Personal stories trump fact-packed proliferations of collateralized debt positions every time. Simple words sound best. So, instead of spelling out my journey into how to build global, trustless stability from debt, I’m going to spin a good yarn about a beach-walker and work that raises us up.

(It’s also a story about cryptocurrencies, volatility, MakerDAO and Dai; a token on Ethereum pegged to the US Dollar. But that doesn’t make for as lyrical a lead paragraph, now, does it?)

Even the prerequisite modern disclaimer can be turned into an interesting tale, when told right. If you hold any MKR tokens (like me) it means that, in a sense, you work for MakerDAO. Except for that pesky prepositional inaccuracy, because we really work with them. And, look, those sentences switched pronouns three times. Decentralised networks do strange things to our language, which seems to lean more and more into the alegal.

Coffee and Coins

Anyway, on rare and lucky days, I get to sit down with Farzam Ehsani and shoot the crypto breeze. Recently, I won the lotto and was invited to his new offices, where we discussed over coffee the rise of stable coins.

Farzam, being the revolutionary he now firmly is, implied that his basic problem with tokens pegged to the US Dollar is that the Dollar is dead long-term, so despite the technical or legal nous of the team, they’re still on a hiding into nothing. It was heady stuff, that coffee.

He got me thinking, though, because if you don’t like the Dollar as an asset, you must — by definition — like it as a liability. If my debt is pegged to the USD, and the USD is slowly imploding, then that’s a good thing for me… This is exactly what MakerDAO and Dai allow you to do, today. I know this paragraph makes for poor narrative (putting aside other omissions like multi-collateral Dai and the fact that it need not, and likely will not, be pegged to the USD in perpetuity), but bear with me. The beach-walker is coming.

Maker has been able to build a financial instrument — Dai — that is created as collateralized debt controlled only by dumb scripts; is stable against the US Dollar; and is governed by a diverse network of token holders rather than a single, bureaucratic institution. Governance is a sticky topic, but one thing we do seem to agree on is that it is contextual. And, in the context of Maker, governance is clearly equivalent to scientific management of the risks implied by running a collateralized debt system. We can map such risks relatively well, model possible solutions, and generally make better decisions than those hampered by bureaucracy.

All of which means there are precise, actionable steps for all my MKR people!

Poise the Cause in Justice’s Equal Scales

Moreover, after Dai held it’s peg through a 90% crash in its underlying collateral last month, even it’s sharpest critics have been forced to admit it seems stable, though it may not be scalable. Hasu argues here that scalability is stifled by a supposed lack of good arbitrage opportunities.

Richard Brown disagrees, saying simply that:

What we do know is people have been arbing Dai since launch and they continue to do so. The price of Dai has remained stable through a 90% market crash. So obviously someone, somewhere has figured out how to arb the ‘impossible to arb’.

Here’s some open source code for arbitrage Maker wrote themselves. That’s not all, though, because demand for Dai may outpace supply, as the two are not obviously coupled. Dai is created as debt people take on after locking up ETH — or, soon, other types of collateral — and the only obvious reasons for doing this are “I need some cash, not some, like, virtual bits and I need it right now!” (short-term liquidity) or because you think ETH is going to the moon and want to take a bigger bet on that happening (a leveraged position). There are more reasons, but we must skip them for the sake of at least some brevity.

A few researchers go into full detail and four-part harmony about the issue of CDPs and demand, but Rune is always at least three steps ahead. His response is worth reading, even if only for the last four words:

Arguing that there could be some inherent barrier to CDP demand shows a lack of understanding of how financial markets work. CDP demand is credit demand, meaning it is commoditized and driven by how competitive it is compared to other financial markets. It’s important to think beyond ETH used as collateral by end user crypto enthusiasts, and towards scenarios such as financial institutions using CDPs as a money market for collateralized credit with corporate bonds, MBS’es, ABS’es and commodities. If CDPs are competitive or cheaper sources of credit for these types of assets, then they will be in high demand. It’s that simple.

“CDP demand is credit demand” — repeat this mantra five times fast and a beach-walker is bound to appear…