Expanding a bit on why addressing the DAI market risk is of urgent necessity.
There are, at least, two important risks when we have an asset in the system in vast excess of what liquidity is available in the markets.
1) Risk of the system becoming under-collateralized: This is the issue addressed by the Gauntlet Risk analysis linked by @rleshner in the OP. The gist of this risk is that if we have collateral for an asset in excess of market liquidity available, in a situation of a sharp price drop for the asset, liquidators would not be able to sell the seizable assets quickly, and will likely not want to risk holding an asset that is falling in price either, so they would not perform liquidations and the system becomes under-collateralized
2) Risk of market manipulation: When outstanding debt of an asset exceeds market liquidity by a sufficient amount, it becomes profitable to artificially move the price of said asset with the intention of unfairly liquidating borrowers for a huge profit. This might or might not have been what happened with this event, but regardless, the cost of buying DAI up to $1.3 was in the order of 21k USD, and required under 400k USDC to perform. To put these numbers in context, the largest single liquidation during the event netted the liquidator in the order of 3M DAI.
DAI in the system is over 4000% global daily volume, according to Messaris’ data, so as mentioned several times, neither of these risks can be resolved by doing any kind of oracle change, though IMO discussions of oracle revamping are also worth having after we deal with this more pressing issue. The only realistic way to resolve these risks is by reducing the amount of DAI in the system by a great amount. I don’t really know which of the options laid out in the OP are the best ones to take, but I think it should be clear that the goal should be to select the ones that result in a swifter reduction of Compound’s present DAI market risk.
Some have commented, here and on the Discord, that these risks are mitigated because a lot of the largest DAI borrwers/depositors are “loopers”, that is to say, they recursively borrow and deposit DAI as a COMP farming strategy. This is definitely true, and for the ones that are “perfectly looped”, meaning they only borrow and supply one asset, these risks are nullified as their collateral and debts grow and shrink concurrently, not having an effect on their account’s health. However, it is definitely incorrect to assume that all the DAI in the system is “perfectly looped” as has been shown by the current event liquidations.