Stabilized Coin Series 3: DAI, a stable currency with hidden dangers?

Based on the currency of asset collateral, it is difficult to ensure the value is stable. There is no successful precedent in history, whether it is the gold standard or the oil standard. In the digital stable currency system, I still do not change my judgment. Today, let's talk about the stable currency DAI based on digital asset mortgage.

In order to make the content easy to understand, do not repeat the white paper content, dig a few to talk:

  1. Replace the credit endorsement with a smart contract – CDP;
  2. Mortgage digital assets, obtain loans, mortgage rate is more than 150%; (this article will discuss the problem with 200% mortgage rate)
  3. The loan is issued in the form of a digital currency DAI;
  4. DAI and USD anchor: 1 Dai = 1 USD;
  5. Use the mortgage and price feedback system to stabilize the price of Dai at $1;
  6. The MKR holder acts as the last buyer;
  7. Global settlement provides the ultimate security.

The above is some key points, divided into two parts: one is the distribution mechanism of DAI, and the other is the stability mechanism of DAI exchange rate.

1. Issuance mechanism

At present, only Ethereum is supported. In the case of Ethereum, the issue is divided into three steps.

Ether Square, which is worth $2, gets a loan of $1;

Issue the digital currency DAI to anchor the DAI to the US dollar 1:1;

Deliver a $1 loan in the form of a DAI.

2. Stability mechanism

Using over-collateralization to guarantee the value of DAI, each DAI has an Ethereum endorsement of $2 worth;

Use the interest rate system to maintain DAI price stability;

When the DAI is less than $1, the interest rate rises, the demand for borrowing is restrained, the mortgage demand is reduced, the supply of DAI is reduced, and the price of DAI is rising.

When the DAI is higher than $1, interest rates fall, demand for issuing DAI increases, market prices fall, and prices return to $1.

The MakerDAO autonomous organization has the authority to manage the DAI, and the holder of the MKR acts as the final buyer to ensure the stability of the DAI;

Global settlement is the last step in the system. When there is a huge problem, the community can decide whether to make a global settlement.

The above stability mechanism is only a theoretical hypothesis, but if the theory is successful, it is necessary to make a big question mark! I have a lot of doubts about DAI, which makes it hard for me to believe that it will succeed.

1. Is DAI a stable currency?

What we hear is that DAI is a stable currency issued based on digital asset collateral. The release of DAI is essentially based on the demand for borrowing. In short, I have borrowing needs. I will go to mortgage Ethereum and get the money to pick up the girl. As for whether you are a stable currency, I have nothing to do with it. Just fine. If I don't have a loan demand, there will be no DAI in the market. In my opinion, DAI is just a digital pawn shop, but not simply as a stable coin.

Therefore, DAI is based solely on borrowing needs, not on market demand based on money. How much DAI is there, and how much DAI is there, not how much currency the market needs.

2. The ceiling of the circulation brought by the mortgage

I mentioned in Series 2 that MV=PY, the circulation of money must be highly correlated with social material wealth. When the total wealth of the society continues to increase and the output of gold cannot keep up with the speed, the monetary solution of the gold standard is naturally abandoned.

In the world of encryption, simply think of PY as the total market value of the cryptocurrency. As the currency of the digital world, whether its circulation can cover the entire market is particularly important.

DAI is only based on mortgages, the market value of mortgage assets is its ceiling, the current market value of ETH is 18 billion US dollars, assuming the market mortgage rate is as high as 50%, that is 9 billion US dollars Ethereum, according to the 200% mortgage rate, the highest market There will be only $4.5 billion in dai. This is the ceiling of the dai circulation.

The USDT is priced at USD 1:1 and can be priced at USDT at any time according to market demand. The dollar is its ceiling, but the ceiling is high enough that we don't have to worry. Unlike the USDT, DAI has obvious ceilings and it is difficult to meet the needs of high-growth markets.

3. Can the interest rate mechanism be really effective?

In theory, when Dai is less than $1, CDP owners will buy Dai (less than one dollar) from the market to repay their CDP's Dai debt ($1), thereby increasing Dai's market. Demand, which will bring Dai's price back to $1.

The above is only a theoretical assumption, and DAI is based on the demand for loans. For CDP owners, I need a loan. The current price of DAI is not important to me. I bought DAI and redeemed ETH. If the loan demand is still there, I will mortgage the assets and exchange it for DAI. The market price of DAI will not change.

