The big DAI mystery.

The big DAI mystery.

By MadMaxx | Crypto Fondue | 4 Jul 2020


I was browsing through my Compound.finance account today, checking on my earnings and looking to transfer some profits to my personal wallet when I saw something very special in the DAI section.

The amount of DAI on compound was a mind blowing 532 million DAI. The last time I checked that metric back in March, it was a little under 300 million, so that was a very big increment.

This got me curious about how much DAI there is in circulation for that much to be kept in Compound alone.

So I did a quick search on the Dai stats website (find it here), and found something very amazing. There's only 160 million DAI in circulation.

This was not just mysterious, but equally mind blowing, because it meant that Compound had more DAI than there was in circulation.

This then got me thinking: What could be the effect of this?

It then hit me. DAI was being used as collateral to borrow DAI.

The way Compound works is that you put up some collateral to borrow against. For instance, if you wanted to borrow BAT, your collateral would be in DAI(which is a stable coin) to ensure that if the price of BAT dropped tomorrow, the lender would still get his money back, as well as his interest.

However, other cryptocurrencies were being used as collateral for those that wished to borrow DAI, such as USDC.

But then I found that you can actually use DAI as collateral to borrow DAI. Which more or less solves the mystery.

So does this have any "side effects"? 

I believe it does. Because Compound is basically "creating" the DAI it has in circulation from other cryptocurrencies, those cryptocurrencies used in it's "creation" are collaterised. However, when users borrow DAI against DAI, they're basically collaterising the DAI itself, which leads to an excessive amount of DAI being stored in Compound. 

This is pretty bad news for DAI as a whole, because it's like saying that a citizen has more power over money than the central bank does.

For this reason, I have started moving my funds in DAI over to USDC. I have collected and earned a lot of DAI over the years, and would have to move them slowly to ensure that there's no slippage when I sell them for USDC.

I advice that you do the same if you have any DAI on hand.

What do you think of this development? Let me know down below 


MadMaxx
MadMaxx

In the eternal quest for crypto fulfilment. I'm an obese frog on the internet, what I say most definitely isn't financial advice.


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