When Mariano Conti wanted a loan for a new Ford Focus, he didn’t go to a bank. Instead, he drew a loan from himself, leaving his assets with himself as collateral, before paying himself back out of his own salary.
He was the bank. A one-man bank.
Now he has a car.
MakerDAO or Maker is a decentralized autonomous organization that maintains the Dai credit system. Dai is a stablecoin with a soft peg to the US Dollar but is backed by ether. Dai acts as a synthetic dollar without compromising on the permissionless nature of cryptocurrency.
Maker has been likened to a decentralized central bank with an arsenal of financial levers at its disposal including control of interest rates. Maker is goverened by holders of the MKR token by proportional votes.
Makers allows one to lock collateral in a smart contract called a collateralized debt position or CDP and automatically receive a Dai loan proportional to the collateralization ratio (currently 150%). Because Dai is backed by digital assets stored in public smart contracts the solvency of the system is intrinsically transparent. In contrast traditional stablecoins are IOUs for off-chain assets which cannot be openly verified and may not exist at all. And because Dai is not connected to any bank or country it can operate with the same freedom as Bitcoin. Whereas traditional stablecoins have built-in mechanisms to seize and freeze funds much like e-money networks.
Dai has weathered extreme price volatility in its underlying collateral Ether. The Maker system is designed to liquidate at-risk CDPs for Dai before the collateral no longer backs the Dai. This process keeps the system fully collateralized at all times. Each Dai represents someone's claim to at least a dollar of collateral. The price of Dai is determined by market factors and is not always on the peg. In order to shift prices MKR holders adjust interest rates. This year the interest rate was hiked from 0.5% to 19.5% APR to address Dai being several cents under the peg.
Many Decentralized Finance protocols integrate Dai in some manner making it the unofficial native stablecoin of Ethereum. Over 10% of the supply of Dai is locked in smart contracts associated with other DeFi protocols like Augur, Compound and Bancor.
Some people do not immediately understand the utility of Maker. A question that is often asked is "What's the use of taking out a loan with Maker if you have to put up more than you receive? For instance, if you lock $150 of Ethereum in a CDP you will only receive $100 of Dai." Well, let's say you then sell the Dai for more Ethereum. If the value of Ethereum doubles you would have $500 of Ethereum, $300 of which is sitting in your CDP. After repaying your $100 Dai debt you receive your collateral back, netting you $400 in total. If you had just held the $150 of Ethereum during the same price increase you would only have netted $300. The best part? You did this all yourself, nobody supplied your Dai funds, you were your own bank.
The collateralization ratio controls the maximum amount of Dai that can be drawn out of a CDP. The minimum required collateralization ratio is 150%. Choosing a higher ratio returns fewer Dai but reduces liquidation risk.
MCD (Multi-Collateral Dai)
Currently Dai is backed by Ethereum. In the future, MKR holders will vote on new forms of collateral. These collateral types will have adjusted collateralization ratios and stability fees (interest rates) to meet their risk profile.
In the event of a global settlement, CDPs are settled globally to anyone with Dai. This can be triggered by a major failure of the Maker system or a system upgrade. There is a planned global settlement before the launch of MCD and CDP owners will have advanced notice.
The Importance of Dai in a World Without Cash
When you use digital money instead of physical cash you sacrifice many of your freedoms.
Many countries have been pursuing aggressive demonetization policies to drive people toward "e-money". In India, large notes were declared no longer legal tender and people were given a window to exchange them for digital currency. In Australia large cash transactions have already been made in illegal. In China, physical cash is uncommon as most people transact with WeChat Pay. It has been suggested that in order to sustain negative interest rates such as those imposed in Europe and Japan, physical cash must be eliminated to prevent hoarding. Negative interest rates could come to the United States in the next recession if the Federal Reserve fails to raise current rates before then.
The end result of demonetization is a catastrophic loss of freedom and greater state and corporate control over individuals. Payment providers like VISA and PayPal are known for censorship. When a number of right-wing celebrities led an exodus from Patreon to SubscribeStar, PayPal promptly de-platformed the entire site. Gab's revenue fell 90% after it was deplatformed from Stripe and PayPal and had to rely on cryptocurrency payments. Fiat onramp Coinbase also closed the accounts of Gab and CEO Andrew Torba. There have been calls by politicians and the media for banks to deplatform gun stores. There are no signs this trend is slowing down.
If a corporation won't deplatform you it will be the government. Which is why we need Dai more than ever. Dai has one property that Bitcoin does not - price stability. And unlike other stablecoins Dai is backed by cryptocurrency and not physical dollars sitting in a bank. Dai is what digital cash should be - uncensorable and stable.
xDai is an Ethereum side-chain that uses the Dai as the native currency instead of ether. Or rather, it uses the xDai token which is pegged to Dai.
All ethereum transactions require ether and this is why ether has any value at all. This is a condundrum because Ethereum users must hold an unstable asset (Ether) to use a stable asset (Dai). Likewise, smart contract developers must work around Ether's fluxuating price. Ether is what might be called dead weight.
xDai is new and not yet available on Metamask but can be added as a custom RPC.
There are two online meetings each week.
- The Scientific Governance and Risk Meeting. This is where MKR holders discuss proposals before they vote on them.
- The Community Meeting for weekly recap, events, etc.
Dai with zero knowledge proofs has been tested. Privacy is the most important feature Dai lacks at the moment.
- Makerscan.io - website that tracks statistics about Maker.
- mkr.tools - similar to above.
- dai-in-defi.com - tracks how Dai is used in DeFi projects.
- Andy Milenius explains MakerDAO at Devcon4.
- Dai Smart Contract
- MakerDAO Whitepaper.
- use-dai - currated list of places to use Dai.
- daiprice.info - tracks the peg.
- dai.stablecoin.science - similar to above.