In this Wyre Talks, we are excited to host Steven Becker COO and President of MakerDAO. Having spent his career at various trading desks on Wall Street banks and high stakes hedge funds, Steven is no stranger to managing risk. However, a new challenge arose as he was tapped to run the decentralized risk functions at MakerDAO. Steven grasped the problem and led the decentralized organization scale and survive the downturn, all while preparing for the launch of MultiCollateral Dai — the most intricate risk management problem.

MakerDAO is many things, but it can be thought of colloquially as a decentralized central bank or more precisely as a decentralized credit facility. Maker is governed by their token holders who vote to implement the risk management around the collateral that backs their stablecoin, Dai. With decentralization center plate and a battle-tested Single Collateral Dai system, Maker is poised to make the jump into additional collateral types. We’re excited to continue rooting on their journey into riskier waters as the world’s only truly decentralized stablecoin.

An overview of the MakerDAO ecosystem components and how they motivate stability.

How the diverse range of MKR holders coordinates to govern the various risk verticals of the MakerDAO system.

How liquidations are an essential part of the economic ecosystem that Maker is creating.

Inherent systemic risks of the DeFi platform that participants should be mindful of.

The primary objectives and motivations behind the launch of the Multi Collateral Dai.

How adding additional collateral to the Maker platform presents a new risk management problem set.

Maker’s measured approach to growing the acceptable collateral assets and subsequently their debt ceiling.

How Maker will measure non-quantifiable risks like counterparty risk & legal risk for new collateral assets.

How the Maker team focuses their go-to-market and partnerships efforts.

Maker’s opinion of the other stablecoin models

How Maker is thinking through the oracle problem.

Related Links

MakerDAO Website: https://makerdao.com

MakerDAO Twitter: https://twitter.com/MakerDAO

Maker Chat: https://chat.makerdao.com

Questions or comments?

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Podcast transcription:

Thomas Scaria: Hey everyone. Welcome to Wyre Talks, the Wyre podcast where we discuss all things crypto. So whether you’re a veteran or a crypto newb, we’re all learning together. This is your host, Thomas Scaria. I still work at Wyre here in 2019.

Thomas Scaria: Today, I’m joined by Steven Becker, COO, and President of MakerDAO. Steven, welcome.

Steven Becker: Thank you very much. Appreciate it.

Thomas Scaria: I also have my cohost with me, a well rested cohost I will add, Louis Aboud.

Louis Aboud: Thank you. Please to be here.

Thomas Scaria: Thank you. Thank you.

Thomas Scaria: So, let’s kick it off. Steven, let’s just begin by talking a little bit about yourself and your background. When did you join Maker, by the way?

Steven Becker: I joined Maker at the end of March 2018.

Thomas Scaria: Okay. So you have almost coming on a year.

Steven Becker: Yes, but relatively speaking I’m new, but I think in crypto world that’s almost a lifetime.

Louis Aboud: That’s what they say, yeah.

Thomas Scaria: Yeah, yeah. From what I can glean online, the overall theme of your career is really risk management, and I think you were hired as the head of Risk, and now you’ve transitioned into a full managerial position, being the COO of the firm and president of the foundation.

Thomas Scaria: Walk us through that journey. Your first day at Maker, to where you are right now. Yeah.

Steven Becker: Okay, so first, my background. You are correct, it has always been in risk management somehow. I think the initial job I took was a market risk position, and that developed into a market risk management position at an investment bank. Went into trading. Went into hedge fund management. I got involved with corporate finance, private equity, and found myself in a position where I was doing a lot of options in futures trading.

Steven Becker: Whilst I was doing that, I got a message from Maker that they were interested in looking for someone with a bit of a risk background. So, I sort of put up my hand and said let’s see what this is about. To be honest, the first time I saw it, I didn’t really have too much of a clue because my crypto experience starts at around about 2015, and that was just mostly a case of looking at bitcoin and saying, okay that’s interesting. I kind of like the blockchain element, but the bitcoin element, I’m really trading enough volatility. I don’t really need to add another one to my plate, but it’s really interesting.

Steven Becker: When this opportunity came around and it was indicated there was stablecoins, that really sort of peeked an interest. I’m thinking, you know, stablecoins. What are we talking about here? Once I spoke to the folks at Maker, specifically Rune, it became clear that this was a place I definitely wanted to get involved with because my tool sets from the traditional finance space definitely had an application in the crypto space, and specifically with this organization.

Steven Becker: I started off as the head of risk, putting together the formats and framework around what we need to consider in order to extract stability from collateral and inject it into MakerDAO as a system. From there, we progressed through a number of articles, a lot of YouTube video clips explaining governance all the way through to actual risk management features, and from there, progressed into the current position I am in now. I think the one thing that was inherent with my risk position was you’ve got insight into how the whole system worked, not just the collateral types, not just the portfolio.

Thomas Scaria: Okay. How’s your role right now different from the pure head of risk role? Are you managing more people? How has your day to day kind of changed over the past nine months?

Steven Becker: Well, the best I can describe it is by looking at my calendar. My calendar had white on it, now it doesn’t. Now it looks like a Jackson Pollock picture. It’s pretty full, but what is interesting is the interdependencies that I notice from a risk point of view have now manifested into managing verticals that actually have a purpose, but also mitigate that risk at the same time. So, there’s still that inherent risk management involved.

Thomas Scaria: Is your day to day quite different from Rune’s day to day? I’m trying to understand the roles, right? Is Rune’s role to be more of the visionary, and you’re more of the operator? Where’s that separation?

Steven Becker: Oh yes. There’s no two ways about who the visionary is. There’s absolutely no two ways about it. The level of integration that Rune has into just the concept of blockchain and what it actually stands for practically and philosophically is evident, and consequently, this guy has an excessive amount of vision as to where MakerDAO is going to go. I learn a lot from that glean, a lot from that, and the one strength that I bring to this organization is the ability to actually make things happen. To put things into operation and manifest them into reality.

Thomas Scaria: Let’s switch gears into MakerDAO. What is MakerDAO? How do you define it? People call it many different things. I think I can list off four different things how people have defined it, but I’d love to hear how you define it.

