A look at its flagship Dai stable coin as it heads for a protocol upgrade

The stable coins have come a long way from just being a digital equivalent of fiat currencies. Innovation continues to drive the Cryptoverse and it is no more evident than in the Stable coin arena. Be it the multi-pegged, open-source project Venus by Binance, an investment-grade token with a stable pay option of Xank, or a more recently released revenue sharing USDD — all have shown that stable coins can go well beyond their initial capability of providing a stable digital alternative to the fiat currencies.

While the market volume of stable coins is still minuscule as compared to the mainstream cryptos, nonetheless, they have made significant strides in capturing the bigger market in 2019. Even among the stable coins themselves, the overwhelming dominance of Tether is outstanding — representing 70.95% of trading volume against BTC & 82.20% of the total stable coins market cap (table below), more than any other stable coin or fiat currency.

The widening scope of stable coins has brought about its own challenges, especially with the regulators who have already had a hard time coming up with a standard set of regulations for the mainstream cryptos. International securities regulator International Organization of Securities Commission (IOSCO) has suggested that some of the stable coin implementations may fall under the ambit of securities. The suggestions came in a statement released recently. This may open a new can of worms for an industry already suffering from the ambiguity of the regulators.

While the recent addition of a Crypto Lending and a Staking platform by Binance, one of the biggest names in Crypto exchange has added another dimension to the Decentralized Finance, the team of MakerDAO has been at the forefront of creating a Defi ecosystem.

Maker is a Decentralized Autonomous Organization (DAO) that manages the Dai Stablecoin System on the Ethereum blockchain. The MakerDAO (MKR) loan system, administered by the Maker Foundation accomplishes this by allowing users to borrow or generate Dai by staking their cryptocurrency holdings as collateral.

While other stable coins are usually backed by bank accounts in the reserve currency to which they are pegged, Dai is generated by putting Ethereum into a collateralized debt position (CDP) via a smart contract. Dai stable coin which tracks the value of the US dollar (1:1) and the CDP platform together form a global decentralized finance solution that can provide access to the unbanked.

The Dai stable coin recently hit the ceiling of 100 million tokens with $339 million worth of Ethereum locked up as collateral, as it heads for a change in the collateral protocol on November 18th. It was July 2018 when the stable coin hit the previous ceiling of 50 million tokens & the community decided to extend the ceiling to 100 million tokens.

The platform has seen rapid growth ever since its inception. The foundation was far exceeded its own expectations of issuing the first $3 million loan by 2020 with five loans exceeding that limit already — including two loans over $8 million each. Raising the ceiling further would require raising the stability fee, which currently stands at 5% as the majority of the community voters polled to raise the debt ceiling to 120 million Dai tokens.

Coming back to the upgrade, the current system functions on a single-collateral Dai (SCD), whereby the user repays the Dai loan at an interest rate per annum of 5.5% backed by Ether as collateral. Under the new multi-collateral Dai (MCD) system, the current Dai stable coin would be known as ‘Sai’, while the new MCD will carry the ‘Dai’ monicker.

As the term MCD implies, the new system would let the users stake multiple types of assets as collateral — to begin with, MCD will support one more token in the form Basic Attention Token (BAT). CDPs for different assets will be known as “vaults,” which will be used for storing the respective tokens. Support for additional collateral tokens will be added in the future, with OmiseGo being considered right now.

One of the risks associated with the Maker loans is that loans automatically get liquidated if the price of the underlying Ethereum drops below a certain level — this varies depending on the loan. The rule will be followed for the additional tokens being added to the platform as well.

Also, the upcoming Ethereum 2.0 upgrade will present challenges in the form of migration of the MakerDAO system to the new blockchain. It will take some time before the whole system can be migrated successfully to the new blockchain, until which time there might be two parallel systems to cope with.