As the Winklevii release their stablecoin, we figured we should talk about an alternative.
It is MAKing waves in the space.
Today’s review is MakerDAO and their stablecoin, Dai.
Let’s dig in….
MakerDAO (ticker: MKR)
Wtf is this shit?
MakerDAO’s prized product is Dai, a decentralized stablecoin soft pegged to 1 USD. Maker is essentially a smart contract platform that manages and controls Dai.
Currently there are several stablecoins (i.e. Tether) which are controlled by a centralized entity. Despite controversy and rumors, Tether seems to actually be backed by real USD, but people will always be paranoid, and rightfully so. These entities have power to seriously manipulate the markets by printing more Tether, only to eventually not have enough to liquidate users. Traders and investors deserve more transparency to the mechanisms, collateral, and assets behind these stablecoins.
A main difference between Tether and Dai is that Tether is audited by banks and controlled by a central company, even though Tether is actually issued on Bitcoin’s blockchain via the Omni Layer…it’s recorded in a Bitcoin transaction, but this isn’t very useful to us as we do not know if the printing is warranted.
ANYWAYSS, the intricacies and nuances in stabilizing Dai can be a bit confusing for those not financially savvy, but here we go… While Tether is monitored by a basic reserve ratio of 1:1 USD to Tether, Dai is more decentralized and priced by collateralized debt in smart contracts on the Ethereum blockchain. It is created through borrowing on the Maker platform. A user can borrow Dai by sending collateral (a currency, generally MKR or ETH) and locking it into a collateralized debt position (CDP). At any time, a user can get back their collateral by sending back Dai to the platform, plus an incentive fee.
Dai’s stability is market based, and is maintained by raising or lowering the incentives for borrowing and holding Dai. Borrowing Dai is more expensive when the price is below it’s $1 target…and if the price is above target, the cost to create new Dai is less. It’s these forces that control the amount of Dai in the network, keeping it towards the 1 USD price with low volatility.
If ETH (or collateral) dumps in value, then collateral needs to be sold off to users to cover the outstanding Dai that it is backed by. There are ‘keepers’ in the network which are basically responsible for watching the network and finding risky CDP’s, then getting it sold. When a CDP is liquidated, the keeper gets a reward.
Maker, the publicly traded token in the network can be priced freely and is traded on exchanges just like any other currency. MKR has a few uses…you must use MKR to pay for fees accrued by your CDP’s, MKR is used to vote on proposals submitted to the network, and MKR can be used to measure reputation of a CDP holder, and thus MKR tokens can be burned if anything is under-collateralized.
Example of things MKR can vote on are liquidation ratios (when is a CDP too risky), fee amounts, and the maximum amount of debt that a CDP can create.
TL;DR – CDPs hold the collateralized asset and permits the user to generate Dai. There is a cost to the generation of Dai. All of this is transparent on the Ethereum blockchain, creating an interesting alternative to other, more centralized stablecoins.
Who tf is behind this shit?
Rune Christensen is the founder and CEO of MakerDAO. He is a young lad in his mid twenties it seems (not sure why we said, lad, it just felt right). He has a degree in International Business from Copenhagen Business School (finished in 2013 it seems) and spent 1 year studying biochemistry. He is also a cofounder of a company called Try China where he was in charge of scouting clients and managing the business (detailed description, we know). Despite his youth, Maker has climbed the charts on coinmarketcap, sitting at #36 at the time of this writing.
Anyways, Mid-Tier shitcoin, cool idea, but we’re skeptical on how much people will really care about this. Hopefully there are no bugs in their smart contract.. Let’s see how they do!
Hope you learned some shit.
– Mike and Aaron