What's the point of adding stablecoins as collateral?

What is the expected loss of a regulated bank-issued dollar coin like USDC being seized because elements of the US government don’t like non-regulated dollar-denominated (and private inside a ZK-SNARK wrapper) tokens like Dai?

Unless the system is robust against all this collateral going to an effective zero (in which case it should not be allowed as collateral due to losses it imposes on other users of the system) it presents an existential risk to Dai.

Hi IslandHunting and welcome to the discussion,

With regards to growing the DAI ecosystem there have historically largely been two major strategies, with the difference between the two being how the DAI system should interact with the existing financial system. Call them “crypto-only” and “love-KYC” or anything else you want.

With the “crypto-only” strategy collateral is exclusively sourced from other crypto assets, making the system lighter in terms of governance and more resiliant against attack. The downside is less collateral, fewer types of collateral and a more niche profile for DAI. The system interacts only weakly with existing financial systems as all funds first pass through other crypto.

In the “love-KYC” strategy collateral is additionally sourced from fiat stablecoins and any security token we can lay our hands on. The upside is a huge increase in collateral and a much larger role for DAI, at the expense of more complicated governance and more risks connected with all the new collateral. Additionally the new types of collateral will increasingly make for tougher KYC requirements which is hugely unpopular in some crypto circles.

Right now we are more or less headed in the “love-KYC” direction unless external events force a change. It is however very valuable to have participants with opposing views so please continue sharing your doubts.

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You probably mean low probability catastrophic event, not “black swan” event.
Black swan is something that is hard to imagine in advance. Uncle Sam wanting to dominate the world financial system is quite predictable. Maybe we should worry more about Ethereum black swans.

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As someone who is relatively new to these discussions, I’m actually really shocked that this idea is even being considered.

I read through @rune’s post and I can’t really comprehend how it could possibly be a good idea for the world’s first and most successful decentralized stablecoin ecosystem to willingly make itself dependent on corporations and banks for its core stability.

Maybe I’m missing a big piece of the puzzle here, but it seems to me that if MakerDAO starts accepting TUSD, USDC, etc as collateral, then any one of those companies facing legal problems, regulatory issues, or even worse - collapsing - could wreak havoc on the DAI system as well as the value of MKR.

I understand the desire to make DAI more liquid as @rune outlined above, but this “love-KYC” idea certainly does not seem like the right path for providing a frictionless alternative to traditional finance, which is what I thought MakerDAO was all about and why I’ve been so attracted to it.

My takeaway was that even if these companies get in legal trouble the rightful owners of the assets would most likely still be able to recover these assets hence keepers would still be buying on liquidation of CDPs.

Also as long as DCS is not only “dependent” on one centralized asset (one type of asset or only assets from one jurisdiction etc) the system will still be decentralized imo. And as such not dependent on any one of these. Actually having only crypto as collateral is currently somewhat centralized as all crypto correlate more or less.

Also as long as Dai and hopefully also MKR and some collateral types stays non KYC I think that is good enough imo.

All that being said I share your concern to some degree. Which is why I raised the subject of putting centralized collateral types into baskets to mitigate the centralization risks even further.

Anyways hope I provided at least a tiny piece to your entire puzzle. And that you stick around and keep making those awesome videos :slight_smile:

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Hi @ChrisBlec and welcome to the discussion,

even if we use centralized collateral such as TUSD we do not place ourselves at the mercy of these companies. The Maker community will use the debt ceiling instrument to limit the amount of DAI that can be issued per type of collateral. So if something could be slightly fishy or face regulatory difficulties we just allow less of it.

Using this instrument we can utilize more or less every type of asset out there, in varying quantities, dependent on how risky we think the type of collateral is.

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I echo @IslandHunting’s concern above, which puts this idea into question. What would happen if Coinbase/Circle, Tether, TrueToken, etc were forced by the government to effectively delete the fiat stablecoin tokens being held as DAI collateral?

As long as this is a possibility - no matter how remote it may be - then the existence of DAI (and the value of MKR) would seem to be hinging upon the continued good faith & existence of these institutions.

Please show me how I’m wrong. I’d love to have my mind changed on this.

(Thanks for watching the videos! :grinning:)

Then the government has suspended the rule of law by seizing property that legally belongs to the token holders (if I understand correctly, for TUSD the USD reserve belongs to the token holders and is held by a third party). It’s always possible, but the likelihood seems small that a first-world government would do this.

The government can’t seize this collateral without screwing over their own citizens who own the token.

Most everyone is reliant of the continued good faith of their government and the maintenance of the rule of law. It isn’t something most governments are eager to screw around with because it ultimately leads to civil unrest as their citizens start to feel that the law doesn’t protect them (or their property) from their government.

I feel like this is possible in the same way it’s possible for me to shoot myself in the foot. I could do it, but I have no incentive.

