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Stable DAI pricing

MakerDAO Token Review: Dai-to-Dollar Stability with Ether Deposits

MakerDAO in Brief

MakerDAO is a decentralized organization that manages the dai stablecoin. Unlike Tether, which relies on one-for-one holdings of US dollars, MakerDAO’s project uses collateralized deposits of ether to back up the value of the dai. This CoinIQ MakerDAO token review will explain how the dai stablecoin works and the role of its MKR utility token.

Pros

  • The dai has not had much volatility, even as crypto prices declined.
  • The MKR token retained its value better than many other cryptocurrencies.
  • Getting dai only costs 2.5% per year.

Cons

  • Ether deposits could be liquidated if prices fall dramatically.
  • MakerDAO has many stablecoin competitors.
  • Demand for stablecoins is still theoretical.

Exchanges that list MKR tokens and Dai stablecoins

MakerDAO’s system operates with two Ethereum-based ERC-20 tokens, the MKR and the dai. The MKR is a utility and governance token that keeps the system running. You can purchase MKR at 14 exchanges. Most are niche exchanges, but BiBox, BitMart, HitBTC and OKEx list the MKR.

The dai is a stablecoin that maintains price-parity with the US dollar.  You can purchase dai on a dozen exchanges including HitBTC and BiBox.

Background

MakerDAO Token Review
Source: MakerDAO

In an interview with the Epicenter Bitcoin Podcast, MakerDAO founder Rune Christensen explained that the Bitcoin crash of 2013 first led him to the concept of stablecoins.

“The killer app of blockchain is currency… even when it is volatile and barely functions as a useful currency,” Christensen said. “A stablecoin is, in a sense, just bitcoin done right. Just the logical conclusion of how you can use blockchain to make better money.”

Related: Stablecoins Guide: A Brief Introduction and List of Stablecoins

Christensen founded MakerDAO in 2014, but its stablecoin and decentralized management system took another three years of development. It wasn’t until mid-2017 that the first prototype, sai, was available to beta test. At the end of 2017, after 3 years of development, the dai stablecoin went live.

Leadership

MakerDAO Leadership
Source: MakerDAO

MakerDAO now has operations in Denmark, Poland and the United States. Christensen has begun developing a leadership team with experience in both technology and global finance.

  • Rune Christensen, Founder and CEO: Christensen founded MakerDAO shortly after dropping out of business school in Denmark. While studying, he founded a successful recruiting firm, Try China.
  • Andy Milenius, CTO: A software engineer, Milenius spent several years developing cloud applications at Amazon Web Services and distributed apps at DappHub.
  • Steven Becker, President and COO: Becker joined MakerDAO in April 2018 after a 24-year career in the financial industry.

MakerDAO investors

Two venture rounds in 2017 and 2018, have raised $27 million for the project. The first round was both led by venture capital firm Andreessen Horowitz. In the second round, Andreessen Horowitz’s new crypto investment fund, a16zcrypto, took the lead.

“As a first mover and innovator in stablecoins,” a16zcrypto’s Katie Haun said in the announcement, “MakerDAO represents a very compelling opportunity in the crypto space.”

Unlike traditional startup funding, these investment rounds did not buy ownership stakes in the Maker Foundation. The investors instead bought $27 million worth of MakerDAO’s MKR utility token. This gives them 7% of the MKR voting shares and a strong voice in the Dai stablecoin’s management.

What Does MakerDAO’s Blockchain Do?

Understanding dai stablecoins

MakerDAO dai stablecoin
Source: MakerDAO

As the name implies, the price of a stablecoin is designed to be stable against another currency. For example, the price of a dai is designed to trade one-to-one with the US dollar. In this case, we say that the dai is pegged to the dollar.

There are three ways that stablecoins maintain their stability. In the case of tether, every USDT available on the market has a corresponding dollar sitting in a bank account. Basecoin will rely on algorithms to buy and sell its tokens automatically in order to keep the price pegged to the dollar.

MakerDAO takes a hybrid approach, using both collateralized deposits and algorithms to maintain price stability. In order to buy dai from MakerDAO, you must put up some of your crypto assets as collateral for a smart-contract-based loan of dai.

In order to keep ether volatility from breaking the peg, however, the value of the ether you hand over must be greater than the value of the dai your receive. That leaves room for the price of ether to fall. At the moment, you must provide at least $150 worth of ether to get $100 worth of dai.

How people get dai

MakerDAO's dai generator
Source: MakerDAO

The easiest way to get dai, of course, is to simply buy existing tokens on a crypto exchange. Dai are just like any other cryptocurrency. You can buy them, sell them or spend them without ever having to go through MakerDAO’s system.

The only way to create dai, however, is by locking up some of your ether in a MakerDAO Collateralized Debt Position (CDP). This smart contract issues the stablecoins to you and holds your ether in escrow until you return the same number of coins.

After connecting your wallet to MakerDAO’s Collateralized Debt Position Portal, you deposit ether to receive dai.When you want your ether back, you simply return the dai and pay a service fee. Calculated at a rate of 2.5% per year, the fee is only payable using the MKR token.

Technically, you must deposit ether worth at least 150% of the received dai. In reality, you need to deposit more than that. If the dollar value of your locked up ether falls below 150% of your outstanding dai, then the system automatically liquidates the CDP and then returns any remaining ether to your personal wallet.

 

How people use dai stablecoins

Stablecoins promise to play an important role in the crypto economy by eliminating the negative consequences of volatile crypto prices. But why use a stablecoin to do things that fiat currencies already do?

The most important reason is that stablecoins keep you in the crypto financial system. Money transfers can take days or even weeks to go through, while stablecoin transfers can take minutes to complete. And given the regulatory issues surrounding fiat, many crypto companies are more interested in handling stablecoins than cash.

