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Comment by zdkl | Hacker News Reader

>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.

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