
MakerDAO gets stress tested as ETH price plummets - tlrobinson
https://messari.io/article/makerdao-gets-stress-tested-as-eth-price-plummets
======
Taek
A lot of Ethereum DeFi (and cryptocurrency in general) has been pretty
frustrating to watch, because it's a lot of people with big ideas and little
understanding of how to build stable financial systems.

In the case of Maker, what's interesting is that a stablecoin is actually
possible. Maker has a really good core idea, several great elements to it:

1\. The stablecoin is backed by collateral, typically a significant amount
more collateral than the amount of stablecoin that has been issued.

2\. People locking up collateral get greater exposure to Eth's volatility. So
there's genuinely a reason to lock up collateral to issue stablecoins if you
are bullish on Eth.

But, this breaks down a bit. There's no way to instantly convert the
stablecoin back into the collateral asset, you have to find someone with a CDP
who is willing to buy the stablecoin from you.

Similarly, there's no way to unlock your collateralized asset, you have to
find someone who is willing to sell you the stablecoin in order to open up
your vault and get your eth out.

So on both sides of the equation, you have this liquidity risk that doesn't
really need to exist.

I could go on for a bit more, there are a bunch of other design decisions that
are backwards and don't work well. But the fundamental ideas are actually
pretty okay, and if you took a more traditional finance person and had them
work through all the tiny details, I think you'd end up with something pretty
powerful.

In that sense, it's almost like encryption. The tiniest detail being incorrect
can make the whole construction useless, even if as a whole the fundamentals
are pretty solid.

~~~
daveytea
> There's no way to instantly convert the stablecoin back into the collateral
> asset, you have to find someone with a CDP who is willing to buy the
> stablecoin from you.

This is incorrect and actually doesn't make sense. An important part of DeFi
are DEXes (decentralised exchanges) such as Uniswap and Kyber. There is a
liquidity pool where you can instantly buy/sell assets. There is no 'waiting'
to find someone (i.e. no problems with coincidence of wants). You definitely
do not need to find someone with a CDP. You can hold DAI without opening a
CDP. Contracts can hold DAI (as DEXes do).

> Similarly, there's no way to unlock your collateralized asset, you have to
> find someone who is willing to sell you the stablecoin in order to open up
> your vault and get your eth out.

Also incorrect. You need to pay back the debt of your CDP with DAI. You can do
this easily by buying DAI on a DEX, paying back the debt, then releasing your
collateral. Some services exist to do this in 1 transaction, so you don't need
to actually 'buy' any other asset. You just send the transaction to a contract
and they take care of the details.

The DeFi, specifically the Ethereum space, has moved very quickly in a short
amount of time, so there are a lot of new concepts and instruments out there.
I think a more traditional finance person will have trouble understanding it
all as in some cases, there are no analogies to the traditional finance system
(e.g. flashloans).

~~~
Taek
> You can hold DAI without opening a CDP

If you hold Dai without opening a CDP, the only way to convert that Dai back
to Eth is to find someone who opened a CDP and is willing to buy from you.

Similarly, if you opened a CDP and then sold the Dai, the only way to get your
Eth back out of the CDP is to find someone who is willing to sell you Dai. The
Maker liquidity crisis yesterday happened because there were more people
trying to scoop up Dai and get their Eth out of their CDPs than there were
people selling Dai, which meant that a lot of people were stuck holding
leveraged positions on Eth that they couldn't exit. Even worse, the auction
system was malfunctioning, so it appeared as though those people may not even
get a fair value for their Eth if they did get liquidated (not to mention,
they'd also have to pay the 13% fee for being liquidated, even if they got a
fair price in the auction).

> An important part of DeFi are DEXes (decentralised exchanges) such as
> Uniswap and Kyber. There is a liquidity pool where you can instantly
> buy/sell assets.

This only works if the total number of buyers and sellers are balanced. The
way Maker is set up right now, its possible for a large percentage of your Eth
pool (or Dai pool) to be completely unavailable because the holders have not
listed the Dai on an exchange. Simply having a decentralized exchange does not
automatically guarantee liquidity - people have to agree to sell their assets
on that exchange.

> You can do this easily by buying DAI on a DEX

The entire problem yesterday is that all of the Dai was scooped up from all of
the Dexes. There was a period yesterday where the Dai price was >$1.11,
meaning that CDP holders were paying an 11% premium to exit their positions.
The Maker system had no exit valve for people stuck in this position.