Steven Becker: Well, the simplest way is that we provide the first fully functional digital cash that is both decentralized and fully collateralized. That is the essence of what we do, is the provision of that kind of stable coin. Now, I also know that there are many ways we can interpret how we go about doing that, because therein lies the edge of MakerDAO. It’s not just the fact that we provide the stablecoin, but the manner in which we provide it is quite unique. And in fact, it is the basic tenants that you find for many financial systems, and you know, financial systems that expand into economic systems the concept of pledging collateral and drawing value. That is prevalent everywhere. Many different naming conventions have been used from banking to insurance and so on and so forth, but the problem being is it’s actually an intersection of so many applications, that what it just boils down to is saying that we do just provide a fully functional digital cash. It’s a very simple premise to rely on.

Thomas Scaria: And, Maker is also a DAO right? There are a ton of governance components to running Maker. Who’s governing the system? If you can give me that answer, I’d like to dive a little bit deeper into the actual ecosystem components.

Steven Becker: Well, MKR token holders, they are the governors of the system. They are the governance of the system, and what we need to consider is how governance extracts value from propositions that are placed before the system and how we actually execute on those propositions to realize underlying value. That’s the construct involved with respect to being a governor of the system.

Steven Becker: To my mind, MKR is a governance utility, it’s a governance token, and it is something that allows you to put the power of a fiduciary interest in your own hands when it comes to MakerDAO.

Thomas Scaria: So, it’s a two token system right?

Steven Becker: MakerDAO is a two token system where the actual product is obviously the stablecoin, which is Dai, and obviously MKR is the governing token that looks after the entire system and provides the direction for it.

Thomas Scaria: So, to create a stablecoin essentially, Maker has constructed an ecosystem, a very intricate ecosystem of credit seekers, CDP’s keepers, oracles. What are all these different components, and how do they meld together to make the coin stable, really?

Steven Becker: Okay, so there are various stakeholders that operate within the MakerDAO system, but simply put, the creation of a stablecoin is literally a function of pledging value and extracting stablecoin against that value, because there are two aspects to it. Firstly, the stability, which you will get from pegging against a stable source of value. In this case, we’ll use US Dollars, right? And then, fungibility, which is the standardization of value that you extract from your collateral.

Steven Becker: Those are the two aspects that are essential to creating what is effectively our stablecoin, and the manner in which we create it is actually a fascinating bit of architecture that, by itself is pretty simple. You pledge a bit of collateral, and against it, you draw out your Dai. But, the smart contract that you use to pledge your collateral, and obviously the Dai that you extract from it, an important feature of this is that you own all of that. That is yours. The whole function of that construct belongs to you, and what you decide to do with it is inherently important. So, the risk management of it, how you look after yourself, that is in your hands. So, it is this utility that is offered to you in order for you to create these very at the spoke financial solutions for yourself that really create that sort of economic empowerment that we think MakerDAO is trying to make.

Steven Becker: Now to the broader aspect, two of the different stakeholders. MKR token holders, that’s your governance, and your CDP creators are in the other stakeholder. You’ve got your Dai users and then you’ve got your keepers, and those keepers are that guys that obviously liquidate the CDP’s to create the liquidity underlying the collateral from the MakerDAO’s perspective, not from the exchange perspective.

Steven Becker: So, those four stakeholders combine together to create an operating environment where we balance the supply and demand of our Dai, along with the ability to recognize recourse in relation to the collateral that is included in the system. That recognition of recourse is essentially seen now through price discovery. So if you liquidate a CDP, what do you do with it? You go into a secondary market, and you use price discovery to go realize the value of your collateral. But in essence, that is just one form of recourse. Recourse in general, in a broader aspect, can be applied to MakerDAO which allow us to use really anything that has the ability to find a natural finality when it comes to liquidating collateral.

Thomas Scaria: How do all these ecosystem components encourage the stability behind MakerDAO?

Steven Becker: The natural one is obvious to all stablecoins, but I’ll mention it here, and that is obviously arbitrage. You have the ability to create the Dai, and obviously if the Dai is higher or if it’s lower than the peg, you can affect the necessary arbitrage processes to net out some profit at the end. That’s the one component. That’s the important component. But, the stability of the mechanism is actually all about the uniformity of distribution in all of the stakeholders. If you have a uniform distribution of MKR token holders you’ve got a dispersion of incentives, and that dispersion of incentives, when added to a system, creates a lot more robustness. You know, if you’ve got different points of view, it’s a lot more robust than having a singular, concentrated point of view, that if it does change it’ll create a sensitivity to the system. Likewise, with CDP creators, you want to have that uniformity of distribution. Dai holders, that’s where your use cases are, you want the same sort of uniformity.

Steven Becker: The way that they add to the robustness of the system is in the ability for the stakeholders to have different incentives, and at the same time balance the supply and demand construct inherent in the system.

Thomas Scaria: I’m just gonna go through an example of the flow of funds, too. Correct me if I’m wrong. I just want to illustrate as best to our listeners how I sort of understand MakerDAO is as simplistically as a decentralized credit facility.

Steven Becker: Yeah, that’s ok.

Thomas Scaria: There’s a CDP, which is a Collateralized Debt Pool.

Steven Becker: Deposition.

Thomas Scaria: Deposition.

Thomas Scaria: That is essentially the major smart contract within MakerDAO. The classic use case is that someone that’s seeking credit has idle tokens. Let’s say they’re an ICO project. They’ve raised a lot of Ethereum and they need some sort of stablecoin to pay their employees. So they’re gonna take this Ethereum, lock it in the CDP. Let’s say the LTV, the loan to value ratio that you need is 50%, right? So, if they lock $1,000 worth of Ethereum, they get $500 worth of Dai, right? They hold the loan for, let’s call it, one year and that loan, you know of course, accrues interest and needs to be returned with interest like any other loan unless you’re in Japan, I guess. That Dai is returned to the CDP with interest, which is dubbed as the stability fee, if I’m not mistaken.

Steven Becker: Stability fee, that’s correct.

Thomas Scaria: Yes, that’s right. Let’s say that the stability fee is 1%. So, 505 Dai is returned to the CDP holder. 500 of that 505 is burned from the system. So that principle is burned and no longer is part of the floating supply of Dai out there, and the 5 Dai that is collected in interest, I believe you purchase MKR with it. MKR, you know, that’s the daddy token. That’s the stakeholders of this decentralized credit facility. That dilution of the MKR or deflation, is basically the return, their interest that they’re collecting, right? Am I kind of understanding the flow of funds here correctly?

