Maker DAO's $1bn Bet on Ethena, Aave Strikes Back

Summary

The discussion revolves around the recent developments in the crypto space, particularly focusing on Athena and its impact on the DeFi markets. Athena, a structured product that creates a delta neutral position by shorting Ethereum on centralized exchanges, has seen significant growth and is raising concerns due to its rapid expansion and potential systemic risks. The guests, Paper Imperium and Mark Zeller, share their insights on the governance and risk management within MakerDAO, emphasizing the need for a more cautious approach to scaling and the importance of thorough risk assessments and decentralized decision-making in the DeFi ecosystem.

Takeaways

• 📈 Athena, a structured product in the crypto market, has grown rapidly and is approaching billions of dollars in size, causing ripple effects across the wider DeFi markets.
• 🔍 Athena's growth has raised concerns about its potential systemic risks, especially since it hasn't been through a full market cycle yet.
• 💡 Maker, a major player in the DeFi space, has been involved in the rapid onboarding and scaling of Athena, which has led to debates about its governance and risk management.
• 🤔 There are concerns that Maker's governance process has become less decentralized and more concentrated, with a few key players having a significant influence on decisions.
• 🚧 The speed of Athena's growth and the lack of thorough risk assessments have been flagged as red flags by some members of the DeFi community.
• 💰 The pursuit of high yields by Maker through Athena has been seen as a shift from its traditional conservative approach, raising questions about its long-term strategy.
• 📉 The stability of Maker's DAI stablecoin and its supply have been affected by the changes in Maker's governance and asset allocation strategies.
• 🔄 The discussion around Athena and Maker's governance highlights the importance of balancing innovation with risk management in the DeFi space.
• 🗣️ Community participation in governance forums is crucial for addressing concerns and shaping the future of DeFi protocols like Maker and Athena.
• 🌐 The wider implications of Athena's growth and Maker's governance decisions underscore the interconnected nature of the DeFi ecosystem and the need for coordinated risk management.

Q & A

What is Athena and how does it relate to the recent controversies in the crypto market?

Athena is a structured product that takes in Ethereum and other assets, creating a one-to-one short on centralized exchanges to maintain a delta neutral position. It has been causing controversies due to its rapid growth and the systemic risks it may pose to the wider DeFi markets.

How does Athena's structured product work in terms of profit and loss?

Athena's structured product works by creating a delta neutral position, meaning that as the price of Ethereum goes up or down, the derivative trades on the back end keep the profit and loss flat. It is used to farm the funding rate, which is then passed back in the form of yield to USDE.

What is the significance of the 100 million DAI credit line that was implemented in the Maker protocol?

The 100 million DAI credit line was implemented to allow people to borrow DAI against USDE and staked USDE. It represents a significant move in Maker's governance and has been a point of discussion due to its rapid implementation and potential impact on the DeFi ecosystem.

What was the proposal made by Mark Zeller regarding the LTV of DAI?

Mark Zeller proposed to cut down the LTV (Loan to Value) of DAI to zero. This proposal is part of the ongoing discussions and governance actions within the Maker protocol to manage the risks associated with the rapid growth of Athena.

What are the concerns raised by the guests about the due diligence process for Athena?

The guests raised concerns that the due diligence process for Athena has been rushed and incomplete. They pointed out that there has not been a technical or legal risk assessment published, and that important questions about the rights of token holders and the potential risks to the system have not been adequately addressed.

How does the speed of the growth of the Athena credit line impact the safety module of Maker?

The rapid growth of the Athena credit line could potentially overwhelm the safety module of Maker, which currently has around $120 to $130 million in equity buffer capital. If the credit line grows too quickly, it could expose the system to risks that it is not prepared to handle.

What is the proposal to increase the maximum debt ceiling to?

There was a proposal to increase the maximum debt ceiling to 1 billion DAI, with an intention to ramp up to 600 million and then assess the situation from there.

What is the concern about the over-collateralized lending against DAI?

The concern is that the over-collateralized lending against DAI is complex and carries smart contract risks. If the value of USD or SSDE goes down faster than the possibility of liquidation, it could result in a debt that the system may not be prepared to handle.

What is the role of the direct deposit module in the Maker protocol?

The direct deposit module is a second-degree effect collateral where DAI is printed out of thin air and deposited into the vote. It is important to note that DAI cannot be accessed without depositing collateral, which in this case would be SSDE or USDE.

What is the significance of the Maker protocol's decision to hardcode the oracle to $1?

Hardcoding the oracle to $1 is a risk management decision made by Maker to ensure that the DAI stablecoin does not fall below this value. However, it also means that the protocol needs to underwrite against the issuer, which requires a deeper understanding of legal and financial facts about the issuer.

What are the implications of Maker's shift towards a more aggressive protocol in terms of yield chasing?

Maker's shift towards chasing yield changes its risk profile, potentially leading to more systemic risks and affecting downstream service providers. It also raises questions about the protocol's governance and decision-making processes.