So people seem to really not know what the fundamental issues in MakerDAO are, so I'll explain. First off what MakerDAO is:
MakerDAO is a system where people post ETH (or whatever, let's assume ETH) and overcollateralize it against a claimed dollar (or whatever, let's assume USD) amount, and there's an oracle (read: trusted party) who states what the current exchange rate is and \
if it goes off people 'are required' to collateralize more. People are going to get into an argument about the semantics of whether this is 'backed'. I don't care. There's a real legal argument that people engaging in this \
are doing something illegal, but moving on...
In a rational market this should trade at a slight discount to the nominal peg, because the outcomes are either (a) a high likelihood the collateral holds up or (b) a much lower likelihood that it doesn't and tanks down to nothing.
People in the far future close to a point of point of collapse should trade at a discount to the peg because of risk. People before that should expect that that could happen and trade at a slightly lower discount, people before that might expect those people to \
expect possible future problems etc. and we can work our way back to the current day where there's a small discount. If you don't want any discount you can sell your damn tokens.
In the wild we might see an exact peg holding up because - shocker - cryptocurrency markets aren't very rational. In a thinly traded market with a bunch of whales trying to erase a small gap to make a political point they're likely to be able to hold it \
and when there is hardly any futures market and the eventual outcome is years out and the variance has been maximized by making a low probability of going completely to zero there's no way to place a +EV bet even on an obvious market failure because \
'Markets can remain irrational longer than you can remain solvent'. In any case the eventual risk not being reflected in the current price doesn't reduce the overall risk it just makes the outcome much more polarized between holding steady and evaporating.
Sudden catastrophic credit collapses happen regularly even in very mature and supposedly efficient markets. It happened with CMOs. It happens with companies which have issued lots of bonds and have done been papering over their problems to keep their borrowing rates down and \
get caught in a downward spiral as their debt is unpayable because of the rates which lowers their creditworthiness which increases their rates etc. The idea that the risk to lenders can be lowered in these situations by forcing companies to raise more cash if their \
credit goes down is not a new one and has been proven to be a horrible idea in practice. Attempting to raise more cash when you need to lean on existing reserves immediately doesn't make you more creditworthy, it just makes you go under, and any lender having the ability to \
force that should cause the company's creditworthiness to be far lower for all other lenders. In the case of MakerDAO with Ethereum the chances of it dropping 90% are clearly within the realm of possibility given past swings so this is not at all theoretical.
But let's say that markets were pricing in risk sanely, what then? Well in that case what should happen (and will happen if the project succeeds) is that when the price and volatility of Ethereum move up and down the priced in risk moves accordingly, and when the oracle \
makes statements about the exchange rate the price moves as well. This brings us to the oracle. What jurisdiction is the oracle supposed to give an exchange rate for? On what exchange? At what moment in time? And where within the bid/ask spread? These are not flippant questions \
The oracle's output is immediately tradeable and even small changes have huge moneymaking potential for something which is supposed to be super stable and hence can be leveraged up the wazoo. The LIBOR fixing scandal was over fudging the numbers to a far smaller degree than \
whoever it is running the oracle is capable of doing, even if they were completely judicious and well-intentioned and guaranteed to be so for years into the future, all of which are dubious assumptions. This whole thing is an exercise in reinventing finance badly in \
an unregulated environment without rules and enforcement, which will inevitably result in rediscovering why many of those regulations were put in place the hard way. Nakamoto consensus makes real guarantees. Overcollateralization doesn't.