Steven Becker: Yes, the construct is correct. You got that spot on.

Steven Becker: The analogy is that you can use against it. You can obviously relate to many things, you know, from a security world through to kind of the repo understanding as well, and how you actually pay back your finance versus the buy and burn concept. There are many ways that you can actually sort of parallel it with the traditional finance world, but essentially, what you said is 100% correct.

Thomas Scaria: Okay, great.

Louis Aboud: Can I just jump in for a second?

Thomas Scaria: Yes.

Louis Aboud: So, the MKR holders are sort of earning this stability fee over time. They’re obviously governing the system. What is it that they’re kind of being compensated for?

Steven Becker: Well, their part in governing the system is looking after the stability of the system, and the way they’re rewarded is by getting the collateral that is necessary to create a robust system in place, and also creating the right portfolio. If they get it right, then the system obviously will be able to generate more Dai. The larger the supply of Dai, the more stability fee it will attract, and consequently the more end [inaudible] that we burned.

Steven Becker: So, by due fact of looking after the system appropriately, you get rewarded appropriately. So there’s your incentive play constructed into the system.

Louis Aboud: And before, you mentioned the importance of having a broad distribution of Dai so you have a broad distribution of stakeholders, perhaps with different perspectives. As you know having your background, risk management is an area of expertise. How do you think about the expertise of MKR holders and you know, juxtaposing that with the risks of perhaps a large amount of MKR being held by either apathetic holders or holders who don’t have the necessary expertise around risk management to really generate stability for Dai?

Steven Becker: So, to that end, the decentralized risk function is very important. That’s obviously were governance gets the majority of its impetus from. So, let’s talk about what that is.

Steven Becker: Essentially, right now the internal risk team is just a template that describes the full spectrum of risk that needs to be considered for a system like this. Now, if you sort of caused your mind back, because I know you guys have been in banks, there’s something called ERM, Enterprise Risk Management, which says look at everything, absolutely everything involved from you know, your market risk all the way through to your operational risk. How do you combine that together and how does that apply to any system organizing?

Steven Becker: That is a big ask. I mean, if anybody has ever been to a bank, everyone knows that that is a massive function. So, what we’re doing, we’re saying that we’ve created a template that shows how important it is to consider not only the data that you use, not only the integrity of the data, the model, the validation of the model, all the way through to the calculations and obviously, the outputted perimeters. All these facets are extraordinarily important in contributing to the way the MakerDAO system works.

Steven Becker: Now, MKR token holders, you’re right, they’re not necessarily interested in the minutia of risk management, but they’re certainly interested in knowing that it’s being looked after. They will be in a position to vote in the risk team, or a collection of risk teams. In fact, the vision here is, if you caused your mind into the future, it will be a risk ecosystem, and that ecosystem will cover a lot of things. Everything from market risk to liquidity risk, all the way through to credit risk, operational risk, legal risk, and economic risk, because all those facets need to be considered to allow MakerDAO to function appropriately.

Steven Becker: Now, it sounds like a lot, but in any organization that is inherent. Whether you recognize it or not, it’s always gonna be there. So, to recognize it and say that we need to do something about it, we need to get a risk team in place, and further to that, we need to get a decentralized risk function in place that looks after this is essential. Recognizing that putting forward the momentum that we need to understand what sort of constructs you can have, what kind of permutations you can have is extremely important.

Steven Becker: I’ll give you an example. You might find that there is a team out there that decides that they want to do the full spectrum and they want to contribute perimeters, but you might also find a team that just specializes in getting data and cleaning data. It’s very hard for that particular team to submit anything to the Maker system. So what does it do? It creates a support structure for maybe other risk teams, that immediately gives you the permutations of possibility. You may find that someone just specializes in legal risk. Now, remember what I said previously about recourse. Recourse is essential to be able to expand the collateral base to almost anything, as long as you know what your recourse trajectory is.

Steven Becker: So, to answer the question directly right now, MKR token holder relies on the decentralized risk function.

Louis Aboud: It sounds like you mentioned almost an element of delegation though, that might occur in the future, where MKR holders will vote in what sounds like you’re envisioning, a more professional team or group of teams that are looking at risk in different ways. So even if they’re not an expert, they might delegate that control to somebody else.

Steven Becker: It is not necessarily a control, because at the end of the day, MRK token holder gets to decide. They’ve outsourced the knowledge base. They’ve outsourced the expertise, and then they rely on the expertise to advise them as to what needs to be considered. So, a risk team will put forward … Let’s just concentrate on a single risk team. It’s a lot easier to think about. They’ll put forward a vector of risk parameters that need to be considered, and they will have already been voted in by MKR token holders, basically the governance, and they’re models, as well. They will demonstrate clearly how their models work because reproducible research is essential to this. Because it’s reproducible, whatever data is out there, anybody can simply just stick it into their model and produce the perimeters, and they can do almost like a hash check, right? Is it the same as what we’ve got? Yes, it is. We rely on the fact that, you know, what you presented to us is correct, it’s valid. We accept your perimeters.

Steven Becker: How does this work? It goes into a voting construct. That voting construct has two parts to it, and maybe you’re gonna touch on this a bit later, but I’ll give a brief. There’s two parts to it. There’s a governing poll, and there’s an executive vote. The governing poll is a way of increasing confidence and reducing contention in the creation of factions in voting. And, the executive vote is exactly what it sounds like. It’s not executive done by the executives of the company, it’s executive. It executes the vote. It actually puts those perimeters onto the blockchain and puts it into effect.

Thomas Scaria: Okay. So, we’re talking about risk management, of course, because one of the things that CDP’s have to deal with and have dealt with quite a lot in the past year is, of course, liquidations right? The same scenario that I was discussing, that $1,000 of Ethereum has basically fallen to $100 over the past year.

Thomas Scaria: By the way, happy belated birthday at Dai.

Steven Becker: Oh yes. From all of us at Maker, thank you.

Thomas Scaria: Yes. I think the birthday was last December, which means Dai’s been live since the whole bull market and the bear market, right? So, you’ve seen them.

Steven Becker: Predominantly the bear market.

Thomas Scaria: Yeah, and predominantly the bear market. So, quite a battle tested system, at least for single collateral Dai. So, just going through that example again, I think if $1,000 of Ethereum has become 100 over time, there’s been several liquidations that have recurred and risks that kind of needs to be managed along that spectrum. I just wanted to highlight that to our listeners. That’s why we’re talking about risk management.

