What’s going on with Dai on Compound.Finance?

With Dai recently launching on Compound, some of you may have noticed an extremely attractive APR for suppliers. Speculation has been floating around social media on why? Here we’ll explore why this individual or entity is borrowing around 1.6 million Dai for such a high rate (around 15.5% currently) and it’s potential implications.

First of, let’s go down the Etherscan rabbithole: (shoutout to https://www.curiousgiraffe.io/compound/ for the awesome analytics tool)

All the borrowed Dai is from a single address: https://etherscan.io/address/0xc1852f917835a9f2f97112672bc5c8afd1f21dc3

300,000 Dai on Dec 3 https://etherscan.io/tx/0x3d05edd385edfbfdf4a7e5286dcee67e3589ad4cebb81f5cd0704e62c47e8a0f

250,000 Dai on Dec 2 https://etherscan.io/tx/0x992cedd28bf1fb5c02777cb41700b1073bbebda9109adb32a64e40ced58229ef

Another 250,000 Dai on Dec 4 https://etherscan.io/tx/0x9d5f04718bff67bc89f236f41bc5942dc5fea247dd23ac9c9af8cac537db1009

The single address accounts for the largest borrows

The total borrow amounts to around 1.59 million Dai

Why?

Most plausible theory: someone is trying to protect a massive Maker CDP.

The same address is supplying around 725000 REP as collateral

By taking advantage of the various supported assets on Compound, the individual or entity opened some type of multi-collateral CDP to protect his larger Maker CDP.

https://mkr.tools/cdp/2715

Why not sell REP for ETH? As stated by Eric Conner could be taxes, maybe lack of liquidity? However there are larger concerns to address.

Potential Implications

Withdrawal liquidity on Compound: When Dai supply and borrow were at a 1:1 ratio yesterday, suppliers were unable to withdraw. In the case of an extreme decline in prices, suppliers are highly exposed to liquidations. This is not clearly stated on the platform which is a cause for concern.

Impact on the Dai peg: If the ETH price approaches the Dai liquidation levels for open CDPs, will Compound markets have a cascading effect on the peg? As it stands almost 3.9% of Dai is being supplied (2.5 million). Which begs the question, what would happen if the borrower cannot repay the loan and suppliers cannot withdraw? More CDPs could be at risk of liquidation which may have a detrimental impact on the peg. (As Dai becomes less dependent on ETH, the release of Multi-collateral Dai should address this issue.)

Key Observation

The fascinating aspect of this whole debacle is watching the world of Decentralized Finance (De.Fi) unfold before us. To have the ability to observe anonymous transactions in all transparency and understand the flow of money is an extremely powerful tool and a game changer for traditional finance. As more De.Fi platforms become available, there lies a real opportunity to disrupt an industry which has been constantly plagued by lack of trust, innovation and efficiency.