Reasons why you should buy 3F Mutual Insurance?
Hedging against potential great risks all the DeFi investors should do
What is 3F Mutual?
Third Floor Mutual (3F Mutual) is a rainy day fund-like mechanism that helps you hedge against MakerDAO collapse risk. It does not work like an option product. It is not a short position of ETH/DAI/MKR. Rainy day fund-like design means it’s more like collective insurance.
Why buy insurance against MakerDAO?
The MakerDAO stablecoin system seems to recently be more and more dangerous. The price of DAI, as a stablecoin mechanism, supposes to peg at $1 at all times to be “NORMAL.” However, due to the DeFi frenzy recently, the demand for DAI is pushed to a whole new level, causing the price of DAI to suddenly rise up and up (~$1.04 so far) as we can see in the chart below.
How so?
Some mechanisms are built to peg the price of DAI to $1. When the price of DAI falls below $1, the MakerDAO governance system (voting by MKR holders) can raise the DAI saving rate to attract DAI holders in order to save their back to MakerDAO. By doing so, the supply of DAI in the market would be reduced, causing deflation to help the price settle back to $1.
On the other hand, due to the fact that the DAI saving rate cannot be lower than 0, while the price of DAI rises, it relies on the investors to mortgage their assets to mint more DAI, providing more supply of DAI to the market, creating inflation to make the price of DAI back to $1.
As we all can see, the mechanism to cause inflation was disabled recently. A few months ago, Multi-collateral DAI only took ETH and BAT as mortgaged assets to mint DAI. However, DAI minted by these two assets could not provide enough liquidity to peg DAI back $1 while demand for DAI is going up.
As a result, MakerDAO has no choice but to start to accept SUBPRIME collaterals so that they can provide as many DAIs to the market as possible. Beginning with accepting their alternative USDC, now they even accept “USDT,” the centralized asset the whole DeFi world was intended to supplant. The adoption of USDT can be regarded as an act that crosses the line against the spirit of decentralization, which may also be considered as the failure of decentralized finance because MakerDAO and DAI stablecoin system is literally the foundation (protocol layer) of almost the entire DeFi world. Assets taken by MakerDAO are presented as below:
Even though MakerDAO has eaten the forbidden fruit, DAI is still at $1.04 (once reaching $1.05) and it shows no sign to fall. In the near future, we can foresee that more dangerous collaterals might be taken to prevent DAI from totally crashing. However, all the effort MakerDAO has expended might eventually speed up the collapse of the DAI system. Imagining another Black Swan Event like on March 12th, ask yourself do you believe that the MakerDAO Stablecoin System can still prevent DAI from shutting down after all the risky assets they have taken as collateral?
Lessons from History
History repeats itself. We can always learn lessons from history. What’s happening right now in the DeFi world is astonishingly similar to the derivatives market in the United States right before the subprime mortgage crisis. Going back to 2007, when institutions were incentivized to maximize sales because of high gross profit, and all the primary mortgages and AAA-rated products were sold out, investment banks were so optimistic that they started taking subprime loans with higher default probabilities. Worse loans were taken to create more CDOs to sell when there was a shortage of primary mortgages.
Concerns of MakerDAO
MakerDAO is, in fact, quenching their thirst with poison right now. Given all the risky assets they have already taken, the DAI price is still at $1.04 with no sign of coming down. When the price keeps going up, who knows what they will accept as collateral to mint more DAIs?
Besides taking subprime assets as collateral, another concern of MakerDAO is that the market cap of DAI exceeded MKR, the governance token of the MakerDAO system. This phenomenon might put DAI and all the collateralized assets in MakerDAO into greater danger. Those who have malicious intension would be granted enough motivation to issue an attack against the MakerDAO system by acquiring enough MKRs.
The mission of 3F Mutual
Given the existing truth that MakerDAO and the entire DeFi ecosystem are in great danger, 3F Mutual is the floating wood that all the DeFi investors should grab at.
3F Mutual is born to protect not only DAI (Total Supply: ~434M), MKR (Market Cap: ~542M), but something bigger and greater: all the protocols integrated with DAI (Compound, AAVE, Curve, yearn, etc), which is almost the entire DeFi ecosystem.
Who needs 3F Mutual?
The potential market of 3F Mutual is ultimately vast. Once MakerDAO crashes, all the DAI-equivalent protocols will all suffer great loss from its damage. The target of 3F Mutual is not simply the DAI emergency shutdown event of MakerDAO, but the existence of the entire DeFi ecosystem.
Hedging against potential great risks is a must for every experienced investor. If you are not capable of sustaining the loss from the possible collapse in DeFi, you should definitely spare some of that budget and invest in 3F Mutual as a rainy day fund to protect against the worst-case scenario.
All you need to know about 3F Mutual:
https://medium.com/hakkafinance/3f-mutual-launch-554e392fcf7a
(with all the links you might need)