Thomas Scaria: Why are liquidation scenarios so important for this system? Can you give us an overview of liquidations in general before we dive a little deeper?

Steven Becker: Well, yes. Liquidations first and foremost are reliant on how individuals actually, or entities, look after their CDP’s. That’s the first thing you must keep in mind. You get an aggregate view if you log onto MakerDAO.com. You’ll get an overview of the system, and it gives you what the … Instead of the loan to value, we turn it the other way around and call it collateralization ratio. That’s the one thing to keep in mind. We look at the collateralization ratio and aggregate, and it’s generally around 250–300%, so there’s a lot of buffers there. But essentially, liquidations are very important because it is the prime characteristic scenario in balancing out how folks manage their risk appropriately, and gives the opportunity for the stakeholders being keepers to get involved and create the necessary liquidity in those actual collateral types that are involved.

Steven Becker: The thing about liquidations, it’s not just so my [inaudible] has to think of it in terms of, oh someone couldn’t close out their CDP, they’ve fallen below the liquidation ratio, this is a problem. Liquid them, take the cash, they get penalized. Oh my goodness, it’s not really about that. It actually is about trying to create the requisite amount of interest and liquidity in the collateral type itself. Because broadly speaking, collateral types that are included in the system should have a certain amount of a catalyst involved in spurring more interest in them, because essentially what MakerDAO is trying to do in its empowerment form is allow folks to use their collateral to draw out value, to use that to create more value for themselves. That’s, in essence, what we’re doing.

Steven Becker: That proposition needs to be matched with an opposite proposition, that if it doesn’t work out for you or you fail to look after that appropriately, then the liquidity underlying that collateral needs to be available in the market in order to justify further use of that collateral. So, liquidations actually don’t just have this weird sort of punishment affect, there is a broader economic incentive to make sure that the exchange liquidity for that collateral type’s in place, and the use of that collateral type in the system makes sense.

Thomas Scaria: Did you want to go over what happens in a black swan scenario? So, let’s say the Ethereum price drops very sharply below the-

Steven Becker: Let’s just say it goes to naught, it goes to zero.

Thomas Scaria: Yeah, let’s just say it goes to zero.

Steven Becker: It goes to zero. I mean, effectively what you have is an emergency shutdown, where the case at hand is this. If you have a flash crash scenario … I don’t know if folks around the table remember the flash crash in May of 2010. If you have that scenario where you realize something went wrong but it is not a fundamental economic problem, then what happens is emergency shut down in the system gets triggered. Now, what is emergency shutdown? There are designated players in the space that look at this and they decide something has gone wrong. There’s an attack [inaudible 00:27:29], it’s all broken, or you know, the collateral that we’ve used decided just to not exist anymore. They will shut down the system, which means that ultimately what remains is collateral and Dai, and what you do, is you effectively net it out and you see what’s left over, and whatever is left over after all the debts are paid off is returned back to the original CDP holders.

Steven Becker: So, it’s a very neat way of almost clearing the table and saying we’ll net everything off and just give back what you can get at the last registered price that we have.

Louis Aboud: So, it’s just like kind of like a bankruptcy proceeding of sorts.

Steven Becker: It is, but it’s kind of instant. You know, it’s really a case of everyone decides, it gets done, the last price that we got from our articles is used, and then everything gets netted out, so that nobody is left with bankruptcy proceedings that last five years. No one is left with this idea of holding the bag or waiting, because it is done immediately.

Louis Aboud: The liquidation mechanism needs to be robust, obviously. It’s the main way of keeping the system solvent. You know, ensuring that there is enough collateral to back up the Dai that’s being issued, right? How do you get comfortable that you’ll have sufficient keepers or bidders on that collateral to cope with rapid movements in price, especially in the kind of early stages that we’re in where, you know, the crypto community is relatively small? Do you kind of go out and try and build those relationships to make sure that there are people waiting to actively bid on those CDP’s?

Steven Becker: Yeah, absolutely. That’s really what it boils down to. You need to bootstrap by quite literally creating partnerships. Showing the requisite people and entities the interest in doing so, explain where the incentives lie, explaining why this works as a whole. It’s very interesting, because if you try and introduce the whole of MakerDAO at once, it tends to be a little bit cumbersome, but if you do it from one stakeholder's point of view, immediately you find that the interest is there, and then folks start seeing the rest of the system work and understand why the other stakeholders contribute the way they do. It a manner of saying that you might find someone who is an original Dai holder becomes a keeper, or someone who is an MKR token holder, they may become a keeper. Or, a keeper may decide, okay I want to open my own CDP’s. I’m gonna do this whole thing myself.

Steven Becker: It becomes very clear that as soon as you get a spark of interest from one stakeholder, it sort of permeates through the rest of the system.

Louis Aboud: Yeah and so, currently the way that it works is that there’s a fixed liquidation discount I think of 13%. Why use a fixed number? Why not have some kind of auctioning system or something like more competitive or something?

Steven Becker: Well, you’ve hit the nail on the head, because that’s exactly what’s happening in multi collateral Dai.

Louis Aboud: How will that work?

Steven Becker: Well, the auctioning system will be … It’s kind of like a reverse auctioning system, where you get to a certain level that covers the debit and then, anything afterward is in terms of how much collateral you actually want to bid for. So, that reverse auctioning system is gonna be obviously competitive. There’s gonna be a defined time frame. There’s gonna be … Everything you can think an auction is going to be included, in terms of increments, in terms of time base, in terms of if there’s going to be a bit of a penalty, what is that penalty? Because, there is the ability for people to try and job the system a little too much, so there must be an inherent amount of value that is in a liquidation available for a keeper, or else you can see someone might be able to job it all the way back to redeeming their own collateral.

Steven Becker: There’s a lot of those sort of edge cases we need to keep in mind, but effectively, that’s how it’s going to work in multi collateral Dai. The 13% right now was a figure that someone basically came up, I think, just looking at the volatility at the time and saying, well essentially this is where the penalty should be.

