The Diffusion Blockchain Hackathon just concluded after a weekend of interesting project announcements. One in particular that did a great job of grabbing attention is called DAI daddy.
Beyond the name, the project is not only shock value. DAI daddy points out that around 14% of collateralized debt positions (CDPs) — in which borrowers give Maker Ethereum in return for DAI and pay it off over time — end up liquidated.
How DAI daddy (theoretically) works
DAI borrowers lock up more than what they are borrowing from Maker, in the form of Ethereum. The point at which CDPs are liquidated is determined by Maker voters and can change depending on the size of the loan.
To keep things simple, say liquidation happens when the collateral decreases to 115% of the loan's value. The extra roughly 15% of value is taken partly for Maker's insurance fund, and partly so that the buyer of the liquidation can purchase at a discount.
DAI daddy lets borrowers in fear of liquidation take the sale of their CDP into their own hands. Rather than being forced to lose around 15% of their Ethereum to fees and insurance, they can sell the CDP before liquidation occurs while keeping a bit of that 15%.
Say the value of their CDP suddenly became worth only around 116% of their borrow. The borrower could then list their CDP on DAI daddy for a 5% discount. If a buyer decides that a 5% discount is enough of an incentive, the borrower saves the 11% that Maker would otherwise have charged them for handling the liquidation.
Maker should probably have a proprietary system for this
If enough borrowers take matters into their own hands, Maker's emergency funds will take a hit. Maker's website already has an intuitive voting system for holders, so the project is clearly capable of building a user interface to allow this natively.
Though, as one Reddit user noted, the idea is not the first of its kind:
We had a CDP marketplace live on DeFi Saver for some 5 months with the exact same idea behind it. Truth is, no one ever used it.