In the last few weeks, almost all crypto-currencies saw a dramatic drop in prices, most of them losing more than 40% of their value.
With such a rapid devaluation, DAI, the majority of which is backed by ETH as the collateral was bound to suffer. On 12th March alone, $8.32 Million was liquidated for 0 DAI, and the protocol lost almost $5.67 million DAI. More details here.
The MakerDAO community has made a few adjustments such as re-capitalization, adding more collateral, lowering the stability fee, adjusting ceiling values, and a few other steps.
Due to the ongoing liquidity situation and the DAI price instability, Maker had an emergency onboarding of the USDC stablecoin as the third collateral in the Multi-Collateral Dai basket. This decision was taken as a part of the effort to increase Dai liquidity and was supported by 82% of the total votes.
Even though the current state of the Maker Protocol is healthy, we need to ask bigger questions now so that we are prepared for situations such as these in the future.
During such Black Swan events, do cryptocurrency as a collateral serve the purpose?
I believe it is time that we onboard commodity based asset such as Gold Tokens as the next collateral. The main reason for this being that Gold is considered as a safe haven in times of financial and political uncertainty, since it is not at a risk of becoming worthless unlike other currencies or assets bearing credit risk. Even though the price of gold has been volatile in the last few weeks, the volatility is limited and within bounds. A liquidation ratio of around 125% is suggested and potentially an efficient use of collateral. It will serve the purpose as a collateral and it is very unlikely to see a rapid devaluation in gold prices in a short period of time. Even if the prices do fall, it will be gradual and people will get enough time to add more collateral or liquidate themselves to avoid the 13% liquidation penalty. For example, during the 2008 Financial Crisis, Gold prices fell around 29.5% from high over a span of seven months. Many people would argue if gold is really a safe haven, but in our case, it pretty much does the job of acting as a good collateral.
But before we add gold tokens as a collateral, there are few factors which we need to consider. The first and most important would be the selection of the token. At the moment of this writing, there are more than 20 Gold tokens, out of which some are straight scams. Transparency and Trust would be the factors that decide the credibility of such tokens. Community vote can help us decide which one to choose. The second factor to consider is that by adding any Gold token, we are adding an asset controlled by a centralized entity. However, adding USDC, a centralized stablecoin as a collateral to the protocol, has paved the way for Gold tokens to get into the Multi Collateral Dai basket…
USDC Approved by Maker Governance as the Third Collateral Type
Black Thursday for MakerDAO
Maker Blog: Recent Market Activity and Next Steps
Gold & Silver Crashes in History: Severity, Duration, and Recoveries
This article was also published on Medium