Louis Aboud: So, we’re seeing a common thread between Maker, Domo, Compound Finance, and DYDX, that they’re all using this kind of liquidation mechanism as a way of managing risk. Do you think that … You know, the liquidation discount exists in multiple systems as an incentive for arbitrages to come and trigger liquidations. Are you concerned that Maker’s incentives will be competing with the incentives of other systems during times of high volatility, and that might take some of the capacity of these partners that you talked about before, which might be common partners with various projects? You know, their capital might be tied up liquidating other systems’ debt positions or margin positions and things like that. Is that something that is of growing concern, or is that something you think about much as more and more of these systems adopts a similar kind of mechanism?

Steven Becker: There is an inherent systemic risk to the whole sort of D5 platform. The one aspect that we can also refer to is other stablecoins that look more or less like Maker and use the sort of similar collateral to Maker pose a risk to us, because obviously, we’re gonna have a point of view of how much collateral to use, and if they want to use the same collateral to a certain extent, we’re effectively double dipping together. How does that have an effect on the system? One needs to cognizant of that, and that’s obviously where you need to know what your liquidity adjusted value at risk is, and have a clear view of how much you want to participate in that liquidity. Because, it’s that fundamental risk premise of saying what’s my appetite, and how much do I want to take that really defines how stable your risk management process is.

Steven Becker: Ultimately, as you guys know, the very first premise of risk management is deciding what your appetite is. Very subjective. Not the easiest thing in the world. People try to use all kinds of utility functions and behavioral finance, but effectively it just boils down to you saying I’m prepared to risk this much, and then from that basis, you can flush out the rest of your system.

Thomas Scaria: I think now is a good time as ever to shift gears to upcoming product launches, and of course, the biggest one is multi collateral Dai. What does multi collateral Dai entail, and how do you hope to grow the ecosystem with multi collateral Dai?

Steven Becker: The essence of multi collateral Dai is diversification. That is it. I mean, if you think about this carefully, it’s all about growing a collateral portfolio, and from an investment point of view, when you create an investment point of view, try to match your risk return objective with your expected return against your actual or expected risk. Here, we’re looking at mitigation of risk. Here, we’re trying to extract stability and stick it into the MakerDAO system. Obviously, the more collateral types that we include that have low correlations to each other, the more diversification benefit we extract, and the more we can use that as an implicit capital buffer or an extra stability add to the system.

Steven Becker: So, that is the primary essence of why you want to use multi collateral.

Thomas Scaria: Diversification is obviously, like you said, the center plate of multi collateral Dai, but I think something else that is going to be a benefit is now you have more assets that you can chuck into CDP’s in general, so the outstanding supply of Dai has potential to be much, much greater, right? I think it can be termed as the debt ceiling, right? What are you targeting the debt ceiling to be? I guess that’s more of a function of which assets do you want to accept as collateral?

Steven Becker: We are not going to be targeting a debt ceiling, because you need to grow the system in a lock step approach. You may find that you have a collateral type that would allow you to have a four, five hundred million dollar debt ceiling, but just by declaring it doesn’t look after your system, because you need to grow that debt ceiling in terms of how a collateral portfolio combines the collateral types together. How you get your diversification benefit is essential to adding stability to the MakerDAO system.

Steven Becker: I’ll give you an example. If we add in Eth and token ABC, and we decide that Eth is gonna stay at a hundred million and token ABC is gonna be 600 million. What have we done? Effectively, if everyone takes token ABC and they use it for collateral type and they draw Dai, we’ve created a major concentration risk. What we need to do is remember our initial condition. Our initial condition is we’ve got a hundred million in Eth. Whatever we add with Eth must, from a portfolio point of view, be risk balanced. So, that debt ceiling must look like an allocation, and that allocation must give you the lowest risk so you don’t get a concentration in any one collateral type.

Steven Becker: Imagine if you will, Eth and then a collection of collateral types that we include, each one of them could be rather high, but you don’t start it high, you start it relatively low and as those debt ceilings get full, so you then increase it on a lock step fashion. Because, you ultimately want to get it into a balanced portfolio that is maintained as best as you can. Very difficult. Anyone that has ever run an investment portfolio with tell you it’s very difficult to keep the balance. On top of that, you must keep in mind that the collateral portfolio is, the essence of it is portfolio diversification. Right? And, the diversification benefit goes into the system. Another aspect of it, and it’s not just the supply of Dai, but the inherent business function, that you want to include in MakerDAO as well.

Steven Becker: There are many collateral types out there, that given the right recourse is in place, will allow you to open up dimensions of business that you haven’t considered before. For instance, supply chain finance. Tokenizing an invoice is not exactly your stand collateral type, pledging that and drawing Dai against it will reduce sort of the terms of the agreement. What do you call it, the payment terms?

Thomas Scaria: Yup.

Steven Becker: And, allow you to release so much more value. You must think about this in the way of the multiply affect it has when you release.

Louis Aboud: All that working capital.

Steven Becker: The working capital comes back and gets used again and again, and obviously it, because you know, you’re getting closer and closer to 17 seconds is being the amount of time required for you to draw out your Dai if you’ve got the correct collateral Dai, theoretically speaking.

Steven Becker: Essentially, you’ve got the broad aspect of your collateral portfolio adding to, not just the business of the economic ecosystem, but also the Dai supply. The Dai supply is the main product and the main sort of metric that we like to use, but it really, if you think about it, is the result of good business, and that’s what we want to do.

Louis Aboud: You described having basically a separate debt ceiling for each asset, and managing that like a portfolio almost. The flip side of that would be, you know, now that I think roughly 1.7% Eth of [inaudible] is now locked up in CDP’s or something around that number.

Steven Becker: That’s correct.

Louis Aboud: Obviously, you’ve got to take into the account the liquidity of the asset. How do you start thinking about how much of an assets total market cap are you comfortable to have in a CDP?

Steven Becker: That is the essence of the answer to what is liquidity adjusted value at risk looks like. Essentially, what you need to do is take a step back and say, well it’s not necessarily the value that you’re concerned about, it’s the number of tokens given at a certain point in time, because if you create a model of using empirical analysis, you’re going to be using Eth when it started out at 40, went up to 1,300, came down to 150, so the actual token prices has changed incredibly. So, what you want to look at is just the returns portion, which means that you’re focusing on really the number of tokens you want to use. What we have now is the 100 million representing more or less given a certain regime, a certain number of tokens. Because, it’s kind of hard to go out and say, listen what we want to do is only allow 1.2 million Eth tokens in. It’s contorted and doesn’t give anyone the ability to understand what they’re doing from a dollar to denominated point of view, but essentially, that’s what’s done.