> The DeFi, specifically the Ethereum space, has moved very quickly in a short
> amount of time, so there are a lot of new concepts and instruments out
> there.

There are also a lot of old concepts and well understood financial
relationships that are being ignored, and a lot of highly predictable failure
modes that are being forecasted as "black swans". The best team is likely
composed both of people who have a very solid background in cryptocurrency as
well as people who have a very solid background in traditional finance.

~~~
3solarmasses
Sorry but please try to use something in an ecosystem before you bash it.
Little of what you're saying is true in the least.

CDP owners the only buyers of DAI?! DAI is on every dex, with pairs for a ton
of assets. Try out Uniswap...

------
Jd
There were a few products prior to MakerDAO that failed when their
collateralized peg collapsed, most notably BitUSD and NuShares.

MakerDAO is somewhat more sophisticated and holds way more capital but the
fundamental problem is that you can't exclusively collateralize a dollar peg
from a highly volatile unit of account with elastic demand or black swan
events can wipe it out.

~~~
chrisco255
Why not? DAI survived the bear market of 2018 and 2019 that saw ETH plunge
from $1400 to $85. And it held with no more than 5% variance from $1 USD.

------
nootropicat
Given that this was a black swan event and the actual damage is minimal, DeFi
has proven to be extremely durable.

~~~
maccam912
Minimal? My understanding is someone was able to pull ETH out at near zero
DAI. Nothing the contract didn't allow, but unforseen use of it which caused
some people who had invested that ETH to essentially lose their life savings!

~~~
nootropicat
It's more complicated. Their collateral ratio has dropped below the
liquidation level of 150%. So at best they would only get a fraction of their
collateral back (any liquidation has a discount and a 13% penalty) -
fundamentally they lost because their speculative bet didn't pay off. So yes,
they lost more than they should, but describing it like they lost everything
_because of the liquidation problem alone_ is misleading.

The "attack" was trivial in that there was only one bid at an auction - not
enough people liquidating undercollateralized positions, but now so many
people are looking at this it's never going to repeat again. It's an obvious
risk only in hindsight.

~~~
nullc
> never going to repeat again

So now it just needs a little help from miners to actively exclude all other
bidders.

My understanding is that in this case there were other bidders but they were
drowned out by the winning bidder paying much more gas.

~~~
nootropicat
>So now it just needs a little help from miners to actively exclude all other
bidders.

A mining cartel that censors transactions is indeed a real risk. Fortunately,
ethereum is switching to PoS where even an average person with a smartphone
could realistically generate several blocks a day, as opposed to multiple
megawatt (or even giga) mining farms, so it's only a temporary issue.

>My understanding is that in this case there were other bidders but they were
drowned out by the winning bidder paying much more gas.

Most likely lack of liquidity and/or gas pricing misconfiguration. Even at an
ultra-high 600 gwei (during the peak congestion, the market rate was ~200
gwei) the total fee was less than $10. Simply put: not enough people running
liquidation bots.

Example:
[https://etherscan.io/tx/0x239cc6ba8f28b7a3b66cd5e1b558b0c735...](https://etherscan.io/tx/0x239cc6ba8f28b7a3b66cd5e1b558b0c735641d3a44405afe5b28eb2e5ef37665)

~~~
nullc
> average person with a smartphone could realistically generate several blocks
> a day,

I seem to recall the proposed staking minimum being around $200,000...

Eth's administrators must have a kink for kidnapping.

It's far from clear that "PoS" can result in a system which is both secure and
decentralized:
[https://download.wpsoftware.net/bitcoin/pos.pdf](https://download.wpsoftware.net/bitcoin/pos.pdf)
... the limited academic work attempting to demonstrate such things have done
things like assume that users were using a lossless ordered reliable broadcast
medium (which is equivalent to assuming they were communicating over a
consensus system). While the history of ethereum has demonstrated that in
spite of claims to the contrary in their investment prospectus strong
decentralization isn't a feature of the system, there are still many practical
challenges even achieving faux-decentralization with PoS. Practically speaking
this challenge is demonstrated by the fact that ETH's operators have
continually pushed back their promised migration to PoS. Moreover, as was
recently demonstrated with "steem" PoS can also easily be abused to rig
outcomes just like that above concern with mining.

So I think its far from clear that this is a temporary issue. Instead, to me
it looks like PoS has turned into a never-arriving panacea being used to
excuse all sorts of serious flaws in the ethereum ecosystem in addition to
ethereum itself.

