SVET Reports

Navigation For DAIvers

The Bear Market Hurricane makes many portfolio-ships captains to herd into the DAI Harbor.

Here’s what they have to be mindful of:

1) DAI is backed by ETH. It means that to create 1 DAI someone needs to provide 1.5 ETH as a collateral (or to lock it in his wallet), according to the 150% collatarization ratio of the Maker permissionless landing platform;

2) If markets go south then the value of provided collateral (ETH) might get below the 1.5 threshold. It triggers liquidations of all open undercollateralized positions by the CDP (collateralized debt position) contract. After that happens the Maker system auctions off the ‘taken’ ETH for DAI inside itself (or without sending ETH to any of external exchanges) until there is enough DAI to close off all over-thresholded debt position and to maintain 1 DAI to 1 USD peg;

3) However, if ETH tumbles so fast that such internal liquidation auctions do not have enough time to happen, there might be the trouble — DAI de-pegging. That what happened on March 12, 2020 when ETH price reached 86 USD, falling for more than 40% in minutes. At this day 1 DAI was sold for 0.89 USD on most exchanges;

4) Maker DAO team had learned their lesson and introduced to their system the Global Settlement
process. When this ‘settlement’ is triggered (by ‘a select group of trusted individuals’), the Maker system stops its contracts execution and all holders of Dai and CDPs are returned the underlying collateral. Then the system tries to gradually re-start itself until all owners can re-possess their collaterals and to send them outside of the platform;

5) Makercoin (MKR) holders are key decision makers and the ‘landers of the last resort’ in the Maker DAO. If there is not enough collaterals to back up all created DAIs, then more MKRs are minted and sold onto exchanges to rise additional capital and to cover DAI liquidity gap. Therefore, if MKR tumbles hard enough we will have much less financially sound backers left standing to safeguard the Maker platform.

Conclusion: The mother-of-all-hurricanes might destroy even safest harbors. Beware of largest waves and lowest tides. We can count only on the strength of our ships and nerves to weather its.