It's actually the reverse of fractional reserve banking. Any Dai that is created must be over-collateralized by 150%. It's not capital efficient, but that's a different argument than what's being discussed.
> It's actually the reverse of fractional reserve banking
It's analogous. (More accurately, it's a carry trade.) If Ethereum crashes more than 33% (given 150% overcapitalisation) the token breaks the buck. Betting your less-liquid assets won't fall below your more-liquid liabilities is maturity transformation and presents the classic risks of fractional-reserve banking.
This has happened, and AFAIK, DAI is still stable. Maybe that's the result of some extra manipulation by the project or whatever. I would love to see an in depth analysis of DAI over the past 6 months.
No, it's part of the protocol. When a collateralized position falls below the 150% (or whatever) mark, that position gets automatically liquidated and auctioned off to pay for the debt.
And the positions are set up to where you can borrow less than the maximum amount of DAI per ETH, to make your position more resistant to price drops.
> When a collateralized position falls below the 150% (or whatever) mark, that position gets automatically liquidated and auctioned off to pay for the debt
The same thing happens with banks. It turns into a run when this forced liquidation drives prices down further which in turn fuels further redemption requests. It’s very possible to start the day 150% capitalised and end 20% because you sold 10% which tanked the market.
I love how we've come full circle to uninsured fractional reserve banking.