Within its own amount of skepticism, 2018 has obtained a title as being the year of the stablecoin. Despite total backlash against Tether, with and yet increased demand for stable cryptocurrency as a means of settlement, a rising cohort of stable coin solutions were brought onto the market. Paxos Standard PAX, Gemini GUSD, Circle USDC, Carbon CUSD, TrustToken’s TUSD prove to be those that have the best credibility in cryptoexchanges as stablecoins. At the same time, it’s still safe to say that all of those products are not truly decentralized. They are more of a token that has the right to claim a fiat USD equivalent that is put into a centralized storage such as the bank account.
What does this mean? It means that using these coins can be associated with the same equivalent of difficulties one has with conventional fiat money. Though their value can be ensured by the emittent, the use still comes with a high comprehensive and complicated KYC/AML procedure and thus has risk of bank accounts getting suspended because of the coins seen as ‘illegally acquired’.
This brings upon the idea that most of stablecoins are an irrational means of transactions in the ‘free internet’ due to its high risks. In a perfect world, it would be good to bring up that a stable way of paying for Web 3.0 should come from the community. It’s value shouldn’t regard the actions from third parties.
DAI as a stable coin.
As of the moment, it seems that the only stable coin that is being emitted securely while being decentralized is MakerDAO’s DAI. This is also possibly why it is one of the most popular #DeFi apps in the entire Ethereum ecosystem. What about DAI is unique that it is able to gain a tremendous amount of trust from the community. This is what we will touch upon in this entry. From the core mechanics of the MakerDAO emission system to how you as an Etherum user can benefit from it as well.
The MakerDAO concept
How does a decentralized stable coin operate?
At the essence of a MakerDAO product is the mechanics of emission of a stable means of payment (i.e. money) deployed as a number of smart contracts in Ethereum network. In principle, the scheme of emission is comparable to that of money emission secured through gold, except ETH is taking the place of gold. A specific amount of ETH is brought to a smart contract that creates a stable token (DAI). Afterwards, it is sent to the user.
The DAIs that are made this way turn out as the debt outstanding to MakerDAO (that in itself becomes a decentralized emission system) secured by the collateral. This is also the same manner wherein the traditional fiat money is basically debt outstanding to their central bank. Although when you compare it to traditional central banks, the DAI user has the ability to create new decentralized money with no obstacle. With the complete automation of MakerDAO system in its design, it’s hard and practically impossible to create money that is not secured with the ETH. The whole system is also entirely transparent to monitor and track.
Securing the Exchange Rate
A rarely discussed issue you may have is how the DAI can actually secure their exchange rate at $1? This is where we consider the concept of excessive consumption. When emitting DAI, the secured collateral should be no less than %166, i.e. the debt in the amount of 100 DAI should be emitted to each $166. The emission made by the individual user turns into CDP, or a collateralized debt position, every part of which may be monitored through a dedicated web-page.
Once the price of ETH drops, and it’s provided that the index of position coverage drops below 150%, the position will start to liquidate. From there, the collateral asset, i.e. ETH, is sold at the discount for DAI which is used for the the debt. A recent lowering in ETH price from $200 to $86 in such a short time span led to the mass close up of the debt positions because of the insufficient coverage ratio. Amazingly, the DAI exchange rate stuck to ~$1.00. This shows how much stability its system has.
The community trust in DAI is extremely high. With their latest data points in mind, the system has obtained a tremendous sum of 1.7 million of ETH, or USD 255 million, as the collateral (which makes up >1.5% of all the ETH existing at the moment). Ther has been more than 70 million DAI created so far, which equates to ~$70 million of stable coins, with the total of collateral coverage amounting to 370%. Several dApps are also integrating DAI so that their users can be give an option to make settlements in stable currency.
There is another token used in MakerDAO system. This is a Maker token and its role is to give a voting right when managing percentage stakes. This is due to the DAI emission is comparable to the emission of conventional money with its borrowing rate and used to pay off the borrowing rate. In itself, the opportunity to pay off the percentage for the emmission of DAI in MKR token is already a one of a kind economic precedent. These mechanics allow the avoidance of normal problems of fiat money when the debt of the central bank exceeds the amount of issued money. The DAI emission system overrides this concern completely.
How you can utilize DAI and MakerDAO right now?
The usage of the MakerDAO emission mechanism can prove useful and interesting for the purpose of crediting with ETH collateral, or receiving a decentralized credit leverage. For example, when you have ETH 100 ($15,000), you can generate up to $9,000 in DAI that can be used later to purchase some extra ETH.
DAI emission system can also become an accessible credit solution. With ETH as collateral, it will be possible to create a certain amount of DAI that will be reimbursed later from the future proceeds. With the interest rate of 2.5%, and the absence of banking commissions, MakerDAO is starting to look like a decent alternative to a bank collateral credit line.
Will the DAI become a feasible alternative to the ‘banking cartel’ of stablecoins?
Despite all the technological innovation, durable lines of codes in the crypto market, and respect of crypto enthusiasts, mass adoption of any decentralized financial product is never easy. First of all, the entire DAI is created under the ETH collateral. This means that the total amount of DAI is restricted. If 10% of all the ETH is used as collateral, with the exchange rate of $150, only $939 mln DAI can be created. At the same time, upon ETH returning to its peak $1000 price, this amount will surge. Despite this, it will still be insignificant on a global scale.
The second issue is liquidity and accessibility for sale-purchase. However, despite the recent listing of DAI and MKR on Coinbase, DAI is still traded mostly against ETH. At the same time, it’s obvious that the mass adoption of DAI, the entry and exit points into fiat are still much needed. This is because the majority of DAI use cases (like payments and crediting) and that would eventually require the exit to fiat.
Yet, there are not much options to sale-purchase DAI for fiat currencies – there are only two exchanges that have those trade pairs at the moment. The first is Ethfinex, but there is much improvement in its means to deposit and withdraw funds. The 2nd one is EXMO, who recently showed their support for DAI and MKR and introduced fiat pair to USD. Oddly enough, there are no more instances of DAI against fiat with non-zero liquidity at the market currently. This is due to the fact that most of larger exchanges are way more interested in cooperating with institutional players rather than decentralized system of electronic cash flow.
The Future of DAI
Therefore, despite some apparent advantages of DAI for an average user, such as transparency and independency of the third parties and all sorts of middle men, the competition with the banking cartels still remain exceptionally strong. It’s still vital to note that the DAI has apparently created a niche of its own that is bound to expand gradually, with restriction of total volume of issued coins and liquidity influx being the major factor contributing to its adoption in Web 3.0 ecosystem.
Fast forward to today and we’ve witnessed the growing excitement in the space, with more than $70 million US dollars created in MakerDAO ecosystem, compared to only ~$3 million of the last year. Knowing that the cryptomarket has historically shown interest to vacant means of payment, we can only guess how many DAI will be generated and subsequently used one year from now.
At this point, there may be a chance to hope for a DAI future, one that comes with safety and stability.
EOI Digital supports DAI and cryptocurrencies in their pursuit for this safe and stable future. If you’re interested in getting into this business or interested in anything about digital transformation, feel free to hit us up and let’s get a fruitful conversation going!