📰News

This week saw the successful launch of Multi-Collateral Dai (MCD), the upgraded version of the decentralized, dollar-pegged Dai stablecoin built with smart contracts on Ethereum. As the name suggests, the headline feature of the new system is the ability to lock multiple assets as collateral when taking out a loan. At the time of launch, Ether and BAT (Basic Attention Token) can be used. More tokens may be added in the future.The upgrade has many noteworthy features beyond additional collateral types. In this issue, we'll dive into Dai, and the MakerDAO project that backs it. This is one of the most fascinating and important experiments in the crypto ecosystem. Let's explore why.

Single Collateral Dai

The original version of Dai, now being referred to as "Sai", launched on the Ethereum mainnet in December of 2017. It allows users to lock their ETH as collateral in exchange for loans in Dai. Once minted by a borrower, the stablecoin can be spent freely or traded on an exchange, just like any other token which implements the ERC20 standard. Link If the price of Ether drops, borrowers are required to pay back their Dai, or provide more ETH. If the borrower fails to do so, their underlying collateral will be liquidated by the smart contracts on the open market, until the system returns to equilibrium. Link The timing of the original launch was inauspicious. It came in the midst of the huge 2017 hype cycle, shortly before the price of ETH shot up to an all time high of $1400, then drew down 94% over the next year. Despite this incredible volatility, Sai (nèe Dai) has held within a few percentage points of its peg for its entire existence.

More Than Multi-Collateral

Astute readers may have a question at this point: how do the smart contracts "know" the price of Ether, which is required to calculate collateral ratios? This is a great question. The price of Ether is provided to the system by a trust-minimized, but-still-semi-centralized, price oracle. Some critics of Maker have argued that this essentially makes the entire system centralized.While it's fair to point to the price oracle as a centralizing force in the system, it's also important to remember why decentralization matters in the first place: decentralization matters in as much as it disintermediates power. In Multi-Collateral Dai, the Maker team has taken steps to reduce the power that any one entity has over the price oracle. Is it perfectly decentralized? No. But then, nothing is. It does mitigate the risk of collusion or censorship that might occur via the oracle, which is the important point. Link Another major improvement to the system in MCD is the addition of the "Dai Savings Rate." Essentially, this parameter is an annual interest rate that is paid to any Dai holders which place their Dai in the interest earning pool. It's funded by the fees paid by borrowers on their loans. For holders, the Dai Savings Rate makes owning Dai a bit like having a savings account: modest interest accrues on your money, which is available for you to withdraw and use at any time. The current annual savings rate is 2%, but it could be raised or lowered in the future in order to increase or decrease demand for Dai. This provides MakerDAO members with another mechanism for maintaining Dai's peg. Link

💡Commentary

One of the most memetic narratives amongst crypto enthusiasts, especially those who are particularly passionate about Bitcoin, is the belief that cryptocurrencies will one day supplant fiat currencies like the US Dollar. Reality, though, often has a way of defying our predictions, sometimes by delivering outcomes that are the polar opposite of what we expected. Dai makes me wonder if crypto is one of those cases.



What if, rather than supplanting USD as a global reserve, crypto actually leads to a wave of global dollarization? If this seems far fetched to you, you should watch this talk by Mariano Conti, head of smart contracts at the Maker Foundation. Link.



Mariano lives in Argentina, a country that has experienced 55% inflation in 2019. The Argentinian government actively thwarts efforts of its citizens to obtain US dollars, but since he works for the Maker Foundation, Mariano is paid in Dai. As a result, he's able to protect his savings, converting only the minimum amount he needs into pesos at the last possible moment. Is it so hard to imagine that more Argentines may choose to hold their wealth in Dai? Sure, there are technical and usability hurdles— but 55% annual inflation is a pretty big motivator. Unlike other cryptocurrencies, Dai offers people in Argentina what they really want: a stable store of value.



Of course, Dai isn't really a dollar. It's a synthetic financial product pegged to it. This begs another question: if smart contracts on Ethereum can make a synthetic dollar available to anyone on the planet, can it make other synthetic assets available as well? The answer is yes. There are a number of projects working on this, and Maker themselves they may eventually move in this direction. Dai can be used as collateral to produce new synthetic assets.



It may soon be possible for anyone on the planet to hold their wealth in a synthetic dollar and invest their savings in a synthetic S&P index fund. The first big use case for crypto might be exporting Western financial products to the developing world. If this turns out to be the case, there's no doubt Dai has lead the way.