Prologue

We are entering a century where everything is slowly becoming tokenised.

Data has become the oil of the 21st century. This oil is being exploited by a handful of companies, but blockchain technology is giving us, the masses, an amazing opportunity to be a shareholder of a new company, emerging ecosystems, supply chains and to be able to benefit from these new investments.

Tokenisation of everything might be bigger than the invention of the internet even though it relies upon the internet to work.

Unfortunately, the majority of people see tokens as nothing but acronyms like ETH, BAT or TRAC they can trade for a quick profit. In reality, they are much more than that – they’re fuelling their respective ecosystems.

Value is no longer in the possession of a few. It is being distributed through tokens, allowing anyone to take part. We are entering the age of shared economy (don’t confuse this with socialism) where we can trade value in a way unimaginable before.

This movement goes beyond the meaning of cryptocurrencies itself. We should remove the word ‘currency’ and replace it with ‘value’ in order to express what it truly represents.

According to CoinMarketCap, there are almost 1600 cryptocurrencies out there (plus those that haven’t been listed on CMC yet). Half of them are tokens, whilst most of them are created upon Ethereum blockchain.

Ask anyone experienced in the crypto space what this number will be in a couple of years and most likely they’ll answer that ~80% of the cryptocurrencies will die.

Yes, we expect the majority of today’s cryptocurrencies to fade away as well, because most of them are purely money grabs. Luckily for us, this is slowly changing.

A more serious approach is being taken as a new fundraising model emerges. Any company can raise funds by releasing its own token to interested individuals. We expect an enormous explosion of entrepreneurism where everyone has equal access to the market thanks to tokenisation.

Currently, we are able to buy shares of a company like Tesla through a broker for a high fee. Then, you can only either sell or buy them within a complex trading panel.

In the near future, we foresee an entirely new type of model emerging where you can buy tokens like shares. In fact, tokens are the new shares. Even your local coffee shop might have tokens for sale. If you believe its prices and service are performing well with the potential to grow into a chain or expand otherwise, you will be able to buy its tokens and be a part of that growth.

First Starbucks store, established in 1971

Investing in the next Starbucks, while it’s still in a tiny corner location, is finally possible. However for now, only tech-companies see the purpose of tokenising their business.

The crypto community often ask why this or that project needs a blockchain to function. Who in their right mind would put a coffee shop on the blockchain? What would be the purpose of the token?

Businesses accepting payments in the form of their own tokens is the primary and oftentimes the only usability they will have.

Most of us don’t realise that this model was introduced way before blockchain technology emerged.

Walmart loyalty points. TESCO clubcard. McDonald’s reward card, etc.

Does this remind you of something?

Even before the internet, companies issued their own custom currencies, oftentimes simply called loyalty points, to make their customers stick around with incentive to make purchases in their stores.

With tokens, this type of incentive can finally become official, fully transparent and tradable!

The number we mentioned earlier – 1600 cryptocurrencies – is tiny compared to what’s ahead of us. Imagine if every company was able to release their token to the wider public. Unfortunately, at the moment the infrastructure is still too fragile for merchants to fully enter the scene.

The unstable nature of cryptocurrencies prevents businesses from participating.

If we want to push this new, amazing technology to the rest of the population, we need to achieve stability of our crypto economy.

Alas, we don’t have decades for Bitcoin or Monero to be fully mined. Nor can we wait for the prices to finally settle down (we will elaborate on that later).

If we truly want to achieve an economy where everyone is able to create and transfer value, we need a stable currency that’s build within the crypto space. A stable currency that would connect all the unstable assets and allow people to safely store them without having to worry about the value dropping as time passes.

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We dream of being our own banks; people paying in crypto of their choice. But what slows us down a lot is the uncertainty of whether our token will drop 50% of its value in the next few hours, days, weeks or months.

Stability is the necessary component to expand cryptocurrency’s ecosystem from traders and holders to businesses and everyday people.

Let’s have a round of applause for one of the oldest projects built upon the Ethereum blockchain – MakerDAO. The crypto space is being changed by this visionary project with its stable currency called DAI.

MakerDAO

Before we break down the facts about Maker (MKR), let us give you a broad overview of why the token that costs around $800 (at the time of writing) is still a massively undervalued cryptocurrency.

A great portion of people who make their first investments in the crypto space often look for that “under $1” gem hoping it’ll experience Bitcoin type growth.

Heck, many people in December 2017 bought Ripple as it was still under a dollar. Unfortunately, they did not realise the importance of its enormous circulating supply that kept its price really “low” in their eyes compared to Bitcoin.

What should truly interest you is the potential percentage growth. The price of the particular cryptocurrency itself is not that important if you don’t take the supply into consideration.

