Stablecoin Collateral and Dai Peg Arbitrage in Maker
Summary
The article explains how accepting centralized stablecoins as Maker collateral helped expand Dai supply when demand outpaced the system’s ability to issue Dai against available trust-minimized assets. It distinguishes collateral share from Dai debt share: stablecoins could support more borrowing per dollar than riskier collateral under the ratios described, so their contribution to outstanding Dai was larger than their share of collateral. The tradeoff is dependence on custodians and issuers, including possible asset freezes.
It then describes a mint-and-sell arbitrage when Dai trades above the stablecoin vault’s collateral threshold: borrow Dai against stablecoins, sell it at a premium, and potentially later repurchase Dai more cheaply to close the position. Stability fees create a cost while the position remains open, and the article argues that the arbitrage can cap Dai’s premium and that stablecoin collateral may leave as the peg returns. These claims depend on the stated collateral ratios, oracle treatment, fees, liquidity, and liquidation rules; the analysis is specific to the 2020 system conditions and is not a guarantee of risk-free execution.
Key ideas
- Stablecoins formed a greater share of Dai debt than of Maker collateral because their collateral ratios allowed more Dai borrowing per dollar.
- Centralized collateral exposes the system to issuer or custodian actions and associated shortfalls.
- When Dai trades above the stablecoin collateral threshold, minting and selling Dai can create downward price pressure.
- Stability fees and the opportunity to repay vault debt more cheaply can incentivize arbitrageurs to unwind positions as Dai returns to its peg.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.