The white paper is complex, and the Emergency Shutdown price stability mechanism appears exposed to ETH price risk such that if ETH moves rapidly around the Emergency Shutdown, there's no guarantee that Dai holders could recoup on a 1:1 basis. Is that correct?
This seems to be not a dependable peg.
DAI has been tremendously successful over multiple years and multiple bear markets and ETH price crashes; it can only do so much of course. If ETH goes to zero tomorrow, DAI holders will not be able to recoup, sure.
In fact, the real problem with DAI is that demand often exceeds supply, the latter being limited by people who want to go long ETH, so they keep having to fight DAI breaking the peg in the other direction. To solve this, they onboarded other collateral types, including the USDC stablecoin, which now unfortunately accounts for >50% of DAI collateral.
I'm not a crypto expert, but naively I would at a minimum expect uncorrelated collateral to be part of the picture. DAI runs on ETH, so collateralizing via an ETH mechanism seems like possibly not the best choice.
I would expect that the peg would depend on something that exhibits a low correlation with crypto asset prices and a very high and dependable correlation with USD, like money market funds or Treasuries.
It seems you would need a trusted party/oracle of some kind, which creates the same problem as centralized stablecoins anew.
Edit: indeed a sibling comment mentions they have USDC as a backing support which means they are as stable as that.
If it is multicollateral, then yes, it somewhat involves trust, but you are dependent on a lot of various people betraying trusts along with ethereum price dipping, whereas a traditional stablecoin is entirely dependent on one entity.
And the value of ETH backing DAI is dependent on Tether not being fraduluent and instead being worth $1.
You won’t find the word audit on that page or in the reports.
And aren't these reports going to take time to complete? Every report in the past took about a month to complete and I don't see why that's a red flag.
I’m not an expert, but I think an attestation just examines if a statement makes sense. My accountant did one for my revenues and the percent that were in USD. I sent them a spreadsheet with my revenues from various sources and calculations showing total USD.
The accountant verified that my spreadsheet said what I said it said. However, they did not actually verify the info underying the spreadsheet beyond examining some screenshots of customer addresses I provided. They samples a handful at random.
In USDC’s case, I think the auditor would look at a bank statement and say “the bank statement on May 31st indeed says Circle has $X” and Circle says this money is theirs for backing USDC.
Stuff they wouldn’t verify:
* Was the money there before that specific minute of the day?
* Did it remain there after?
* Was the money from deposits, or was it from a loan or some other source? (Bitfinex did this with a prior attestation, mixing up Bitfinex’s money and reserve funds)
So most people would assume these attestations mean “At all times USDC had backing of basically all of their tokens by $ in a bank account, free and unencumberer” but the attestations don’t examine that claim at all. They examine a very specific moment in time, and don’t examine the source of the funds.
In an audit you might actually examine the accounts at a time not chosen by Circle.
https://news.bitcoin.com/usdc-attestations-run-late-raising-...
An attestation offers considerably less assurance than an audit.
An audit is the most comprehensive type of assurance. Often called positive assurance. A clean audit opinion means the auditor collected sufficient and appropriate evidence to form an opinion on the financial statements (or reserves in tether/usdc case).
On the other hand, an attestation or review is a form of negative assurance where auditors state that nothing has come to their attention to indicate that subject matters or financial statements contain a material misstatement. In this type of assurance, auditors do not give an opinion; they simply say that financial statements look "reasonable".
Unlike positive assurance, auditors are not required to obtain sufficient and appropriate evidence to form an opinion. Instead, they only need to review if there are any problems with financial statements or subject matters.
Would an attestation have no ability to verify that the statement was fraudulent? In other words we must trust the entity undergoing attestation in order to rely on the attestation, and the attestation merely certifies there is no error of math or logic in what was presented.
With an audit, the auditors get a representation from management that they will provide the truth etc. The auditors would also get third party evidence eg. from the bank providing the audit client's account. For important things you would always get third party evidence from banks, custodians, etc or even just go and check to see if physical things exist!
With an attestation or limited/negative assurance engagement, there's no third party evidence. Instead, the auditors just rely on what they are given and whether it looks reasonable. The auditors would state in their "report" that only limited evidence was gathered and not enough to form the basis of an opinion.
Basically, limited / negative assurance is not really that useful in most circumstances.
Regarding fraud - auditors are not expected to find/uncover fraud under any type of engagement, which is a common misconception.
The biggest audit firms won't go any where near tether, and this alone, tells you quite a bit :)
> Basically, limited / negative assurance is not really that useful in most circumstances.
So what exactly can we glean from USDC having attestations? It’s certainly a step up from Tether in that respect but I’m also not sure it tells us all that much.
Or maybe a better way of asking is: how exactly would you prove that a stablecoin was backed?
1) review the processes and controls which operate the business to check they were operating correctly for the period under review
2) interview the various key stakeholders to assess competence and get representations
3) perform substantive testing over the collateral balance for the whole period. Eg daily bank reconciliations. Get third party confirmations for EVERYTHING.
4) perform a contingent liabilities review and a legal review.
5) see if there are any related party transactions
6) do a going concern assessment
The key thing would be to check existence, completeness and valuation of collateral and existence and completeness of liabilities (issued tokens).
Depending on what the assets are that would entail different procedures. For tether I would want to see their whole CP portfolio to perform a thorough credit risk and systemic risk assessment. Do some modelling to understand valuation implications under various scenarios.
Is worth noting that it's not feasible to do this on a monthly basis because it's so onerous. Hence why probably they just do monthly attestations. I would expect that the legal entity which issues the tokens and holds the collateral is audited at least once a year.
Never knew my audit knowledge would ever be useful/interesting :)
Cheers