stability fee or worry about liquidations doing this. The issue is that governance may not be fast enough to do this. What we really need is a elected team to do the fast paced management, guided by governance and risk teams on this but I don’t see it happening fast enough. Literally I don’t think Maker will be able to respond fast enough nor has the tools to act properly to try to rebalance the DAI market. The problem will be measuring what is needed and then trying to manage providing it. We literally are going to have to leave things alone until we see how bad the DAI PEG gets and then try to figure out based on how much DAI liquidity was soaked up by compound to see what the first pass looks like.
My suggestion is that we raise the SF to 1% now rather than later. Deal with the inevitable PEG hit until compound gets their shit together with a real tangible plan that stops this. Right now nothing I see in prop 10 (enacted) and prop 11 (soon to be) is going to change anything except drop this problem right into USDC and DAI laps. Will USDC with stable prices soak this up or will it drive against DAI.
I am with @cyrus it is probably going to drive against DAI until the PEG compensates, I think from a risk perspective we have to raise SF since lowering it later won’t do dink (DCs will be maxed out already) and we will quickly find ourselves back at my mint DAI run a negative DAI surplus and buy stablecoin solution to direct inject DAI liquidity to manage this. My problem is what if this cranks DAI up to $.5-1B. But if we throw a SF on this of at least 1-2% we can capture the added liquidity SF fees as a kind of risk compensator. In the end once this comes under control governance can use the stablecoins to unwind the DAI short stablecoin or stablecoin long positions and bring the surplus back to positive and then decide what to do with the extra DAI generated.
I have not had much time to look at the exact details on this but I am pretty sure the DAI PEG is probably going to see north of 1.03 for some sustained time if the markets fall we are going to have a hell of a problem with DAI liquidity for ETH or other collateral auctions. I think we need to warn borrowers to start paying back, which again is a reason to raise the SF. Try to reign in the system now and put a risk premium on all of this now before it gets out of control until compound reigns this in.