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.
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…
There are other arguments in the Reserve analysis that Maker has yet to answer concretely, mostly to do with whether they can out-manoeuvre the competition in global debt markets.
“This is the key problem for Maker. Even if tokenization efforts succeed and there is a lot of demand for collateralized debt in tokenizable traditional assets, Maker can only capture this large demand by overcoming the competition from other issuers of collateralized debt […] To win as a stablecoin, Maker needs to build a very large CDP market, while competing with other debt providers […] At the moment though, TrueUSD is leading Dai a bit in market cap and a lot in trading volume.”
Let’s ignore for a moment the win-loss, zero-sum framework so typical of financial types, and focus on TrueUSD: “the only regulated, exchange-independent stablecoin” on the block. Can you sniff out the old language, see how the narrative is no different than it’s ever been? TrueUSD is a “new standard of trust”, not a trustless means of establishing stable currency from debt. The difference is not merely semantic: it is everything.
“We work with multiple trust companies that already manage billions of dollars. Pass a KYC/AML check, and send USD to a trust company with an escrow agreement.” What, really, is new about this? Using TrueUSD is still about who I am and not what I can do with the tools at my disposal. Whom does it serve? Cui bono? Certainly not ordinary people, looking to take back some modicum of power from the financial elite, but rather those same exact “financial services, exchanges, traders, and commerce”.
This is not an exciting narrative in which I wish to take part.
The Real Magic of Stories
Which brings me to a story I do want to tell about a good friend who once walked the Wild Coast of Africa, from Bulungula to Ponta do Ouro (about 800km). He started with a backpack, a sleeping bag, and R200 ($14.44). He arrived in Mozambique some months later with the same R200 still in his pocket. I sat with him, late at night on a mountain beneath the Milky Way, and asked him how such a thing was even possible.
He gave me the simplest answer: “If you approach people correctly, with openness and kindness and love, then they naturally want to be a part of your narrative.” I often quote Rumi: “Speak a new language and the world will be a new world” and worry that people don’t interpret it anywhere near literally enough — but this beach-walker is ultimate proof of that very idea. If you speak and live your story sincerely, people can literally sense it, leading to virtuous feedback loops where the stories you weave become indistinguishable from the life you lead.
Purely financial analyses miss entirely this crucial point.
Wealth is a set of linguistic protocols once more open to the public, and MakerDAO can be read as a narrative about a provably more level global playing field, where the rules specify only what can be done with the ball of debt, not who is allowed to kick it in the first place. It is this most simple of reasons that makes Dai truly interesting.
Reality can be described as running code about which we have reached some kind of rough consensus. It is just the rules of other men, no better or worse than ourselves. This generation, though, has at our disposal a whole, open source family of languages with which to express how we might be different. Dai gives us all a means to name an alternate way and work together toward Rune/Rumi’s ideal.
It may not be the Hero’s Journey, but it is certainly a fellowship formed around a fool’s hope. Such are always the best tales in which to take part.
“It’s like in the great stories, Mr. Frodo. The ones that really mattered. Full of darkness and danger they were. And sometimes you didn’t want to know the end. Because how could the end be happy? How could the world go back to the way it was when so much bad had happened? But in the end, it’s only a passing thing, this shadow […] I think, Mr. Frodo, I do understand. I know now. Folk in those stories had lots of chances of turning back, only they didn’t. They kept going, because they were holding on to something. That there is some good in this world, and it’s worth fighting for.”