Could MakerDAO trigger a positive feedback loop of increasing ETH lockup?

Inside of MakerDAO is a significant price-support mechanism for Ethereum

Growth of DAI

has been insane. MakerDAO has been minting an average of ~3 Million DAI every week. As prices of crypto return to volatility, DAI issuance grows as CDPs are opened.

Growth of Locked ETH

More than 1% of the total supply of ETH is now locked inside of MakerDAO. Locked-ETH is itself a price-support of ETH, but this isn’t what this article is about.

While it is difficult to prove (if someone knows a way, hit me up), I think it’s fair to assert that a decent amount of CDP holders took their newly minted DAI, and purchased more ETH with it. Crypto holders do what crypto holders do best: Speculate.

Now, they could have similarly purchased Bitcoin, or any other cryptocurrency, but by definition CDP holders are also ETH holders, and ETH holders are likely to purchase more ETH.

There’s also the very strong, very real incentive to purchase ETH, and re-lock it inside of MakerDAO, in order to over-collateralize the CDP that has been issued.

Lockup ETH with a 200% CDP Get DAI Purchase 50% more ETH Lockup this ETH to get a 300% CDP Sleep soundly at night

What Happens When ETH Appreciates?

Say, hypothetically, at some point ETH appreciates to $500.

The current 253% collateralization rate of MakerDAO would increase to 750% collateralization.

If MakerDAO returned to ~250% collateralization, at this new ETH price of $500, then there would be ~230,000,000 DAI out there. 150,000,000 more DAI than we have today.

And all of the 150 Million newly issued DAI would be in the hands of ETH holders. As we all know, cryptospeculators gotta cryptospeculate, and I’m willing to bet a significant amount of that DAI will be used to purchase more ETH, and further lock it up inside of MakerDAO. The same cycle noted above.

$150,000,000 is a lot of money. That’s a lot of buying pressure which could theoretically force the price of ETH up, which could, theoretically, be used for minting more DAI, and purchasing more ETH.

This, of course, would require the MakerDAO governance system to increase the debt ceiling of DAI above 100,000,000. Multi-Collateral DAI will likely allow this to happen.

The governance system behind MakerDAO will be able to have some control over this process, by voting to raise the debt ceiling or not. MKR token holders are responsible for maintaining the risk of the MakerDAO system, and I believe understanding this potential outcome of increased ETH price needs to be understood.

It sure would be interesting to see ETH lockup explode during a bull-run.

Strap in, everyone. The future of crypto is going to be a wild ride.