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Comment by drcode | Hacker News Reader

DAI coin is just diversifying risk by using multiple underlying assets- So instead of a 10% chance of the value dropping 90% due to a failure of an asset guarantor, it will just have a 90% chance of dropping 10% in value. The MakerDAO organization can likely cover this 10% loss in asset value by using their enormous capital, but this is not a sustainable strategy for creating a stable synthetic asset.

I think sustainable synthetic blockchain assets are possible, but they will always have complicated risk/reward profiles that won't fully mirror the underlying asset they are designed to model: The dream of a truly "synthetic dollar" will always remain a dream.

EDIT: I should clarify that I think DAI coin may still be a useful construct for some situations, but it's going to be an asset with very different properties compared to any target real-world asset.

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> sustainable synthetic blockchain assets are possible, but they will always have complicated risk/reward profiles that won't fully mirror the underlying asset they are designed to model

We figured out this doesn't work in the 19th century.

Reserves don't remove volatility, they just hides it. This is how banks work. And like a bank, a system of keeping "enormous capital" on the sidelines, ready to buy, works 90% of the time. When it doesn't, however, when people fear "enormous" is not enormous enough, they withdraw (i.e. sell), which prompts more selling, until eventually, since "enormous" isn't 100%, the buck breaks and the cards come crashing down.

Also people like to steal the "enormous capital," which is why we have regulations.

>this is not a sustainable strategy for creating a stable synthetic asset

Could you give some pointers for further reading on the subject please?

There's not really much reading on this- You simply can't take 10 assets that are worth less than $1 individually (because of guarantor risk) and mix them together to create an asset that's pegged at exactly $1- This is not a problem that can be solved by "diversification".

For other history on synthetic assets, read Preston's posts and also Vitalik's posts such as https://blog.ethereum.org/2014/03/28/schellingcoin-a-minimal...

MakerDAO's system over-collateralizes on DAI. Currently, it takes at least $1.50 of ETH to create $1 of DAI. This is based on the volatility and risk profile of ETH. These parameters are adjustable by MakerDAO token holders. Suppose they added gold to the asset basket where 50% of DAI was backed by gold and 50% was backed by ETH. They could require 125% position on gold and 150% position on ETH. In this case, 50% of the supply of DAI would be subject to the whims of ETH price while 50% would depend on gold. If gold or ETH were both to drop to near zero at nearly the same time so rapidly that the CDPs could not be liquidated in time, then the system would be at risk. Seeing as how Gold and ETH are not correlated, this is an unlikely event. Adding 8 more uncorrelated assets to the protocol would only further improve the stability of the system.

The inherent problem is that even if you are heavily diversified, in order to back by 50% gold you'd need to have 50% gold PLUS 50% MULTIPLIED BY THE PROBABILITY THE GUARANTOR FAILS.

For ether, such overcollateralization isn't a problem, because you can package it as an ether derivative and have no counterparty risk... But for a gold collateral you would have a risk that cannot be mitigated in this way and the risk will need to increase the slippage of the asset.

As time progresses, other guarantors will place their assets on the blockchain similarly to Digix. And when other guarantors come online, Maker will be free to add those to the pool. As it stands, Digix provides Assay certificates and undergoes third party auditing. MakerDAO is off to a great start. They're doing all the right things to build a sustainable stable coin.

I'd be curious what your thoughts are on the structure I propose in this comment of mine (different thread): https://news.ycombinator.com/item?id=16867880

If wanting to read from my parent comment: https://news.ycombinator.com/item?id=16851187

> sustainable synthetic blockchain assets are possible

Want do you have in mind?

Well, maybe something like an ethereum on-chain dollar ETF and a decentralized oracle for determining the exchange rate, which is built out of bonds that allow people to get leverage against the underlying ether currency in exchange for providing collateral for the ETF. The problem with such a construct is that (1) the people providing the collateral will insist on high fees and (2) the amount of collateral provided will need to be limited for enough people to participate, so the design would always have a risk for a "broken peg" during extreme fluctuations.

It's not quite the same thing, but Stellar allows the implementation of pegged Assets (e.g. USD), though they are issued by an anchor that you must explicitly trust to redeem those deposits. That could be a bank or other well-capitalized institution however.

This is basically the BTC Tether model, except hopefully some anchors will step up that can actually complete an audit without breaking up with their auditors.

I'm not all that convinced that it will be possible to create a stable synthetic blockchain asset without either explicitly pegging to fiat (a la Stellar) or having a big and diverse enough slice of GDP flowing through the system so that speculative activities are a minority of transaction volume.

This is more or less how DAI works. And in the case of a broken peg, there's a global settlement option that can liquidate all the collateral. https://developer.makerdao.com/dai/1/stability

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