Collateral risk deals with the likelihood of an event where a sudden decline in the price of an underlying asset triggers the liquidation of a Vault.

A comprehensive understanding of all collateral assets is a prerequisite for proper risk management.

Illiquid or fundamentally risky assets have a higher predisposition to sudden crashes, meaning that a proportionately higher risk premium must be assessed.

The primary assurance for Dai holders is the collateral portfolio. Qualitative factors, market liquidity, and recourse methodologies should be carefully analyzed.

Monetary policy deals with management of the supply and demand for Dai.

The Dai price is still subject to the whims of the market as the incentive for Vault creators (generators of Dai supply) may not perfectly align with Dai holders (representing Dai demand).

Risk levers such as the Stability Fee, Dai Savings Rate, and the collateral onboarding process can be used to influence both Vault and Dai holder behavior in order to facilitate a market equilibrium at $1.

Because the supply and demand for Dai fluctuates based on a variety of market factors, creating an accurate model requires a sound understanding of economics, statistics, market psychology, and more.

For example, in Single-Collateral Dai there is clearly a relationship between the ether price and the Dai price.

Analyzing this correlation in order to make optimal policy recommendations is an important function of decentralized governance.

Exogenous risk refers to external or operational risks associated with variables like oracles and governance.

Oracle attacks and the presumed susceptibility of the collateral price feeds would be an example. To what extent can an attacker siphon value from the system if they were to subvert the price feeds? What would the appropriate countermeasures be in such a scenario?

Another type of exogenous risk includes threats to the governance process. Social attacks or improper procedures might necessitate an Emergency Shutdown to preserve the legitimacy of MakerDAO.