Synthetics are the future of Maker, not Dai

Ken Chan
Ken Chan
Nov 1, 2019 · 7 min read
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Cryptocurrency market caps are a small blip as compared to traditional financial markets. One way to bootstrap a blockchain’s value is to tokenize existing financial assets onto the blockchain. Users of these asset tokens are able to benefit from the DeFi ecosystem by having the ability to lend, borrow, and swap these assets. Due to its programmable nature, there are infinite ways these financial systems and services could improve the access and reliability of new tokenized assets.

One straightforward way of tokenizing assets is to create synthetic representations of them on the blockchain. Synthetic assets are financial instruments that simulate an asset, including its risk and reward profile. They are created by holding a combination of other financial instruments.

We do not need a new protocol to do this — we already have Maker DAO. Maker is a collection of systems that combines a decentralized governance and collateral loans on the Ethereum blockchain to create Dai, a stablecoin that is censorship-resistant and community-owned. Said differently, Dai is a synthetic representation of the US dollar, backed by Ether as a collateral.

Though creating a USD stablecoin is a monumental achievement, I would argue that Maker’s vision could be grander than that. With Maker’s governance, the community is able to create and issue new synthetic assets on the blockchain.

In this blog post, I posit that Maker is not only capable of creating a cryptocurrency that is stable in relation to the US dollar, but is also capable of creating synthetic coins of local currencies or assets. These synthetic coins are able to make use of Maker DAO’s crowdsourced intelligence and stability features.

The Vision of Synthetic Assets

Why is a local stablecoin needed? The future where Dai gains acceptance in countries that don’t use USD is far-fetched. As an example, a Parisian merchant would need to use a stablecoin that is stable in relation to their local currency for conducting their day-to-day business.

Once you have a digital, non-custodial Euro stablecoin, let’s call it dEUR, you would be able to plug yourself into this new ecosystem of financial services and ecosystem. (d in dEUR stands for Dai).

Foreign currency exchanges would be as straightforward as interacting with a program on your computer such as Uniswap. When the Parisian merchant wants to remit money back to their family in India, they would be able to go to Uniswap’s website to instantly swap between dEUR (Euros) and dINR (Indian Rupees). The transfer would go through in at most a minute, with a configurable amount of exchange rate slippage.

Another use of synthetic assets is to create synthetic representations of a stock. Outside of the US, it’s still fairly difficult to buy US stocks with low brokerage fees. However with synthetic assets, Maker could issue a synthetic version of Apple stock (AAPL). It would have low fees and instant settlement. Though you do not own the actual stock and have little legal recourse, you still have price exposure to the asset beneath.

Any asset that could follow a price feed, could in theory become a synthetic asset on the blockchain.

The Synthetic USD, Dai

In this section, I will briefly cover the mechanisms Maker uses to keep the Dai’s 1-to-1 peg with the US dollar. These mechanisms are generalizable in order to create new synthetic assets.

First, the Maker system uses the over-collaterization of an external asset (Ether) in order to create a synthetic asset (Dai) that follows a target price of 1.00 USD.

In order to ensure that each dollar of debt (i.e. Dai) in the system is backed by a sufficient amount of collateral, the system requires the users to put up more collateral than the amount of debt acquired (150%). Should the value of the collateral go down due to large changes in Ether price, their collateral will be liquidated to close off the debt in the system. Thus, the system keeps the amount of debt in the system well in check i.e. not printing money “out of thin air”.

Generalizing this mechanism, one would be able to substitute (A) the collateral used (Ether) and (B) the target price it follows, to create a new synthetic coin.

Creating a Synthetic Euro

In the Maker system, there are two prices that are crucial — the external reference price (the price used to value the collateral) and the target price (the optimal price of the synthetic asset in relation to a currency).

In the Dai Stablecoin, the external reference price is the USD price of Ether (ETH/USD), while the target price is the USD price of Dai (DAI/USD).

Building on this concept, to create a synthetic Euro (dEUR), one would need to collateralize the synthetic asset with an external asset. The most liquid and trustless asset in the Ethereum ecosystem is the Ether. Assuming we collateralize the dEUR position with ETH, we will be using the ETH/EUR price as the external reference price. The target price on the other hand, would be the dEUR/EUR price.