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Currently, there is zero risk of any DAI collateral being seized by anyone at all. The decentralized nature of ETH simply does not allow for it.

If centralized stablecoins are permitted as collateral, then the risk of seizure or other centralized shenanigans will be introduced for the first time. Even if it’s unlikely to occur, the risk level will no longer be zero, and that’s a big deal.

The idea of introducing debt ceilings for each centralized coin (max % of total collateral pool) could be a good way to mitigate this risk. However I’d suggest that those ceilings should be agreed to at the same time or before approving the assets as collateral - not after they’re already approved.

My “Yes” vote would be contingent upon satisfactory ceilings being agreed upon. I’d be very interested in seeing data simulations proving that the ceilings will be low enough to mitigate the effects of any centralized disasters in terms of both DAI peg and MKR value.

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I think this argument proves too much. One of the features of Bitcoin, Ethereum, etc. is precisely to reduce reliance on the continued good faith of a government, and in general saying “we’re somewhat reliant on them anyway” shouldn’t justify increasing our reliance.

However in a hypothetical world where I’m looking for maximum safety and I have the choice between a pure dollar-denominated ETH debt instrument and a mixed debt with assets under the power of several countries + crypto collateral, all in reasonable proportions, I will choose the mixed instrument. That seems pretty obvious.

It also seems pretty obvious that the “reasonable proportions” part is crucial, as mentioned by @Planet_X. If MKR holders disregard safety (i.e.: act against their self-interest), they could give too much influence to an entity with control over a large part of the total collateral. But that’s just one risk among many, and in the long run choosing to have 100% exposure to a single risk (including the current, pure ETH risk situation) is also less safe than the alternative.

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I run a network of freelance developers and am building a decentralized version of our app. I was planning on exclusively using Dai, but if Maker accepted as collateral fiat-backed stablecoins I would use something else instead. Fiat-backed stablecoins backing Dai would ruin the entire ethos of what you all have created here, and would cause a mass-exodus from Dai. Please don’t.

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hi @Joe,

I suspect you mean fiat-backed stablecoins, not trustless stablecoins. But its fine - where can I read more about your dapp?

@Planet_X
Yes, thanks for the correction.
The company is subspace.net – we haven’t published anything about our dapp yet. It’s using swarm for git storage and some smart contracts to vote on pull requests. There is also a reputation component. To be used either by clients and freelance developers or the open-source community.

As LongForWisdom mentioned it seems unlikely that the regulators would seize the assets from the rightful owners. But yes it might not be zero % chance that It happens. There is also a non zero % chance that Ethereum has a fatal bug and since this is the only blockchain this project is currently enabled on such a scenario could also be fatal to MakerDAO.

But to me this is just an example that shows how fundamental diversification is to every aspect of this project.

As mentioned it kind of depends on setting the right risk parameters so that we keep Dai as decentralized as possible. If centralized assets are not used Dai will not have a diversified collateral basket which is really the pillar upon which this project is built. I don’t actually agree that the “ethos” of this project would be ruined on the contrary it just shows that even the collateral basket is diversified/decentralized (I.e. not centralized around one collateral type). Also seems like Dai being backed buy centralized asset (in a decentralized manner) has been on the roadmap since day one.

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@ginworkflow

If centralized assets are not used Dai will not have a diversified collateral basket which is really the pillar upon which this project is built.

Wrapping (“diversifying”) risky assets in a basket doesn’t make the basket less risky (housing crisis anyone?).

I don’t actually agree that the “ethos” of this project would be ruined on the contrary it just shows that even the collateral basket is diversified/decentralized (I.e. not centralized around one collateral type).

In a democracy, adding an additional person to the population with inordinately more votes than everyone else doesn’t make it more decentralized just because you’re adding another person. Maximum decentralization is a uniform distribution.

Lastly, in what world does the value of ethereum collapse without the value (practical, not theoretical) of tokens on ethereum collapsing. That probably isn’t how things would play out in a crash.

If Ethereum has a fatal bug, then it would take the fiat stablecoins down with it as well.

There is a huge difference between the inherent risk of operating on Ethereum, which comes with the mere existence of DAI, vs this proposed newly introduced risk which is purely optional right now and not required for continued existence and growth.

Agree wrapping <> diversification. The important thing is to have non correlated collateral which is what is being attempted with centralized assets.

Agree. And currently the distribution of collateral types are not at all balanced as only crypto is currently enabled.

imo centralized collateral is not optional currently as diversification of collateral is what underpins Dai’s value proposition. It is not “required” because of growth or a means to exist. But collateral diversification is required to make Dai more decentralized and hence the peg more secure. Essentially making Dai the best possible decentralized stablecoin. The growth aspect I would say is not a requirement but a nice to have.

Can we close and lock this thread given Rune’s PurityDAI proposal?