Does FraxLend AMO lending increase CR? Since each Frax lent

Question

Frax Finance

Ouroboros Capital

Does FraxLend AMO lending increase CR? Since each Frax lent

out is backed by >100% CR in the "CDP"

#cryptocurrency #english #frax

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17.06.2023

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Sam Kazemian ¤⛓️¤ · Accepted Answer

This is a good question and common misconception about DAI as well btw. DAI does not do proper accounting for its CR. DAI is not overcollateralized, it is 100% collateralized at all times. DAI counts the collateral value inside of the loans as its own collateral which is wrong. DAI is never backed by the collateral itself. It is backed by a loan that is worth the same amount of DAI. For example, if you mint 1000 DAI by opening a CDP with $1500 worth of ETH in it, that DAI is not backed by $1500 ETH. It is backed by "a loan worth $1000." So 1000 DAI is backed by $1000 worth of assets (the loan). You can see this very clearly if you take an extreme example: say you decide to deposit $5 billion worth of ETH as collateral but mint just 1 DAI. There is not $5 billion more worth of collateral backing MakerDAO now. That would mean someone can make DAI's CR 200% just by depositing $5 billion worth of ETH and minting only 1 DAI. That would be nonsense.

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Does FraxLend AMO lending increase CR? Since each Frax lent

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