[px43]

DAI works fine. Over-collateralization with a looming threat of liquidation has proven to be resilient against all imaginable forms of market turbulence. It still leans heavily on oracles that are basically run by humans, so there is risk, but the incentives seem to be about right to keep enough people honest.

UST was an obvious bad idea. This exact scenario was warned about over and over again, and Do Kwon did what he could to try to delay the inevitable, but here we are.

[phphphphp]

If the algorithm is “give us assets more valuable than the claim we give you in return” is it an algorithmic stable coin, or just an asset with an arbitrary price? I’m unsure I understand how DAI can be characterised as an algorithmic stable coin, given “algorithmic” is usually understood to mean “the thing from which it derives it’s value is an algorithm” whereas for DAI, like Tether (ostensibly), the value is derived from its collateral. I’m open to an argument to why it is a algorithmic stable coin though, perhaps my definition is too narrow? To my understanding, the point of a stable coin is stability of value for the holder, which isn’t true of DAI — because they’re still exposed to the volatility of their collateral.

[px43]

People who actually hold DAI don't experience liquidation risks. It's the people who create the Collateralized Loan Deposits (CDPs) who are taking that risk, and in exchange, are given DAI.

Also, technically the value of UST was fully backed by LUNA, until the total market cap of LUNA dipped below the market cap of UST, and then it wasn't.

IMO it's not the collateralization that makes something an algorithmic stablecoin, it's the currency is managed entirely by on-chain smart contracts, as opposed to Tether or USDC etc, which are managed manually by humans working in a room somewhere. Who knows though, I just made that definition up. The algorithm that manages DAI is pretty rad, so it seems unfair to deny them the status of "algorithmic", but that's fine.

[audleman]

> Also, technically the value of UST was fully backed by LUNA

And what was LUNA backed by? Unless somebody gives a better definition I'll say it was backed by two things. One was UST successfully working as a stablecoin. The other was the vague promises made by the charismatic founder that they were enabling a whole ecosystem with hundreds of developers, creating blah blah. In other words, people bought into the hype that Terra was to become the next big blockchain startup and holding LUNA was as good as owning early stock.

So that goes back to the first point, and as soon as Terra wasn't able to run an effective stablecoin what was left? "We're still here making noise" says Do Kwon. Face palm.

[Fargoan]

There are a lot of dapps on Terra. I'm guessing they'll all move to their own Tendermint chains or Juno

[55555]

Technically, sure. But now remember that market cap is simply last trade price * outstanding tokens and realize that if there’s not enough buyer demand to liquidate all tokens at that price or greater then UST wasn’t backed at that moment in any real sense. The true theoretical backing is buyer demand * buyer’s best bid for the sum of all buyers.

[ProjectArcturis]

One dollar of DAI is backed by $1.50 of a basket of crypto. What happens when that basket drops more than 33.3%?

[charcircuit]

If a vault has a liquidation ratio of 150% and the value of the vault drops below that then the crypto in the vault is auctioned off for DAI.

If it's not able to raise enough DAI to make up for the DAI that was issued when creating the vault the protocol can mint and sell MKR for DAI to get rid of that debt.

[kristjansson]

And who's going to buy MKR?

[charcircuit]

There's hundreds of millions of dollars worth of volume trading MKR. If you can get MKR at a discount you can just sell it on the market.

[ProjectArcturis]

Sounds like the exact same protocol that Terra had with Luna.

[charcircuit]

The difference is that that mechanism isn't supposed to regularly be used. They've only ever gotten into debt once.

Right now there are vaults containing $10.6B worth of various coins as collateral for 6.4B DAI.

[Jasper_]

But again, like we learned with Luna, if everyone is getting MKR at a discount, why would anybody else buy? Prospective buyers want to sell their MKR that they got at a discount, too.

[charcircuit]

Because not everyone is. The protocol has only ever gone into debt once. To get rid of that debt were about 90 auctions to burn about 4.5 million DAI. The market cap at the time for MKR was over $200 million. Even if it did crash the price of MKR that doesn't affect the stability of DAI because DAI would be fully collateralized my the vaults.

[wtracy]

That's why DAI isn't really an algorithmic stable coin. Overcollateralized stable coins really belong in their own category.

That's not too say that DAI is safe, but any sort of algorithmic stable coin faces massive systemic risks unique to their design.