Another day, another long tweet thread, this time about Dai deposit tokens (cDai and aDai) as collateral in Maker, and how they unlock a new avenue of rapid scalability and distribution of Dai

I'm really excited about when Maker can get cDai, aDai and other lending platform tokens as collateral. It has uniquely powerful synergy and I think its a type of composability that will stick around for the long run and be a key pillar of DeFi scale.

It will help solve a key issue that Maker is facing: How to rapidly scale without introducing too much technical risk.

Rushing to mass onboard random tokens as collateral isn't safe, because in theory doing a single such onboarding wrong could break the entire system.

So it's a lot more desirable to have fewer collateral types, and add them slowly, but instead give them very high debt ceilings. (Like what is happening with ETH, USDC, and WBTC right now). But this goes against another key principle: Diversification of risk!

So the question is: How to rely on a few collateral types with very high debt ceilings and good stability fees, and at the same time have those collateral types themselves represent a broad and diversified exposure to underlying collateral without single points of failure?

A good answer is: lending platform Dai deposit tokens! cDai and aDai as collateral in Maker, means that Maker is directly extending a line of credit and lending on Compound and Aave, injecting newly generated Dai into the DeFi economy and expanding the Dai supply.

This means that Maker gets to scale through the innovation and userbase of Compound and Aave, and future similar platforms, while earning a decent return and enjoying the protections that Compound and Aave offers their depositors.

It also means that Maker can benefit from collateral onboarding that it hasn't yet done itself. As an example Aave right now has both a huge LINK and YFI market, both collateral assets that Maker hasn't yet onboarded.

If aDai was used as collateral in Maker right now, then LINK and YFI users would be able to borrow large amounts of Dai against their LINK and YFI collateral on Aave, while enjoying low and stable rates, since they would be borrowing almost directly from Maker

Its a bit similar to borrowing from a commercial bank, where that commercial bank then sources its funds from the central bank, in order to be able to offer larger loans and better rates

It even scales with the DSR, and helps increase it. If the DSR in Maker is at 2%, then all unused Dai deposits on Compound and Aave would be earning 2%, and Dai that gets lent out would earn even more than that. So the yield on cDai would increase, allowing for higher SF

This makes cDai and aDai more interesting than e.g. cUSDC or aUSDC as collateral IMO, because in addition to having the single point of failure risk, cUSDC and aUSDC might not have high enough yield to be useful as collateral once the DSR goes up.

However in the short run, cUSDC and aUSDC will be very important as collateral as well. They have a more direct impact on the peg than cDai/aDai, since any Dai generated by e.g. cUSDC collateral will get dumped on the market to buy more cUSDC.

In the short run, there's also yield farming. If Maker enables yield farming through collateral adapters, then cDai/cUSDC vault users would be able to lever up on their farming returns, and Maker would be able to charge a higher stability fee, without extra risk.

Maybe we will see cDai and aDai each cross debt ceilings of 1 billion within a few years. I'm definitely optimistic that the Dai deposit tokens of top tier lending platforms will be contenders as the most scalable collateral types in Maker in the long run.