Ether Deflation as Caused by MakerDAO (Part 2)

This post follows Ether Deflation as Caused by MakerDAO (Part 1)

The first part of this post was written (at roughly this time) on September 18, 2018. This is one of the figures that shows just how many ether were locked in the DAI stablecoins pegged to the dollar.

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747,516.69 ether to be exact.

Let’s see what happened as of September 29, 2018, 11 days later:

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(data )

During these 11 days, which were relatively quiet in terms of ether prices, 2,874.94 ether were entered per day and locked in the liquidity pools as collateral for the DAIs issued, for a total of 31,624.41 ether.

The conclusion that can be drawn from this albeit partial observation is that the rate of deflation of the ether caused by the collateral system for the issuance of DAIs is slowly increasing.

In the past 11 days DAIs have “eaten” the 14.02% of the ether produced by Ethereum to reward the mining activity.

Having said that, let’s see what really happened during the recent, more violent phases of the ether price collapse.


  • in what way and how many pools were forced to settle positions in DAI to ether.
  • What was the reaction of the market players to guard themselves against the forced liquidation caused by the collapse of in US dollar value of the collateral (that is to say, the ether)?

There have been three big, deadly liquidity events since the start of the year:

  • March 18, 2018
  • August 7, 2018
  • September 6, 2018
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What you are observing is (in the lower part) the graph for the ” Bites”. The bite is the settlement action that a subject of the DAI system called “keeper” is entitled to do when conditions are met. The keeper runs a software that “hits” the pools by way of collateral for the DAIs when the collateral in ether goes below the threshold of 150% (or 1.5$ in ether for each DAI issued and covered by the pool) and forces the pool to settle in ether paying a strong penalty (5%). Said penalty goes partially to the keeper.

What happened on those dates, and what happened after the two deadly liquidity events?

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March 18, 2018: The price of ether is free falling, going from about 850 US $ to 600 US $. Many CDPs go under the minimum threshold of 150% and about 5.8 million DAI are paid off.

August 7, 2018: the price of ether continues to fall to $370. many other CDPs go under the minimum threshold of 150% and about 9.4 million DAI are paid off.

September 6, 2018: the price of ether goes briefly under 200$. A further 7 million DAIs are paid off.

So what happened after every single liquidity event?

Basically, two things:

  1. The pools that survived this massacre (because they were well capitalised) decided to “secure” themselves with other ether as collateral.
  2. Ever lower Ethereum prices, on the one hand, pushed the more speculative side of the market to demand stablecoins, including DAIs as a way to escape from the bear market. On the other hand, the more conservative side (the HODLers) was driven to create new stablecoins in order to have the possibility to leverage on ether at increasingly lower prices.

The result is that the DAIs have recovered from every single liquidity event and the ether as collateral have risen disproportionately.

A final note

DAI, the system created by Maker DAO to produce stablecoins, has proven to be resilient to the worst possible conditions of the market, i.e. during the collapse of the dollar value of the underlying collateral.

The market’s interest and confidence in DAI is growing and there is no reason to believe that DAI will not grow in terms of billions of dollars (as well as other currencies) in the coming months.

The consequence on the amount of ether needed as collateral is huge in terms of actual deflation and therefore of the necessary increase in the price itself of ether.

DAI is by far proven to be the most important DAPP ecosystem on the Ethereum blockchain, probably the most interesting project since the concept of blockchain was invented.

Author: Paolo Rebuffo, CTO @Deepit AG

Originally published at on September 30, 2018.

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