Steven Becker: Everything comes from a returns aspect, not necessarily a nominal aspect, which is at the heart of any sort of risk management or sort of investment collateral portfolio point of view.

Steven Becker: To that end, the question I ask myself it, considering how far Eth has dropped, and we’ve seen this question a couple of times on social media, isn’t it a concern that you’ve collected so much into the system? Well, it’s not a terribly major concern, because the actual debt ceiling that we’d like to apply to Eth is a lot bigger.

Steven Becker: So, it really is contained in the idea that we are looking after the system as a whole, and not focusing on one element and going, oh I’m sure you guys could do like 5 billion dollars with Eth. Sure, but it’s not gonna help the system.

Louis Aboud: Yeah, I mean, you’re at 1.7% and let’s face it, it’s very early days, right? It could very easily be 10 times that with a high debt ceiling, i.e. the market might naturally put 10 times that into CDP’s, and then, having that kind of liquidated into the market starts looking perhaps a bit scary. Obviously, liquidity is the key concern, but from a practical standpoint, I think everyone in the crypto space is now relatively aware that it’s hard to trust exchange data. You know, the order books might be fraudulent, the volume might not be real. How do you think about that kind of, you know, when the market’s this immature and the exchanges might not be totally reliable or trustworthy?

Steven Becker: That is a point of discussion pretty much every day. It is fundamental to how we approach the analysis because what I suggested, in the beginning, is your data, and then, your data integrity. What I didn’t emphasize on is that in your traditional space, data integrity generally is referenced to mismatches, finger trouble, that sort of thing. Data integrity in this space takes on a whole new meaning, and you need to have certain metrics in place to try and give you some sort of proxy analysis as to what is possibly something you need to filter down or dress down and then apply. We do have that. We are very cognizant of the fact that you’ve got to adjust for these aspects. Where something is traded is as important as what it is. The other thing that needs to be acknowledged is that just because a specific token is exposed to this kind of behavior doesn’t mean the token itself with the organization underlying it is aligned with it.

Steven Becker: So, there is a goodness, there is a stability mechanism, there is value you can extract from the organization and its token, but you may not be able to do that in the price discovery sense in a secondary market, or you won’t be able to it to the extent that you wish.

Thomas Scaria: When you launch multi collateral Dai, is it just off to the races? You can add whatever asset you want into that collateralized debt pool, CDP, or are you going to have a measured approach of-

Steven Becker: Extraordinarily measured.

Thomas Scaria: Extraordinarily measured.

Steven Becker: Yeah, an extraordinarily measured. The one aspect to touch on this, obviously, the collateral types should RC20 compliant, right? That seems to be something that most people think they are, but on close inspection, it’s not completely there. Let’s just put it that way. We have a standard adapter for collateral types, and we’ve found that some collateral types require a different adapter, and that’s to take into consideration the nuances of the token structure and economics. That’s fine, but it also is part and parcel a description of how things are a lot more challenging than you first perceive. The biggest issue here is the technical audit. Making sure that the representation of the token is what it says it is, and at the same time that what it represents is clearly defined in its code.

Steven Becker: We think about the necessary audits that you have in it from those sort of data points are very important to us, but is essentially important to us is to make sure that it does integrate well and it does work well with us. I mean, that is just one component of the qualitative analysis that we need to do on the token in the organization as well, before we include that collateral type. So, that is essential. It is extraordinarily measured and it is extraordinarily considered. There is no way that is open to the races. There is a sense that, oh multi collateral, we’re gonna hit a trillion dollar debt ceiling. We’ll get there, but we have to get there not only with respect to our system, but with respect to the crypto industry altogether. If we’re not growing together, then what are we going to do? We’re just gonna stick out and we are going to be the concentration risk.

Steven Becker: We need to grow together as an ecosystem. My contention is that the blockchain economic system is gonna dovetail with the traditional ecosystem. You’re going to find that certain things in the traditional world would be more efficient in the blockchain world, but you’re gonna find [inaudible] and services only available on the blockchain, and that’s going to interact with the traditional work. You’re gonna have this permutation release of value that is really at the essence of it, and if the blockchain economy doesn’t grow as a whole, then we can only go as far as it goes. You’ve got to consider that, otherwise, you may just be fooling yourself.

Thomas Scaria: How will the risks actually be managed from a day to day sense? There are all sorts of different levers that you can pull to manage the risk of a certain CDP and the underlying portfolio. So, the stability fee, liquidation ratio, things like that. Who’s actually going to be-

Steven Becker: Debt ceilings.

Thomas Scaria: Debt ceilings. Who’s going to be actually managing the risk and how would that data be compiled, and who’s making the decisions?

Steven Becker: The quick answer is it should be continuous, and it will be continuous. The decentralized risk function that I described earlier will be looking after this on a point by point basis. It’s going to be a continuous interaction. With respect to how you react to necessary changes, that’s interesting because that is a case of putting forth proposals. Proposals that need to be considered by governance, and once those proposals are passed and set perimeters are passed, then you’ve made the change that you need on that particular collateral type or that collateral portfolio as a whole.

Steven Becker: The policy instruments that we use, the stability fee is two components. One, specific to the collateral type, but also one part that is specific to the system as a whole.

Louis Aboud: I think one of the really interesting forms of collateral are the fiat coins that are coming about. I mean, ideally when you’re trying to build a diversified portfolio, you don’t want all the process to be correlated right, and so having USDC or True USD or Tether or something like that could actually fit nicely into the collateral portfolio. That obviously introduces a new kind of risk that I think you eluded to before, which is obviously counterparty risks, and there’s also some legal and regulatory risks and things like that around that. All of that stuff, in my mind, is quite opaque and it’s very hard to quantify. How do you think about it?

Steven Becker: Well, that is interesting. The first thing is I would welcome the fiat stablecoins, not only in terms of joining the industry, but as a collateral type, definitely. There is a massive benefit to it. But at the end of the day, they do have counterparty risk, and the strange thing about it is that they’re part of banks which have credit ratings, which have transition [inaudible 00:50:16], which have, funny enough, there’s actually a lot of information out there, it’s just not being transferred onto the blockchain to measure those particular tokens against.

