Hacker News Reader

Comment by scotty79 | Hacker News Reader

How would death spiral on DAI look?

There's not really a death spiral mechanism for DAI. DAI's reserves are all auditable and on-chain. Anyone can verify if it is or isn't overcollatoralised at any time.

Theoretically a big enough crash could cause the collateral to drop faster than liquidations happened, and that could cause a run on DAI to cash out the collateral that's left before it runs out

What if ETH would start dropping towards 1$/ETH for some unrelated reason?

Would DAI be able to defend peg or also fall and accelerate fall of ETH?

People wanting to withdraw their ETH from collateral would need to get DAI on the market to pay back the collateralize DAI loan to get their ETH before it's liquidated. This should initially drive DAI over 1$ peg.

Would liquidating loans drive down ETH further? What exactly happens to ETH form liquidate loans? Is it sold? Is it burned? Does it happen automatically or is decided by owners of Maker token?

I'm not sure 100% how the liquidation method works for DAI so not completely sure, but DAI is not backed by 100% ETH, in fact i think most of the backing is actually USDC at the moment

DAI has been backed by a basket of coins for quite some time now, precisely to mitigate the scenario you described. Even if ETH went to near zero it would still be over 100% collateralised.

Death spiralness is a particular kind of failure mode - and it has to be built into the design of the protocol, and have an economic environment that's right for it to happen as well. It's possible for anything to fail, but not everything can death spiral.

Though I'm a perpetual pessimist (and saw the UST/Luna failure mode in five minutes of reading the whitepaper), I don't think DAI can death spiral as it right now.

DAI is currently backed by 47% USDC, 17% ETH, 7% WBTC, 7% USDP (very like USDC), and 10% USDC/DAI Uniswap LP positions and 4% "other". DAI is backed with 150% assets per DAI.

Since only 28% of DAI's backing is non 1:1 USD backed assets, even if ETH, WBTC, and whatever is in "other" where to zero, there would still be > 100% backing for the remaining.

FRAX though, FRAX could death spiral any time now.

Oh wow you can use shares in uniswap liquidity pools as collateral on DAI?

People would very loudly insist that DAI cannot possibly fail and that it's not like all those other stablecoins that failed and this time it will be totally different.

Then the peg would break

I was hoping for more detailed, more technical scenario that takes into account the specifics of the protocol.

There's a good comment in a previous crypto thread on this: https://news.ycombinator.com/item?id=31414217

Basically DAI might break peg if the backing assets became illiquid (no buyers).

DAI is not fully algorithmic but is backed (in part) by USDC. RAI is backed by ETH which is a currency that is not linked to RAI in the same way that UST and Luna were.

Reply on news.ycombinator.com