To maintain the stability of the currency price, the entire ecology must have arbitrageurs. Take the USDT as an example. When the USDT exchange rate rises above 1 US dollar, the arbitrageur will mortgage the US dollar at Tether, get the USDT, and sell it to the market, thereby increasing the USDT supply and restraining the USDT exchange rate. When the exchange rate is less than 1 US dollar, the USDT will be purchased to redeem the US dollar and reduce the market supply. The arbitrageur acts as a middleman, swinging and profiting on both sides of the exchange rate.

For arbitrageurs, when the exchange rate is less than 1 US dollar, the purchase of DAI, and the withdrawal of the mortgage position, there is no exit mechanism, which puts arbitrageurs at great risk. The presence of arbitrageurs allows the supply of USDT to keep up with demand, and arbitrageurs cannot redeem ETH by purchasing DAI, and it is difficult to enter the DAI market.

4. Is DAI a valuable asset with intrinsic value far greater than the face value?

DAI and the US dollar are anchored one by one, we can think that the face value of DAI is 1 US dollar (we will not talk about market fluctuations for the time being).

For the borrower, the final is to redeem the $2 value of Ethereum with a $1 denomination of DAI, so the intrinsic value of DAI is $2. The intrinsic value is 2 times the face value, which is the mortgage rate.

Let's take a brief look at this problem. Assume that the DAI market price has risen to $1.50 and that this price has been maintained for a long time. The borrower has money in hand or wants to switch back to Ethereum to sell. Then the problem is coming. The price of DAI is already $1.50. I still can't buy DAI and redeem Ethereum. The answer is yes, as long as it is less than $2, redemption is profitable. Then the price expectation for DAI will rise, and finally it will be $2.

When the evil capital realizes this problem, will it launch an attack? How to attack?

Suppose the market only mortgages $2 ETH and issues a DAI. So if you buy this DAI, the price is $1.50. For the borrower, you can only buy DAI for $1.5. If the market mortgages $20,000 for ETH and issues 10,000 DAIs, will the situation change? No, as long as the attacker buys all of the 10,000 DAIs and the price is $1.50, the borrower can only accept the price. By analogy, no matter how many DAIs you issue, the DAI can only be generated based on mortgages. Its intrinsic value is $2, and it does not change its intrinsic value as the circulation increases. There are many more issues, and this fact is not changed, and the price cannot be stabilized.

The question is whether or not all acquisitions can be made. As mentioned above, the supply of DAI is ceilinged, and there are limited. If it is limited, it is entirely possible to be attacked. If the mortgaged asset releases the dollar, it will be completely different, because the dollar can be understood as infinite, and the problem lies in the DAI's issuance mechanism.

This is the case with the capital crocodile Soros attacking the Thai baht. This is a war. Your foreign exchange reserves are limited, which gives me the possibility of attack.

The market price change is due to market expectations. If the market expects the price to rise without attack, the market will react in advance.

5. What should I do if the price of the collateral falls? What should I do with the black swan?

The digital currency market is an extremely unstable market. It is normal for market prices to skyrocket and plunging. Can DAI withstand the volatility of collateral prices? This is a test that needs to be tested in actual combat.

When the price of the collateral rises, everything is fine. Hello, hello, everyone. When the price fell slowly, there was no problem, and the market gave sufficient reaction time.

But what happens when the price plummets? Black swan events can happen at any time. The black swan appeared in the history of Ethereum. The DAO smart contract was hacked. The ether worth more than 60 million US dollars was stolen, and the price of Ethereum plummeted.

Black swan accidents often occur quickly and do not have enough time to react. In the event of a market crash, the sale of ETH to liquidate the DAI will actually cause the price to fall faster. Eventually it will lead to a plunge in the chain and the market will step on it. In 2015, the stock market's de-allocation led to a collapse in the market, which is a ready-made example.

6. Is DAI decentralized?

DAI is distributed to the center, but the management organization MakerDAO behind it is a centralized organization. By mastering a large number of MKRs, the Maker Foundation obtains the appropriate funds and maintains the supply and stability of Dai through the way the transactions are made. This is facing the centralization of DAI.

First, in the market, MKR holders acted as the last buyer of DAI; but when the market price collapsed, I doubted Maker's solvency, and whether he really could withstand the impact of the market. Whether the market value of MKR can completely cover the market and make up for the losses of DAI holders is a big question. And whether MKR holders are willing to do this is also a question.

Second, when an uncontrollable risk occurs, the global clearing system is activated and the DAI system can be terminated, which is determined by community voting and triggered by a group of trusted personnel holding a global settlement key. This is really a big power, we can't know when it will pull. This puts the ultimate fate of DAI in the hands of a few people. This centralized power is like a sword in the square, hanging over the head, you don't know when it will fall.