Steven Becker: If you’ve got an account to open with, let’s say something really strong like Citibank, it’s Triple-A rated. What does its transition matrix say? It says the chance of default might be half of a percent a year, right? So that half of a percent must be reflected in any and all instruments that it has delivered, and one part of that might be stablecoin. So, it really is a case of saying what is the value fiat backed stablecoin? Is it, in fact, one or is it, in fact, some sort of small measure? I wouldn’t say it’s highly volatile, but it might be a small measure below one, and that would be the true reflection.

Steven Becker: Then there’s also the case of understanding how it dovetails with a decentralized token, like a decentralized stablecoin like ourselves. In fact, it’s a wonderful on ramp and off ramp, as well into Dai, if people wish to do so. At the end of the day, and this is why I like them so much, is that they give a variety of choice, and really, at the end of the day, that’s what makes something robust. In terms of the stablecoin industry, people need choice, and you can choose, do I want to go what is effectively quite a tradition route, understanding that your risk is centered in a bank, or do you want to go a decentralized route which solves the centralization of the bank, but obviously creates a new risk profile, albeit extraordinarily transparent?

Steven Becker: There’s that thing, you know. As soon as you get transparency, you do have to own some of the risk that comes with it.

Thomas Scaria: Interesting. Yeah, let’s shift gears into go to market. Let’s go over the current track record that Dai has already accomplished, and the markets that you’re hoping to distribute Dai into in 2019.

Steven Becker: We are currently at around about 71 million in supply. I think it’s a very organic supply. It comes from the single collateral Dai being well considered and well used, and it’s finding avenues for itself, but essentially, go to market is a two prong attack.

Steven Becker: The first one is enterprise level. Understanding the architecture that, and as I mentioned before, within our partnerships with Wyre, we are basically offering a broader aspect of either remittances or business to business payments. Not only just that aspect, but the architecture behind banking itself. We are trying to show, very clearly, to the financial institutions out there and the banking institutions out that, that what we have as a construct is a wonderful add on to their offering. It’s a wonderful add on to their architecture. It doesn’t substitute, it doesn’t take over, it just creates more efficiency with respect to what they have.

Steven Becker: There is no inherent fear in what we’re going to do in terms of substitution, because what I eluded to previously is that the blockchain offering is a dovetail to the traditional world, and this is a good example, MakerDAO, and Dai, and I’ll go to market focusing on enterprise and getting into the architecture, getting into the background. Supply chain finance is another one. We have a partnership with Trade Shift. That gives you a very clear idea about where we fit in the broad payment system and the broad financing system.

Steven Becker: Then, obviously on the other end is the retail. Now, on the end, it can be anything from we’ve got a mechanism where you can pay freelance programmer in Dai, all the way to donating to UNICEF in France using Dai. There are all these avenues that are open to us, and at the end of the day, this is digital cash.

Steven Becker: I remember someone said at DevCon that they paid for all their coffees in Dai. So, the use case is all there. It’s growing, but the main aspect of this is to make sure we have a balance between enterprise, because at the end of the day, we want people to use Dai without knowing they’re using Dai. All the way down to the very simple use cases of you know, buying milk and bread using Dai. That’s pretty much the spectrum.

Louis Aboud: Now that you’ve taken a kind of broader managerial role at Maker, how do you think about the internal organization? You know, running growth and business development for this kind of project is sort of a rather novel area. How do you think about building up the kind of business side of things to push the adoption of Dai forward?

Steven Becker: Well, that really comes down to focus, because we’re in the strange position where all options are open to us, and we need to be able to say, well what is effectively our strengths? What is it that we want to lean on? You know, something as simple as remittances is something we can jump onto quite easily and quite quickly. Business to business payments and so forth. The idea is to have a look at the partnerships that we’ve created, and understand how they focus on our strengths that we have, inherent the lower hanging fruits that are available to us right now.

Steven Becker: We can do marvelous things. Anybody on the blockchain can do marvelous things, but in essence, we need to focus on the primary elements of enterprise that leads to the recognition that MakerDAO is first and foremost the producer of decentralized stablecoin, which is, in fact, a piece of architecture that they can include and that should be included in everyone’s backhand, to the point where you don’t even need to know that you’re using Dai.

Steven Becker: But, with that, you’re going to have that force of growth that immediately comes into the consumer's radar, and then becomes simply novel at first, and then ubiquitous and common. So, that’s kind of the aspect we’re looking at. The focus, I could quite easily say, just boils down to remembering that this is digital cash, and we need to be cognizant with the fact that it is simple and we need to keep it simple.

Louis Aboud: Is there other particular geographies that you think are interesting for Dai?

Steven Becker: Off the cuff, not interesting because … Not to say not interesting, rather there’s too many geographies. That’s the aspect. There’s too many areas that we can explore, and what we’re trying to do is be aware of the fact that being interested in a space must match with the obvious strategy for that particular geography, and also the regulation. For us, that is the most important aspect right now, being very sensitive to what regulation looks like must match the inherent potential of that market or that particular country.

Louis Aboud: So you’re not going to try and replace the Bolivar in Venezuela or anything like that?

Steven Becker: No, we certainly don’t want to do that, but if there is an added use case that could provide, if there’s some way that you can create a store value that is stable in economies that require it, then why not? But in terms of substitution, in terms of there’s this idea that the total addressable market for stablecoins is the total of all the currency in the world. That’s cool, but in terms of it being a realizable target or a realizable market, that’s something we can obviously discuss ad nauseam.

Steven Becker: Effectively, I think that Dai, specifically, is just adding on to use cases of Fiat.

Thomas Scaria: Let’s talk about competition. How do you view yourself against other stablecoin models? So there’s the collateralization model, and then there’s the senior shares model. There’s the Fiat back stablecoins. There’s all sorts of different competition out there. Do you have view? I mean, of course, your bias that this is the right one, but how do you view yourself against your competitors?

Steven Becker: The first thing I’d like to put on the table is the fact that our categories are centralized versus decentralized but it simply is something like that. We welcome the centralized guys because they actually provide more use cases for us, keeping in mind that true USD is not fungible with Gemini which is not fungible with Circle Point yet.

Steven Becker: They are all backed by the same dollar component sitting in a bank account. It gives you a good sense that there is the need for an interaction between those elements and also a need for an interaction between those elements and also the ability to transfer into a stable coin with a completely different risk profile. They add to the benefit of MakerDAO.

