Crypto Teats

Weaknesses of the current MakerDAO

First, let’s review the problems that MakerDAO currently faces. As written in this article, MakerDAO is a system in which borrowers’ losses are quite large. Borrowers contribute 150% of collateral, pay interest, and are penalized if they cannot maintain the collateral. This is because MakerDAO requires Dai borrowers to guarantee the collateral needed to maintain the stablecoin. (With collateralized stablecoins, it is most important to maintain collateral that exceeds the issuance amount.)

This means that Dai borrowers cannot hedge the price risk that they would get from obtaining stablecoins and must pay additional costs such as interest. However, while this is a major issue, there is a significant demand for Dai in markets such as Compound, which shows the popularity of decentralized stablecoins denominated in ETH. “Cal”, which I will explain today, issues stablecoins in a decentralized manner while eliminating the problems with MakerDAO.

Overview

The feature of this system is that it aims to reduce the burden on users by separating the issuance of stablecoins and the maintenance of collateral, which Dai previously handled alone.

Publisher

Its role is quite simple: it obtains stablecoins in exchange for ETH and fees. And you can exchange it for ETH at any time.

Risk Taker

It is similar to Uniswap’s liquidity supply. They provide ETH as collateral. Their benefits are twofold.

1. When the ETH price rises, you receive the increase in the publisher’s collateral

When prices rise, there is a surplus of Stablecoin Maker collateral needed, which the system allows Risk Takers to collect. For example, if the Publisher deposits 10,000 yen worth of ETH, the Risk Taker supplies 10,000 yen, and the ETH price rises 1.5 times, the increase in the Publisher’s collateral price, 5,000 yen, goes to the Risk Taker. The current value of the ETH held by the Risk Taker is 10,000 x 1.5 + 5,000, or 20,000 yen.

2. A portion of the publisher’s commission income becomes interest

This will remain the same. As with Uniswap liquidity provision, a portion of the fees goes to the Risk Taker.

On the other hand, there are two risks:

1. If the ETH price falls, the publisher’s collateral will also have to be borne by the company.

This is the opposite of what happened before. In the previous example, if the ETH price halves, the current value of RiskTaker’s collateral will be 10000/2 – (10000 – 10000/2), which is 0.

2. There are restrictions on the amount of withdrawal

To ensure that the total collateral in the system does not fall below a certain level, withdrawals are not possible if the risk taker’s collateral is below a certain level. There are also minimum deposit periods in place to prevent frequent trading.

However, this does not mean that you cannot withdraw it; there is a concept called Set Withdrawal, which allows you to raise a certain number of stablecoins in the market, exchange those stable coins for ETH, and withdraw the ETH at the same time, allowing you to withdraw that amount. The gain will vary depending on when the stablecoin was procured, but it is possible to withdraw it.

Advantages and disadvantages of this system

Advantages

The advantage is that there is a clear distinction between those who take risks and get returns (fee income) and those who reduce risks and pay costs. This clear distinction makes it possible for the financial system to work.

In addition, the fact that the interests are clear and pricing is easy also reduces governance risks compared to MakerDAO.

Disadvantages

It is powerless against a large drop in the ETH price. In this case, the risk taker’s collateral may be confiscated. It is also important to note that this system will not function unless risk takers are paid proper returns to ensure liquidity throughout the system.

Interest rate and fee determination algorithm

The fees for issuing stablecoins and the interest rate paid to Lisk Taker are determined so that the balance between the amount of stablecoins issued by Stablecoin Maker and the amount of ETH deposited by Lisk Taker is maintained appropriately. Specifically, if the proportion of stablecoin issuance is too high, fees will increase, and if Lisk Taker collateral becomes too overheated, interest rates will fall.

Plans for Version 2

As the number of days of operation passes, and ETH deposited by both Risk Taker and Stablecoin Maker accumulates at various price ranges, a sense of stability will emerge. When this happens, the Risk Taker will be able to decide the rate at which ETH can be increased or decreased, to a certain extent. This is V2. At this time, there are disadvantages such as fees being charged and interest being difficult to accrue, but

What is good about this system?

Providing hedge value

If stablecoin issuers were to take care of the collateral, they would not be able to obtain the hedging effect that stablecoins are supposed to provide. On the contrary, the risk of price fluctuations would be quite heavy, considering interest rates and penalties for not maintaining collateral. However, with this system, once the bonds are issued, there is no need to worry about collateral, making it possible to hedge.

A system that places little burden on users

Although this system has certain restrictions, it also allows risk-takers to earn interest. This makes it advantageous for those who hold the collateral, especially if they believe the ETH price will rise.