~~~
zeven7
> I seem to recall the proposed staking minimum being around $200,000...

I takes 32 ETH to run your own validator node, so at current prices $4,183.

~~~
nullc
Ah. Indeed, when that was announced the price results in 32 ETH being ~$250k.

Why is the same number of ETH an appropriate amount now?

~~~
alphast0rm
ETH's all time high is $1,432.88 [1], so 32 ETH has only ever been worth
$45,852.16 max.

[1]
[https://coinmarketcap.com/currencies/ethereum/](https://coinmarketcap.com/currencies/ethereum/)

~~~
nullc
Thanks for the correction.

------
lalaland1125
Most of the contracts in MakerDAO are currently holding collateral worth 300%
of the loan amount. You won't see any widespread failures until either that
changes or the price drops at least 66%.

~~~
arcticbull
So well be seeing it shortly.

------
dnprock
When you are involved long enough with crypto, you'll see a lot of stupid
ideas. DAI is one of them.

For those who don't have time to get into the weeds, DAI is a "digital native"
stable coin. It wants to create a 1-1 peg to USD using an underlying volatile
asset, Ethereum. If you want to use USD, it's probably most efficient to go
get USD. :) But for some ideological reasons (decentralization), DAI wants to
be USD but also digital native. So they "lock" the underlying asset, Ethereum,
and issue DAI coins. The premise is with intelligent computer algorithms, we
can maintain 1-1 peg between a digital asset (Ethereum) and a real-world asset
(USD).

Digital assets are digital. Humans are the arbitrageurs. Humans are emotional.
DAI is trying to create stability on top of Ethereum volatility. It's kinda
like building a stable house on a shaky foundation. Your building will either
collapse or you spend so much money patching the flaws of your shaky
foundation. This is a laughable idea for those who live in reality. But I
guess some computer programmers/investors live in alternative realities too
long. They forget about reality.

Whatever your algorithms are, you need to arbitrage risks. So you will always
need to lock up more USD-ETH to account for risks. To be safe, maybe, you need
1.5 USD-ETH for a DAI USD. However, with digital scarce and volatile assets
like Ethereum, there's a chance that 1.5 USD-ETH will drop to 0.9 USD-ETH. At
that point, you will be underwater. Yesterday, it did. If you need to lock up
1.5 USD for 1 USD, you may as well go get 1 USD. It's a dumb idea to use 1.5
USD to get 1 USD.

DAI has a lot of jargon and technology (more layers on top of the shaky
foundation). These things make it look sophisticated and fool people. The
basic problem is very simple. You only need elementary school arithmetic and
logic to know its flaws and inefficiency.

~~~
Acrobatic_Road
>Digital assets are digital. Humans are the arbitrageurs. Humans are
emotional. DAI is trying to create stability on top of Ethereum volatility.
It's kinda like building a stable house on a shaky foundation.

And yet it works. Dai has practical results; it has weathered massive
volatility in the price of Ether over the past 2 years.

>If you need to lock up 1.5 USD for 1 USD, you may as well go get 1 USD. It's
a dumb idea to use 1.5 USD to get 1 USD.

If it's such a stupid idea then nobody would do it. Yet, there is now 350
million dollars worth of collateral people have put up of their own volition
just to generate some Dai for themselves in this fashion. stats:
[https://defipulse.com/maker](https://defipulse.com/maker)

>DAI has a lot of jargon and technology. These things make it look
sophisticated and fool people.

Or you just don't understand how it works. Dai is a complicated solution to a
complicated problem, but its not some trick.

~~~
ac29
> Or you just don't understand how it works. Dai is a complicated solution to
> a complicated problem, but its not some trick.

But the problem isn't complicated. If you need something worth 1USD, buy 1USD.
It is by definition stable relative to 1USD. You don't need to understand
complicated terminology or esoteric failure modes.

DAI is effectively never worth exactly 1USD:
[https://coinmarketcap.com/currencies/multi-collateral-
dai/](https://coinmarketcap.com/currencies/multi-collateral-dai/)

~~~
Latty
People buy 1USD of Paypal account value for 1USD all the time, do you say the
same thing to them?

I'm not saying I definitely think Dai is a good idea, but fundamentally the
value isn't the only thing that matters. The ability to transfer that value is
important and Dai offers something different to USD there.

