Over the weekend, a few people reached out to us to get @CeloOrg’s take on @MakerDAO’s #BlackThursday event last week, and to ask what it means for the algorithmic stablecoin space in general.
We’ve been following the event closely and wanted to start by sharing our support to the entire @MakerDAO community. Building complex decentralized systems is challenging and while the system didn’t run 100% as expected, it ultimately held up 🙌
If you’re interested in learning more about what happened, check out the following medium post which does a good job of summarizing: medium.com/@whiterabbit_h…
1) Oracles: One issue that contributed to #BlackThursday was that oracle updates were not getting mined. Celo implements EIP1559 which reduces gas price and transaction length volatility in times of contention, which will help oracle updates get through.
2) Auction Participation: During #BlackThursday, there were a number of vaults liquidated for 0 Dai because of lack of auction participation. Celo uses a uniswap inspired design (CP-DOTO) instead of auctions making it harder to “steal” collateral during times of low participation
Celo started with a similar auction design for buying back #stablecoins when it needs to contract supply, but after running a Stability Challenge at @MIT we became worried that the reserve might be prone to attacks during times of crisis. More here: medium.com/celoorg/zoomin…
3) Liquidity: Another reported cause for the failure of these auctions was the lack of liquidity for Dai. This made it hard for Keepers to buy enough Dai to then spend it on the vault auctions.
Because Celo uses a seigniorage-like model, stablecoin liquidity is tied to demand for the stablecoin and not to demand for borrowing against crypto assets. This will likely lessen liquidity issues in times of need.
Under this model, collateral is maintained in a single diversified crypto-asset reserve rather than in multiple vaults. When the collateralization ratio dips below a target, it diverts mining rewards, institutes a Tobin tax and stability fee that builds the reserve automatically.
Wrapping up, while there have been plenty of critics citing that algorithmic stablecoins are doomed to fail, @MakerDAO has shown time and time again that even in worst-case scenarios, it’s possible to keep a peg. We’re excited to see Celo launch and contribute to the space!
If you’re interested in learning more about @CeloOrg’s stability protocol, check out a detailed write up of its theoretical properties and behavior in simulated market environments here: celo.org/papers/Celo_St…