The circulating supply of Maker is a critical factor that values it even higher than its underlying Ether – as far as price per token is concerned. There are only 618,228 MKRs out there with a total supply of 1 million. This low supply leads to high valuation of each token.

That’s around 16 times less than Bitcoin’s value and 98 times less than Ether. Let that sink in.

Let’s put this into perspective. If Maker’s supply was the same as Ether’s (99,908,373), MKR token would be valued at around $5 at the time of writing this.

We strongly advise you make a cup of chamomile tea before you continue to read, as the growth potential of Maker can significantly speed up your heart rate.

Bitcoin will never be used as a go-to cryptocurrency payment on the mass market.

Yes, you heard us.

At least not in its current state. Some may argue that there are already apps out there that let you pay for your coffee with Bitcoin or that merchants already accept various crypto payments.

Unfortunately, in most cases this process requires an instant market sell of Bitcoin’s fraction for fiat in order to complete that coffee transaction. The conversion either happens on the user’s app or on the merchant’s side. In the end, the merchant receives fiat currency like USD, EUR or GBP.

Cryptocurrencies will never lift off if we continue to operate this way. For mass adoption, we need both sides to spend and receive crypto without using fiat to preserve value.

Businesses cannot afford to receive payments purely in cryptocurrencies because most of their prices are too volatile.

Let’s be honest – people treat crypto mostly in a speculative way. There is no way a business will start accepting i.e. Bitcoin and keep it for the operational business costs. It would be a pure gamble.

If Bitcoin goes up by 10%, the business owner can make a trip to the Lambostore. Unfortunately, due to the volatile nature of BTC, he might not be able to afford a Prius by the time he gets there.

If Bitcoin goes down by 10%, businesses might not be able to afford rent or salaries. They might even stop making a profit, which may eventually lead to the business having to close.

There is simply too much risk involved for merchants, yet they are the key to the crypto mass adoption.

Some may argue that cryptocurrencies like Bitcoin will one day finally achieve a certain level of stability. There are two reasons why we don’t see that happening any time soon and here is why:

It is predicted that all Bitcoins will be mined around 2140. As long as there are new coins to enter the market we can expect BTC to be volatile. There will probably be much less instability toward the end when there are only a few coins left to mine, but it’s still not possible to call them stable in any way. Even when all Bitcoins are successfully mined and in circulation, it will be almost impossible to keep the price stable. The reason for this is the supply being finite with more and more potential buyers.

We believe Bitcoin will survive as a commodity just like gold.

Stable cryptocurrencies are the key to bringing crypto to the masses. Not another fleeting flavour of the week on the blockchain, but crypto currencies that are here for the long term.

We have to take care of the fundamentals first. The core is important and then we can let the branches develop. If we start the other way around, it will be hard to keep huge branches of the tree healthy if its trunk is weak.

Stable cryptocurrencies are what make the trunk solid and healthy and ecosystems like Ethereum will serve as the roots to ensure a firm foundation.

As mind blowing as it sounds, the brilliant people behind Maker managed to create a decentralised stable cryptocurrency called DAI. In other words they created a stable value that lives within a smart contract. It is beyond anything we have seen so far in this space as far as stable currencies are concerned.

DAI lives purely within the blockchain and is soft pegged 1:1 to USD.

It is basically a product of the Maker company and we’re investing in it by buying MKR tokens – a.k.a. its ‘shares’. These tokens also have a few utilities that we’ll elaborate on in a second.

Is it possible for a token to remain stable with no central authority control like the USD has with the Federal Reserve?

If we look up the DAI chart it is clear that its price fluctuates tightly around $1. There is no solid straight line. That’s why it is called a soft-peg where the price is maintained within a narrow band around a central rate that is adjusted by the interplay of complex mechanisms that keep the price stable. We will talk about these later on in the tech section.

Is DAI useful for crypto investors?

Many new crypto investors do not see the purpose of buying crypto that is always $1. We are here to make money, aren’t we?

DAI gives crypto investors a fantastic opportunity of protection. Stablecoins are oftentimes called ‘safe havens’ or a shelter during periods of uncertainty.

You probably had a situation where you made a profit from a crypto investment and wanted to cash it out for FIAT in order to keep the profits untouched by the market volatility. Converting to FIAT usually means you’re eligible to pay tax (depending on your country). On top of that, you are facing high fees when converting crypto to FIAT and vice versa.

Maker allows investors to cash out profits into DAI tokens and sleep well as its value remains stable. This means you can chill out during the bear market and be ready to make an instant and cheaper rebuy of your favourite cryptocurrency when it dips.

How is DAI created?

This part of the article can be challenging for many, yet it is very important for investors to at least understand some basics before you move on to the next parts of our review.

