MakerDAO: Bitcoin, in Two Coins

The MakerDAO system separates specific features of Bitcoin into it’s two coins MKR and DAI, while adding a few new ones on top.

Failure to build a better Bitcoin

2017 was the year for new and improved coins to compete with Bitcoin. Billions of dollars were invested over hundreds of projects, trying to come up with a faster, more secure, improved version of Bitcoin.

It seems they all failed. As it turns out, Bitcoin has generally all the right tweaks and design choices that make it what it needs to be: Sound Money. The window of opportunity for some base-layer coin to replace Bitcoin as the leader of the cryptocurrency world seems to be closing.

So many projects tried to be ‘innovative’ by tweaking one or two things about the Bitcoin code, and tried to market themselves as a Bitcoin killer. As 2018 has allowed us to autopsy 2017, we can now say that all of those projects were not really as innovative as originally marketed, and the only innovative thing was the marketing. It seems that there is only going to be one Proof-of-Work based, finite supply, base-layer cryptocurrency, and that will be Bitcoin.

In order for something to truly “compete” with Bitcoin, it’s going to take a radically different design structure, because more of the same designs seems to not be working (see LTC, BCH, or any other Bitcoin fork).

MakerDAO: A Radically Different Design Structure

MakerDAO represents Bitcoin, separated into two coins. The relationship between two tokens of the MakerDAO system, MKR and DAI, and Bitcoin, have almost identical qualities.

Network Size of Money: Where is your money accepted?

The value behind money is partly a function of how many other people accept it as money. Gold in World of Warcraft has value, but only to the other people who can use it in World of Warcraft. Gold in real life has value to the entire world, because of it’s increased network size.

The value in the Bitcoin network will be a function of how many different entities will accept Bitcoin in order to complete transaction.

The value in the MakerDAO system will be a function of how many different entities will accept DAI in order to complete transaction.

Store of Value: How much is the network worth?

The value behind money is a function of the price people are willing to pay for it. It’s a self-defining function.

Bitcoin stores value by having a 21 Million limit on the supply. The finite supply promises that the holder of 1 Bitcoin that they will always have 1/21,000,000th of the supply of money. 1 Bitcoin today will be 1 Bitcoin in 10 years.

MakerDAO stores value extremely differently. It stores 1$ worth of value for every DAI in circulation, through the use of clever arbitrage opportunities that provide strong buying incentives, if the value of 1 DAI goes below 1$, and visa versa. This offers a stable store of value.

But thats not the only value in the MakerDAO system. The marketcap of MakerDAO is the marketcap of DAI + MKR.

MKR stores value in a similar way to Bitcoin, but with an additional deflationary mechanism. MKR gets burned as loans in DAI are repaid. When someone opens up a $1,000 loan, and closes it one year later, they are charged a 2.5% stability fee. They must pay back $1,025. This extra 25 dollars goes to purchasing MKR, and burning it, reducing the supply of MKR.

Here is the MKR burner wallet. 250 MKR as of 28 November 2018. For every day that the MakerDAO system does not need to mint new MKR to back up the 1$ value of DAI, is a day that MKR supply has been reduced (read more about this effect here!).

Therefore, MKR has a similar, if not more, possibility of entering a deflationary spiral.

The value stored by the Bitcoin network is a function of the 21 Million supply limit. 1 Bitcoin now = 1 Bitcoin later

The value stored by the MakerDAO system is a twofold function: Stored in DAI by pegging to 1$, or stored in MKR by having a reducing supply. 1 MKR now = more than 1 MKR later

HyperBitcoinization? What about HyperMakerization?

Solving the Central Bank Issue

Bitcoin, and it’s 21,000,000 finite supply, represent a simple and viable solution to the issue of the central bank. By having finite supply, Bitcoin claims to provide people who own BTC the peace of mind that their currency will never be diluted, and therefore always worth something. This is solving the central bank issue with Austrian economics.

MakerDAO offers an alternative solution to the central bank problem. By decentralizing the central bank to all MKR holders, MakerDAO can do all the good things that central banks do, and none of the bad ones. Some of the things MakerDAO can do to impact monetary policy:

Increase or decrease interest rates

Raise or lower the debt ceiling

Determine what tokenized assets safe enough to issue DAI against

Incentive or disincentive savings in DAI (did you hear?)

But has none of the issues of a central bank. MakerDAO is:

Fully audit-able

Forced solvency

Open to the public

After all, weren’t these the qualities that Bitcoin was going after from the beginning? Lack of central control? Fully audit-able system? Putting the value of the currency first? MakerDAO has taken best of traditional finance, and the best of cryptocurrency, and integrated them to a system that is currently exploding in size, while under the strain of a bear market.

This is something that can give Bitcoin a run for it’s money. It’s going to be Keynesian vs Austrian all over again. Will history repeat itself?

MakerDAO: A Peer-to-Peer Electronic Cash System