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DAI · 16w

Design idea: Automatically hedge collateral using ETH futures/options on DEX

Here is how it might work: Let's say you want to lock your ETH to issue DAI. Maker smart contract automatically opens equivalent short position for your CDP on derivatives DEX. So in theory, your collateral's value is locked regardless of ETH volatility. If ETH goes down, short futures position offsets these losses. Of course, such futures must have hourly settlement to bring ETH into your losing collateral. If ETH goes up, then it funds margin for losing futures position. An obvious problem is that you need very liquid derivatives DEX. One solution is to use foundation resources to bootstrap such exchange and initial market maker activity. Later, may be CDP owners must contribute for liquidity rebate fund for market makers. Less obvious but very important problem is slippage. Especially when it comes to big CDPs. And even more so - how multi-billion CDPs with relevant hedge positions can affect entire market? In other words, there is a scaling problem. However, I can't dismiss this hedging solution simply on the grounds of scalability. There can be rules of slow openning/unwinding of big CDPs (even it's hours/days). Gas can be funded from stability fees. And collateralization ratio must be proportionally higher for big CDPs! Another solution is partial hedging using put options. And yet another solution is manually managed hedging for all locked ETH by elected team ideally with some hedge fund experience. Or even better with several different competing firms. Of course, elected team must have skin in the game and take losses for their failures to maintain hedging. Let's discuss this idea even if it's far cry from current Maker design. Anyway, it's far better than lousy solutions including Trump/Xi/Putin shitcoins (even if they wrapped into ERC20 like USDC). Of course, USDC brings immediate relief but I bet it will stay with Maker forever.
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