Bear in mind that the process we describe below isn’t necessary for 95% of users to understand in order to interact with it. This section is for us, the early investors, to make it clear that everything in the process of DAI creation makes perfect sense.

Let’s get started.Maker platform offers everyone the opportunity to create DAI tokens in exchange for collateral (currently only in the form of Ether). This pushes off the cliff any potential argument that Maker could print money out of thin air.Think of a form of deposit where you lock up your Ether and are able to receive DAI from the system.

To make this scenario far easier let’s say 1 ETH is worth $1000 on the market. By utilising the Maker smart contract you can lock your Ether in and in return get DAI at a certain ratio.

For instance, say 4:1 – for every four dollars’ worth of Ether, you receive one dollar worth of DAI. In our example this would translate to $250 in DAI.

The main incentive to create DAI is the fact that you can basically give yourself a loan.

Yes, correct. A self-loan. We know, it sounds a bit impossible at first but hear us out.

Smart contracts and blockchain not only allow us to send money without the need of a middleman. Other possibilities such as a loan without a third lending party have become available.

What’s the point of locking in your assets if you are borrowing less?

Let’s head back to our scenario of locking up that 1 ETH. In this case you still own that Ether plus you lend yourself 250 of DAI. The rest of the Ether is held as collateral until you pay back your debt.

Where is the catch?

There isn’t one. You simply no longer have control over that ETH until you pay back that 250 of DAI plus the 0.5% annual fee. Dead simple.

The beauty of that system is the fact that even if the price of Ethereum rises to $10,000 you can unlock it from deposit for only paying back 250 DAI to the system with a small MKR fee.

But what if the Ether goes down, will I lose my locked ETH?

As long as the collateralisation ratio stays above a certain percentage threshold your deposit will be safe.

Confused? No worries, we have prepared a nice and sleek ELI5 below.

When you lock up your ETH in a smart contract it is being held in a collateralised debt position – CDP for short. In simple terms, a deposit.

Now, when you lock up that $1000 worth of Ether, your CDP is worth $1000. If you decide to take out $250 from that deposit then it puts asset collateralisation at 400%.

A collateralisation of 400% means that your collateral – $1000 – is worth four times more than your outstanding debt – $250. This ensures that you have plenty of secure room if Ethereum drops.

Even if Ether goes down to $500, your debt collateralisation sits tight at 200%. Your $250 is worth twice as much as your collateral of $500. Thanks to that, the system has enough funds to cover your debt.

If ETH drops too close to a range of $250 your CDP can get partly liquidated in order to cover your outstanding debt and keep the collateralisation level healthy (in our example this could be 130%, meaning that if ETH falls bellow 130% * 250$ = 325$, then your deposit would get partially liquidated).

To sum up the process, DAI is created upon value – currently it can be collateralised in the form of Ether. The Maker system ensures there is always enough Ether in deposits (CPDs) to cover the outstanding debts of DAI.

If you keep an eye on your self-loan there is no need to worry about your deposit. And yes, if you decide to pull more out, i.e. $500 from a $1000 deposit, your CDP sits at collateralisation of 200% upfront. Which means that if Ether drops close to $500 the liquidation scenario is more likely to happen.

Just like the USD was backed by gold until the Nixon shock, Maker takes a similar approach to back its currency with ETH that allows for DAI’s transparent existence.

The market’s need of a safe and stable asset will speed up the demand for DAI and result in an increased value of MAKER’s token which we invest in.

How is DAI’s success tied to Maker?

Remember that 0.5% annual fee we talked about? Let’s say someone took a loan equivalent of $100,000 in DAI and decided to fully pay off the debt after 365 days. In order to reclaim his locked ETH (which might be worth much, much more than it was a year ago) this person needs to pay back 100,000 DAI to the system plus 0.5% ($500 worth of DAI in this case) of the annual fee.

This fee is repaid in MKR. Each time someone pays off their debt the Maker tokens are purchased at market price and are burnt immediately ($500 from our example) resulting in less MKR tokens in circulation. This way, each remaining MKR gains in value. This growth is the revenue that MKR holders get to enjoy.

The actual fee is calculated on the go proportionally to how long the loan was active for.

The more people generate DAI the more MKR token holders will benefit from it as each time a debt is paid back the overall value of MKR tokens out there increases.

Keep in mind that if the price of MKR is high then the system burns its smaller amounts upon debt payoff and vice versa. This ensures us that there won’t be just a couple of MKRs in circulation any time soon.

Going back to our example of burning $500 worth of DAI, if MKR is worth $1000, then 0.5 MKR would be burnt. Respectively, if MKR price doubled to $2000, then only 0.25 MKR would be burnt. And so on…