Risk Management in MakerDAO

A core function of the financial system is to transfer risk to the parties most willing to bear it. It should therefore be no surprise that two of the most successful products in DeFi, stablecoins and DEXs, address the key risks of using and holding cryptoassets. But these systems face uncertainties of their own. While limited counter-party risk and full transaction auditability have been rallying cries for DeFi, history reminds us that risk isn’t eliminated, but transposed. In fact, increasing complexity of products and complacency of market participants can magnify rather than reduce systemic risks.

To avoid what Mario Laul calls “the DeFi Déjà Vu” and realize the full potential of open financial protocols, sound risk management should be a priority as the DeFi ecosystem matures. While such an exercise is made easier by access to the full ledger of transactions, it still requires significant effort and iteration. As an attempt to further the conversation on risk management in Maker as well as the broader DeFi ecosystem, we are releasing a preliminary risk framework for the Maker system.

The reader should note that none of the parties involved in the production of this model are risk managers or credit experts. The goal in publishing this is to invite feedback from those who are, especially as the work of managing interest rates and collateral types at the scale Maker intends will likely require real experts on a full-time capacity. 

Lastly, I’m of the opinion if the framework is not debated and iterated upon, it will be far less useful to the community. The work is meant to be a starting point for future extensions, revisions, or rewrites. To that end, we’ve published a full description of the model and open-sourced all data and code used in its production on Github. Readers less familiar with the Maker system may consult the MakerDAO Whitepaper as well as Placeholder's Maker Investment Thesis and Maker Network Overview. We look forward to refining these ideas with the help of the DeFi community.