Earlier this year, MakerDAO published several dai use case studies. People used their ether holdings to finance the purchase of a car or pay off their home mortgage. Rather than cashing out their ether and paying capital gains taxes, they locked away their holdings in a CDP to generate dai. The CDP fees they paid were lower than the interest rates on traditional debt and they still owned their ether when they returned the dai.

Integrating dai into applications

MakerDAO Stable Fund
Source: MakerDAO

MakerDAO provides an API and developer programs to encourage other projects to incorporate the dai stablecoin. The JavaScript system makes it easy for developers to create CDPs, receive dai and trade dai on exchanges. MakerDAO hackathons help to introduce developers to the API.

The Maker Foundation has also created an investment fund, The Stable Fund, to help promising new projects integrate the dai stablecoin into their system. Grants up to $25,000 are available without any equity requirements. Projects further along can give up some equity in exchange for grants up to $200,000.

How Does the MakerDAO Blockchain Work?

MakerDAO also runs on the Ethereum blockchain using an ERC-20 token called the MKR. This token serves a number of functions as a way to manage MakerDAO’s system.

Understanding DAOs

A decentralized autonomous organization (DAO) uses blockchain technology to spread decision-making power across a project’s token holders. This eliminates the need for a centralized group of decision makers and makes a project truly community-driven.

MakerDAO’s MKR token

MakerDAO's MKR Governance
Source: MakerDAO

The MKR token is a utility token, a governance token as well as an instrument for managing risk. As a utility token, borrowers must use MKR to pay the fees when they repay their CDP. The system burns those tokens, permanently removing them from the monetary supply.

As a governance token, MKR lets holders influence the project’s policies. MKR-holders decide, for example, what the minimum collateral borrowers must deposit to get each dai. MKR holders also get to vote on setting the project’s overall direction. In September, for example, MKR-holders approved a proposal defining MakerDAO’s core principles.

In order to vote, MKR-holders must lock up their assets in a digital wallet. The software-based MetaMask hot wallet or the hardware-based Ledger and Trezor cold wallets work with MakerDAO. The locked up assets provide proof-of-stake and let the system accept the votes. MakerDAO’s system counts votes on a per-MKR basis. The more MKR you lock up, the more votes you get to cast.

Since MKR holders receive the privilege of managing MakerDAO’s policies, they also bear the risks of making bad decisions. For example, if the collateral levels are set too low to cover a fall in ether prices, the system will automatically push new MKR into the market. The money that this raises covers the cost of supporting the CDPs, but it also slashes the value of the MKR holders’ assets.

At the same time, MKR holders are rewarded for playing their roles. The fees generated when CDPs are paid off go to buying and burning MKR. This reduces the money supply and raises the price of MKR. When everything is running smoothly, the generation of dai drives up the value of MKR holdings.

How Are MKR Tokens Distributed?

MakerDAO launched with a supply of one million MKR tokens. In his 2016 conversation on the Epicenter Bitcoin Podcast, Christensen explained that 42% of the MKR tokens had already been distributed to founders, contributors and investors. “We’ve been very much under the radar and the sales have been strategic in the sense that we’ve tried to choose stakeholders.”

Now that MakerDAO has gone live, a little less than half of the MKR supply remains to be distributed. MKR stakeholders control these remaining tokens which they allocate to fund the project’s development. The sale of tokens to Andreessen Horowitz, for example, came from this pool of MKR.

Does MakerDAO Have a White Paper and Blockchain Explorer?

Ether locked up in MakerDAO CDP
Source: MakerDAO

MakerDAO’s 5,700-word white paper provides a thorough, but high-level, explanation of how the stablecoin system works.

A purple paper provides a technical explanation. The actual MakerDAO system is written in Ethereum’s Solidity programming language, but the purple paper’s reference implementation is written in Haskell.

MakerDAO explorer

MakerDAO runs on the Ethereum blockchain, but there is a special webtool designed to let people inspect the MakerDAO system. Charts let you track the MKR price and the circulating supply of dai over time. You also get to see the system’s total collateralization level. At the time of this review, the locked collateral was worth 285.72% of the value of dai in circulation. An inspector tool lets you examine each CDP.

Where Does MakerDAO Stand Now?

Testing of the new Multi-Collateral Dai began in September. This update will mark the end of the MakerDAO project’s launch. Rather than simply accepting ether as collateral, the new version of dai will be based on a wide variety of collateralized tokens. A vote by the MKR-holding community will decide on the first tokens in dai’s expansion.

In May, Request Network and MakerDAO announced that it would include dai as a payment option. The company has built a blockchain-based platform that lets developers create decentralized financial applications.

MakerDAO and Tradeshift, a supply chain services company, announced an agreement in July. Tradeshift will use dai and MakerDAO’s loan system to let small and medium businesses borrow against their accounts receivables. “The Dai Credit System is a unique vision for a transparent and stable token that allows anyone to represent real-world currency settlements on the blockchain,” said Tradeshift co-founder Gert Sylvest.

In August, blockchain money-transfer firm Wyre and MakerDAO announced a partnership. “With our API, developers can leverage our experience in banking and compliance with the stability of Dai stablecoin,” Wyre CEO Michael Dunworth said in the announcement. Wyre’s global payment network makes dai available in more than 30 countries.

Final Thoughts

MakerDAO has taken a slow approach to developing its stablecoin system. Its full capabilities won’t be available until the dai’s multi-collateral version becomes available. Even then, the dai is among the 100 largest cryptocurrencies by market cap. The MKR has an even higher market cap, placing in CoinMarketCap’s top 25.

What remains to be seen is whether dai can hold its own against so many competing stablecoin projects.

Christopher Casper

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