November 21, 2018 11:22 PM
“Stable, but built on tears,” says one redditor.
Despite steep losses by Ether holders amid the recent price drop, many in the Ethereum community are finding cause for celebration: MakerDAO’s Ether-backed stablecoin, Dai, is maintaining its peg to the dollar.
It was recently reported that (slightly less than) 1 percent of all Ether was locked in MakerDAO CDPs (Dai-issuing EDCCs). Since Ether’s crash this past week, the amount of Ether held in CDPs has risen by around 29 percent.
If you understand how the MakerDAO system functions, the explanation is fairly straightforward. At its most basic, this is how Dai works: You put some Ether into a CDP. The CDP then holds your ETH as collateral and issues you a loan/line of credit in Dai. Because something needs to be held as collateral against the loan/line of credit, and the price of ETH fluctuates, your collateral must always be at least 150 percent of your loan. If the value of your collateral drops below 150 percent of the value of your loan, then your collateral is liquidated and sold to the highest bidder, and you’re charged a 13 percent liquidation fee (calculated based on your debt).
This being the case, those who wish to take out a loan in Dai, or who already have one, have an incentive to over-collateralize to prevent losses, leading to more Ether being locked in CDPs than usual.
This is good news for Maker, but it’s not all bright eyes and sunflowers. While the anti-fragility of MakerDAO’s stablecoin in the face of Ether’s sharp decline is a cause for optimism, it’s also true that a lot of people just had their Ether sold when they were unlikely to have intentionally done so, and they were charged a 13 percent fee on top of that. The number of CDPs liquidated in the last week due to under-collateralization has skyrocketed, and the total amount of Dai in circulation has declined more than 8.5 percent.
This isn’t necessarily a bad thing. For people without access to banking, or bank-issued loans, a robust workaround to banks thriving on Ethereum is undoubtedly good news – even if those same people, who are already a vulnerable group, might have just been put in a financial pickle after their assets were sold at what was likely a much lower price than they purchased them for.
Alison is an editor and occasional writer for ETHNews. She has a master’s in English from the University of Wyoming. She lives with her pooch in Reno. Her favorite things to do include binge listening to podcasts, getting her chuckles via dog memes, and spending as much time outside as possible.
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