~~~
ForHackernews
Yes, Paypal is also terrible[0] and you'd have to be pretty dumb to
deliberately keep a large fraction of your savings "invested" in a paypal
balance.

[0] [http://paypalsucks.com/](http://paypalsucks.com/)

~~~
fastball
Who is using DAI as an investment instrument?

~~~
ForHackernews
Elsewhere in this thread posters are talking about users losing their "life's
savings", but you're right perhaps they weren't investing. Maybe they just
wanted to park money someplace they viewed as safer than a traditional savings
account or treasury bonds.

~~~
dboreham
Presumably this is because there's a trade that promises one side something
(stable value coin vs USD) that has another side that offers something
different (profits if everything works out, losses if it doesn't?). Kind of
like Lloyds of London?

------
baby
> leading to oracle’s price updates not going through with the gas price they
> chose

wait so the thing relies on oracles? I always thought that MakerDAO was a
decentralized stablecoin. Does this mean that it is centralized then?

> This put the system in a $4 million deficit

So is this proof that MakerDAO does not work in practice?

~~~
Benmcdonald__
Yes they are centralised. You cannot have a truly decentralised price data

~~~
cdiddy2
You _could_ use something like uniswap and use their ETH/USDC pool as a source
of price data for ETH. This is a bad idea because its easy to manipulate that
one price feed but that is technically a truly decentralized price feed.

------
wildchild
Stop shilling crypto scams here. When HN will start banning all this crypto
scam junk?

------
cryptica
One of the main purposes of cryptocurrency IMO is to replace the concept of
debt. So I find the idea of using blockchain to implement debt to be
ridiculous. Why do you need debt if any group of people can create a
cryptocurrency and raise money that way?

Debt is an outdated concept and a dirty hack on the financial system, it
allows one person to lend money to another person to run their business
without owning any part of the business. In today's reality, there are two
scenarios:

\- The business succeeds and the borrower can afford to repay their debt. The
lender only gets back their principal plus interest even if the business no
matter how successful the business was. If the lender had invested in the
business instead, would have gotten more out of it.

\- The business fails and the borrower declares bankruptcy. The lender may
lose all their principal; they may have gotten some interest payments if the
business was running for some time but it typically doesn't come anywhere
close to offsetting the loss of principal. Liquidating remaining assets likely
won't cover it either. If the lender had invested in the business instead - In
the event of business failure, they may still have been able to get similar
returns because they could get a share of the value of remaining assets from
liquidation. The only thing they would miss out on is preferential treatment
in the event of liquidation... Which is the financial equivalent of travelling
first class on the Titanic.

So debt as a concept doesn't make sense from the lender's perspective. As a
lender, if you win, your upside is limited. If you lose, your downside is not
limited (not any more than it would have been if you had owned the shares
outright and could benefit from asset liquidation in case the business had to
shut down). Not only that, but forcing the business to constantly make debt
repayments only makes it more likely that they will fail. The lender is
setting themselves up for failure from the beginning.

That's why only banks loan nowadays. It doesn't make sense. It just allows the
Fed to keep giving free money to their cronies.

~~~
perl4ever
If there were no debt, how would that work for individuals? Would you sell a
share of your income to pay for a car, instead of borrowing?

~~~
cryptica
No, you would save up to buy a car. Same for a house, you would save up to buy
it. The average house price would be lower because demand would be lower
because only people who could afford it would be able to make an offer. Same
supply, lower demand means lower price. You won't have to compete with over-
leveraged fools who are on their 20th credit card as is the case today.

~~~
perl4ever
Saving is fine, as long as you know what your needs will be ahead of time and
can wait.

But the social purpose of loans is to help people who have an urgent need, or
an unexpected one.

Living beyond your means isn't inherently part of borrowing money.

If you can't get a loan to buy a house, having to save for 30 years is in some
sense, making you a lot poorer. You only have so long to live, and for 30
years, you don't get to live in the house.

And if you can't get a loan when something unexpected happens, then bad things
could happen, that are really unnecessary. People don't have to prepare
independently for all possible disasters because we live in a society.

If you think borrowing money is bad, what about borrowing things? Should
rental cars be eliminated? Is it only that borrowing things should be free? Is
borrowing a cup of sugar from your neighbor ok?

Edit: I should say, urgent, unexpected, or short term.

