It’s not so much that the risk is associated with USDC. The risk is that when Vaults are being liquidated, DAI tends to trade high (because vault holders want to save their vaults.) During auctions we want keepers to be able to source DAI as cheaply as possible.
The keepers captial cycle looks a little like this:
Acquire DAI -> bid on vault -> win collateral asset (ETH as an example) at auction -> Acquire more DAI
Now, that last step can be done in a couple of ways.
- Keepers can buy DAI on the market (selling the collateral asset they just won.) But they lose value on this trade if DAI is trading at 1.05 (as a consequence they bid lower earlier in the cycle, bad for Maker!)
- Keepers can mint DAI from a vault using the collateral asset. But this is probably dangerous, if an asset is being liquidated, it’s because there is some downward market movement.
- Keepers can sell the asset they won for USDC, lock that USDC in a USDC-A vault, and then mint DAI. But, USDC-A vaults fill up when DAI is trading at 1.05 (because people short the peg.)
- Keepers can sell the asset they won for USDC, lock that USDC in a USDC-B vault, and then mint DAI. USDC-B vaults should always have space because the SF is so punishing for long-term use. Keepers should be able to exit in a short time once the market has calmed down.