Andreas Park PRO
Professor of Finance at UofT
Instructors: Andreas Park
Idea:
Sidebar: what is a DAO?
4 ETH
(1 ETH = $375)
(Oct 15, 2020)
\(\approx\) $1,500
\(\vdots\)
1,500 DAI
(1 DAI = $1)
formally: this smart contract is a collateralized debt position (CDP)
fractional collateral \(\to\) collateralization factor \(=\) 150%
total collateral = $1,500
maximum loan = $1000
overcollateralization = $500
actual loan (example) = $500
buffer = $500
ETH \(\nearrow\) $500
value of ETH collateral = $2,000
maximum loan = $2,000/150%=$1,333
total collateral = $2,000
maximum loan = $1,333
overcollateralization = $667
actual loan (example) = $500
buffer = $500
overcollateralization = $667
new loan capacity= $333
ETH \(\searrow\) $187.5
value of ETH collateral = $750
maximum loan = $750/150%=$500
total collateral = $750
maximum loan = $500
overcollateralization = $250
actual loan (example) = $500
buffer = $0
for reference: former value of collateral
ETH \(\searrow\) $150
value of ETH collateral = $600
maximum loan = $600/150%=$400
total collateral = $600
maximum loan = $400
required overcollateralization = $200
actual loan (example) = $500
buffer = -$100
for reference: former value of collateral
\(\Rightarrow\) triggering of liquidation auction by "keeper"
sell 3.33 ETH=$500=500 DAI
repay $500=500 DAI loan
retain incentive
return remainding ETH to vault owner
\(\Rightarrow\) all relies on behavioral assumptions
\(\Rightarrow\) But: there are also real incentives & mechanisms
borrowers of DAI need to pay interest \(\to\) stability fee
DSR paid on "locked" DAI
total amount of debt (or DAI) outstanding is limited
Sidebar: how is this decided?
\(\to\) special "governance" token MKR
Source: daistats.com (Oct 27, 2021)
Source: daistats.com (Oct 26, 2022)
The Problem:
The Solution:
Note: In May 2021, ETH prices dropped again by >30% but no drama in DAI
interoperability
inefficiency
centralized control
limited access
opacity
payments
/lending
Fundamentally, what does a bank do?
And how is this done?
on blockchain
Example 1
Example 2
Example 3
borrowing and lending rates compounded per block
In Compound
translated
new deposit
1,000 DAI
100 cDAI
500 DAI
add 50 new cDAI
In Compound
translated
new deposit
1,000 DAI
150 cDAI
500 DAI
1 year later: 10% interest on compound
150 DAI
(same cDAI, ownership shares don't change, just each cDAI is worth more)
(accrues per block per deposit)
1. flash-borrow DAI
5. repay DAI
3. receive ETH
4. convert ETH to DAI
2. liquidate ETH loan with DAI
Loan liquidation opportunity
By Andreas Park
This slide deck provides an overview of DeFi protocols. It draws insights from Harvey, Ramachandran, and Santoro (2020) "DeFi and the Future of Finance"