A dEUR/EUR price of 1.00 would represent that the token has the same USD value has the actual EUR currency.

dEUR (Euro synthetic) comparison with DAI.

This construct is similar to the existing Dai stablecoin, but replaces all use of USD with EUR.

Creating a Synthetic Apple stock

Stablecoins of every local currency is a huge vision. However, what’s even more exciting is bringing in the trillions of dollars of the US stock market into the Ethereum ecosystem.

It isn’t a new idea, as seen in Synthetix and UMA. However, the use of SNX (Synthetix’s token) to mint sUSD (synthetic USD), which in turn is used to mint new assets does not make for a particularly liquid ecosystem.

Thus, I believe the best path forward is to use Dai, collateralized by the most liquid token in Ethereum, Ether. In the next example, I use the concepts in the Maker ecosystem to create a synthetic representation of Apple stock (AAPL), dAAPL backed by Dai collateral.

By using a stablecoin such as Dai for collateral, it would mirror a real-world loan quite nicely. The collateral of the loan would not change in value drastically over a long period of time, unlike collateralizing a CDP with Ether.

With that, the external reference price DAI/USD is used to price the value of your collateral. Next, a target price of dAAPL/AAPL is used to ensure the price of the synthetic dAAPL trades close to the actual USD price of AAPL stock.

dAAPL (Apple stock synthetic) comparison with DAI.

dAAPL/AAPL is a ratio that represents how many dAAPL tokens it would take to buy an actual AAPL stock. Essentially, we want the dAAPL/USD to be equivalent AAPL/USD.

dAAPL/AAPL = 1.00 is the goal.

Maker’s governance is the enabler

The feature that underpins the ability to collateralize and mint new assets in Maker is its governance. It is not a small achievement so far that the Maker governance is able to maintain Dai’s peg to the dollar (albeit imperfectly).

DAI price chart from Coinmarketcap.

Crucial parameter changes that are otherwise contentious, are done in an open and transparent way. By using the incentives of the MKR token holders, the system is able to increase the stability fees when the price of Ether was down significantly, thereby decreasing the supply of Dai.

The whole idea of Maker’s governance is to source information from “the wisdom of crowds.’’ In order to maintain the stability of its currency, Maker makes use of the expertise of economists, data scientists and financial analysts from all over the world.

For an open platform for asset issuance to work, the use of local knowledge is essential. New assets or stablecoins issued require the deep, technical insight of the local community.

For example, a group of Apple stock analysts have knowledge about Apple’s new product release. This would cause the Apple stock price to spike after their announcement. The group of analyst buys MKR token to vote for the stability fee for dAAPL to be increased, decreasing the supply of dAAPL. Finally, they hold the dAAPL before the product release and sell the top when dAAPL’s price appreciates.

As new assets get issued, it is crucial to leave parameters to be open to change by the public.

Open Questions

Despite the optimism of this post, there are plenty of open questions to address on how this “open synthetics issuance platform” on Maker would work:

  • Oracles and price feeds. How would the governance determine these players? Should we fallback to use new third-party oracle systems that are not determined by Maker governance?
  • Should the creation of new synthetic assets be a decision that is made by the community? If yes, how should they be handled?
  • Or, should the creation of new assets be created by two parties on an ad-hoc basis, such as Uniswap markets?


Building on top of Maker’s ecosystem of contracts, one could potentially issue assets that are able to adapt to new market conditions. These assets are able to adjust their parameters such as stability fees and over-collateralization rate just by virtue of voting. On top of that, utilizing Maker’s CDP infrastructure, these new assets are guaranteed to have enough collateral backing them.

What the Maker team has built so far is amazing — a decentralized governance system, a stablecoin and a trustless loan platform. However, these seem to be building blocks for larger things to come in the Maker ecosystem. Maker’s role in the composability of DeFi is undeniable because it can potentially bring new sources of assets onto the blockchain. All of which are able to access the large collection of existing DeFi services.

Many thanks to Rune Christensen and Julian Koh for feedback and comments.

Ken Chan

Written by

Ken Chan

Decentralization and Bitcoin. Previously @Zilliqa

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