System surplus accumulates in the
tap as excess
dai which are sold in
exchange for collateral (
Siezed collateral from forced liquidations (
peth) is also sent to the
where it is sold for
tap is a liquidator. It has three token balances that determine its
joy: Dai balance, surplus transferred from
woe: Sin balance, bad debt transferred from
fog: PETH balance, collateral pending liquidation
and one derived price,
s2s, which is the price of PETH in Dai. The
seeks to minimise all of its token balances. Recall that Dai can be canceled
out with Sin via
tap has two acts:
boom: sell Dai in return for PETH (decreases
woe, decreases PETH supply)
bust: sell PETH in return for Dai (decreases
woe, can increase PETH supply)
bust we close the feedback loop on the price of
PETH. When there is surplus Dai, PETH is burned, decreasing the PETH supply
per, giving PETH holders more GEM per PETH. When there is
surplus Woe, PETH is inflated, increasing the PETH supply and decreasing
per, giving PETH holders less GEM per PETH.
The reason for wrapping GEM in PETH is now apparent: it provides a way to socialise losses and gains incurred in the operation of the system.
Two features of this mechanism:
Whilst PETH can be inflated significantly, there is a finite limit on the amount of bad debt the system can absorb - given by the value of the underlying GEM collateral.
There is a negative feedback between
bite: as PETH is
inflated it becomes less valuable, reducing the safety level of CDPs.
Some CDPs will become unsafe and be vulnerable to liquidation,
creating more bad debt. In an active market, CDP holders will have to
be vigilant about the potential for PETH inflation if they are holding
tightly collateralised CDPs.