Dai 1.0

Debt Market

System surplus accumulates in the tap as excess dai which are sold in exchange for collateral (peth) via boom.

Siezed collateral from forced liquidations (peth) is also sent to the tap where it is sold for dai via bust.

Tap - the liquidator

The tap is a liquidator. It has three token balances that determine its allowed behaviour:

• joy: Dai balance, surplus transferred from drip
• woe: Sin balance, bad debt transferred from bite
• fog: PETH balance, collateral pending liquidation

and one derived price, s2s, which is the price of PETH in Dai. The tap seeks to minimise all of its token balances. Recall that Dai can be canceled out with Sin via heal.

The tap has two acts:

• boom: sell Dai in return for PETH (decreases joy and woe, decreases PETH supply)
• bust: sell PETH in return for Dai (decreases fog, increases joy and woe, can increase PETH supply)

Through boom and bust we close the feedback loop on the price of PETH. When there is surplus Dai, PETH is burned, decreasing the PETH supply and increasing per, giving PETH holders more GEM per PETH. When there is surplus Woe, PETH is inflated, increasing the PETH supply and decreasing per, giving PETH holders less GEM per PETH.

The reason for wrapping GEM in PETH is now apparent: it provides a way to socialise losses and gains incurred in the operation of the system.

Two features of this mechanism:

1. Whilst PETH can be inflated significantly, there is a finite limit on the amount of bad debt the system can absorb - given by the value of the underlying GEM collateral.

2. There is a negative feedback between bust and bite: as PETH is inflated it becomes less valuable, reducing the safety level of CDPs. Some CDPs will become unsafe and be vulnerable to liquidation, creating more bad debt. In an active market, CDP holders will have to be vigilant about the potential for PETH inflation if they are holding tightly collateralised CDPs.