Steven Becker: Other decentralized, I don’t know any other functioning decentralized stable coin but the ones that promise to come on, they look exciting. I’ve met with some of the folks involved with the project and what they’ve got is genuinely an interesting product. As to what my further comments on it is simply a case of when it’s out and it’s working, I’ll be the first one to make a comment on it and tell you if it’s a good idea.

Thomas Scaria: On the point of decentralization, I think there are a few ways of looking at whether, almost limitless ways of looking at decentralization. Let’s just put software development and all that to one side but the two areas that I’m particularly interested in are market making and Oracles.

Thomas Scaria: Obviously if you’re maintaining a peg, you need the assets quite liquid, Dai’s quite liquid, you’re gonna need professional market makers in there. My understanding is that MakerDAO is a bit of that now. How do you think about evolving that over time?

Louis Aboud: Same as the question with respect to keepers, making sure you have the partnerships in place, ensuring the folks that they understand what the incentives are and also running proper market making output. In the traditional space, market making is a very well defined, profit oriented function. That function in the crypto space is slightly blurred. I’d like that blurriness to go away. I would like it to be more clear as to what it is they want to do, what it is that their track record looks like, and how are they going to purposefully contribute to the system but yes.

Louis Aboud: Market making is essential. It is the major component that you require behind all creation of liquidity and if you don’t have it, you don’t have liquidity. If you don’t have liquidity, you don’t have your price discovery secondary market economy, fluidity transactions, you name it. The whole thing stops simply because you don’t have the right market makers in place.

Thomas Scaria: Kind of related to the issue of market making, I noticed that you didn’t actually mention and go to market in use cases what the fiat backed stablecoins have predominantly been used for today, which is as a risk off mechanism for crypto traders, right? Right now, Dai is significantly less liquid than most of the fiat backed stable coins.

Thomas Scaria: Is that something that you want to be in the space? Do you want people to be trading- Do you want bitcoin dai to be one of the highest volume trading pairs on centralized and decentralized exchanges alike?

Steven Becker: I would like that but I think that this landscape is absolutely massive and the fact that fiat backed stable coins may have taken a predominant role in one part of it, it’s fine and to a certain extent, we’ll take a big of market share there but generally if you take a look at the broader landscape in terms of what you can use stable coins for, the centralized aspect probably has more use case, more spectrum that the decentralized guys probably don’t have.

Steven Becker: It’s kind of a case of there’s an intersection and where we intersect, that’s where we get the questions of that’s where you’re competing, what do you think about that competition? And you think the intersection’s actually quite small. The rest of it is pretty big and I really don’t mind if we intersect with them on that point.

Steven Becker: In terms of the risk off, you’re completely correct. The notion of what liquidity is is still to be properly defined but as we have it right now, in the crypto market, you will see that pretty much all stable coins are a good sort of risk off mechanism. Some may think others are better than ours but obviously, I’m horribly biased and think that Dai is the best.

Thomas Scaria: The other sort of aspect of centralization is of course oracles. Oracles to some extent are by definition a centralized data feed but there are- I’m not sure if this is your area of expertise, I know you have people working on this specifically but how do you think about minimizing trust with oracles?

Steven Becker: We’ve got an approach. We have a selection of inputs which we medianize and then we have a price security mechanism that is delayed by an hour so there’s this constant cognizance of where the price is in relation to that hourly check. If it’s departed too far and it looks like it’s something of an attack, then that allows us to or allows the system rather to get the emergency shut down in place

Steven Becker: Oracles in terms of what it does, oracles in terms of the security that it requires, that has been established and further to that, in the details I wanna be able to talk to because I simply don’t know them, there is a very technical, very astute guy that is head of oracles on our team and he could talk until the cows come home on that one.

Thomas Scaria: What you’re saying about medianize, basically you have a range of feed and you’re taking the median price.

Steven Becker: The median price ’cause it’s not sensitive to outliers because when you take the mean, you put an outlier in there, the mean moves. The median doesn’t.

Thomas Scaria: I noticed Makers now actually influencing price oracles for orga and polymath which I thought was pretty interesting. Do you see some kind of risk of Makers operations around oracles becoming a kind of systemic risk for the space in general? Is that a position that you’re comfortable to be in to be providing those services to a whole bunch of other applications?

Steven Becker: That’s a really good question. To the extent that it’s a concern, not yet. But I see where, if you follow your train of thinking, yes I can see how it could be a concern but I don’t think we’re there yet. I don’t think we’ve gotten to a point where we are the sort of central provider of all the oracles. It really has organically got to this point and we have to be aware of what happens with that.

Thomas Scaria: You’ve got a job, evidently.

Steven Becker: I’ll thank Marianna for that one.

Thomas Scaria: Thanks so much for joining us Steven and thanks so much for just being yourself and being such a huge tremendous value add to the community.

Steven Becker: Thank you.

Thomas Scaria: I think it’s very tough to be qualified for trying to manage a foundation that’s so novel but you certainly have the right background and sort of feel for it, so thanks for your contribution.

Steven Becker: Wish you all the best, definitely.

Thomas Scaria: We’d love to have you on the show again, let’s say in a year or so when multi collateral Dai is fully out in the wild so we can really see where we’ve gone.

Steven Becker: Stretch its legs and see what it can do.

Thomas Scaria: Exactly. Where can people get in touch with you or read about your work?

Steven Becker: We obviously have a Medium blog, Twitter, we’re on Reddit, and obviously you can go to makerdao.com and page through that. You can see the products and it’ll take you to different links with respect to the products and also to the social media pages as well and sites.

Thomas Scaria: There’s a chat room I think as well that’s quite active if you wanna get a bit more technical?

Steven Becker: Unbelievable. I can’t believe I forgot that. It’s a rocket chat. We’ve got public channels that really cover pretty much everything. I kinda forget sometimes that there are community members that are really involved with it. I interact with them on a daily basis and then it’s become so habituated, I feel like it’s a part of me.

Louis Aboud: It’s one of the better community chat rooms and there’s a lot of knowledge in there. I’d encourage anybody who’s interested to hit it up.

Thomas Scaria: Absolutely. We’ll share the link the show notes. Thanks again, Steven. Thanks for joining us today. To learn more about MakerDAO, check out the show notes included in your podcast and remember to subscribe to get the latest episodes. If you have any questions or comments, reach out to us on Twitter, Facebook, LinkedIn, or the Wyre blog, whatever works for you.

Thomas Scaria: If you liked this episode, share it with your friends and colleagues. Thanks again for listening.