[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.