TokenGazer Crypto Review |MakerDao: Overall Rating: 4.1, Indicator Trend: Outperform

NAME: MakerDao
Ticker:MKR
Issue Date:Jan.30.2017
Total Supply:1000000
Circulation Ratio:72.8%

Technology:Outperform

1.The Two-Token architecture and stablecoin system are well designed. The price of DAI is basically pegged to USD with little fluctuation. [Bullish]
CDP operations require multiple transactions to be sent, which is too costly for small-amount collateral. [Bearish]
The stablecoin is a rigid demand, and MakerDao’s asset collateralization model is transparent. [Bullish]
There will be more collateral types but currently only ETH is available, the specific launch time and details of the new version have not been disclosed. [Bearish]
The code for Multi-Collateral DAI (MCD) has been completed which supports multiple collateral types. [Bullish]

Community: Neutral

The DAO model is transparent and in accordance with the community’s interest to some extent. [Bullish]
The governance token MKR is too concentrated, leading to a centralization risk in voting activity and governance. [Bearish]
UNICEF France allows individuals to donate DAI on its official website. [Bullish]

User: Outperform

The cryptocurrency market is volatile and thus vulnerable to the insolvency problem, which may lead to margin calls. [Bearish]
Users can use the rules of CDP to make an ETH-leverage. [Bullish]
Fiat-currency-pegged stablecoins like USDT have a large market share and good liquidity, which is an obstacle to the development of new stablecoins. [Bearish]
MakerDao’s transaction remains in top three in volume for a long time among Ethereum’s Dapp transactions. [Bullish]
MakerDao’s on-chain active addresses and users are on the rise. [Bullish]
On January 25, 2019, REQ (Request Network) put 20,000 ETHs on the MakerDao platform for risk hedging. [Bullish]

Market: Neutral

DAI and MKR have been listed on Coinbase and OKEx. [Bullish]
DAI and MKR have a limited number of trading pairs and their transactionss are too concentrated, which are no match for USDT. [Bearish]
MakerDao has obtained 1.9% of total ETH supply. [Bullish]

1 Project Background

1.1 Stablecoin Development

With the development of cryptocurrency and blockchain industry, some people may have made a fortune by investing in cryptocurrency over the past few years. However, cryptocurrencies like Bitcoin and Ethereum are less applicable to daily payment and transaction scenarios due to their great volatility. And investors also need a cryptocurrency which is pegged to fiat currency to protect them from investment risks in market downturn. Thus comes the stablecoin, whose value is pegged to a fiat currency. The stablecoin can also serve as a bridge for fiat currency and play a part in trading pairs, daily payment, cross-border payment and commodity trading.

1.2 Stablecoin Market

Top 5 Stablecoins in Marketcap on Jan 15, 2019(Data Source: www.feixiaohao.com

At present, USDT still maintains a dominant market share in the stablecoin sector, but the opacity of its fiat asset accounts has always been criticized. Currency backed stablecoins are somewhat less trustworthy and prone to be released excessively. However, MakerDao uses decentralized cryptocurrency backed stablecoins, of which transfers and releases are public on the blockchain, eliminating currency backed stablecoins’ risk of losing credibility. However, USDT and other centralized currency backed stablecoins have obtained a dominant market share and a large number of users during the infancy of blockchain industry due to high market recognition, large transaction volume and no need of much cryptoasset as risk reserve.

2 Technology Assessment

2.1 Technical Architecture

Maker is a smart contract platform based on Ethereum that backs and stabilizes the value of DAI through a dynamic system of Collateralized Debt Positions (CDPs), autonomous feedback mechanisms, and appropriately incentivized external actors. DAI is the native stablecoin in the MakerDAO system and MKR is the token used to pay the Stability Fee on active CDPs and plays an important role in the governance of the Maker Platform.

Maker enables anyone to leverage their Ethereum assets to generate DAI on the Maker Platform. Once generated, DAI can be used in the same manner as any other cryptocurrency: it can be freely sent to others, used as payments for goods and services, or held as long term savings.

2.2 Minting and Destruction of DAI

1) Collateralized Debt Position Smart Contracts (CDPs)
CDPs hold collateral assets deposited by a user and permit this user to generate DAI, but generating also accrues debt. This debt effectively locks the deposited collateral assets inside the CDP until it is later covered by paying back an equivalent amount of DAI, at which point the owner can again withdraw their collateral. Active CDPs are always collateralized in excess, meaning that the value of the collateral is higher than the value of the debt.

The CDP interaction process:

·Step​ ​1:​ ​Creating​ ​the​ ​CDP​ ​and​ ​depositing​ ​collateral
The CDP user first sends a transaction to Maker to create the CDP, and then sends another transaction to fund it with the amount and type of collateral that will be used to generate DAI. At this point the CDP is considered collateralized.

·Step​ ​2:​ ​Generating​ ​DAI​ ​from​ ​the​ ​collateralized​ ​CDP
The CDP user then sends a transaction to retrieve the amount of DAI they want from the CDP, and in return the CDP accrues an equivalent amount of debt, locking them out of access to the collateral until the outstanding debt is paid.

·Step​ ​3:​ ​Paying​ ​down​ ​the​ ​debt​ ​and​ ​Stability​ ​Fee
When the user wants to retrieve their collateral, they have to pay down the debt in the CDP, plus the Stability fee that continuously accrue on the debt over time. The Stability Fee can only be paid in MKR. Once the user sends the requisite DAI and MKR to the CDP, paying down the debt and Stability Fee, the CDP becomes debt free.

· Step​ ​4:​ ​Withdrawing​ ​collateral​ ​and​ ​closing​ ​the​ ​CDP
With the Debt and Stability Fee paid down, the CDP user can freely retrieve all or some of their collateral back to their wallet by sending a transaction to Maker.

Summary: The operating process of CDP is completed by using Ethereum’s smart contract. A total of 6 transactions have to be sent, which incurs high “gas” fees for micro-transaction users. Besides, the entire process relies too much on Ethereum network’s processing capability. Once the Ethereum network is congested, there will be a poor user experience. However, the entire process is completed on-chain and is open and transparent, which can eliminate centralized stablecoins’ risk of losing credibility.

2.3 CDP’s Lifecycle

1) 6 stages of CDP’s lifecycle

· Pride: CDP is non-risky.
·Anger: Collateral has reached the CDP’s debt ceiling.
· Worry: Collateral price feed has expired and the CDP is about to be triggered for liquidation.
· Panic: The CDP is under collateralized and the price feed is expired past the CDP type’s grace period.
· Grief: The CDP is triggered for liquidation.
· Dread: The CDP is undergoing liquidation.

2) Operations allowed and prohibited in each stage of the CDP lifecycle

Actions in Each Stage of the CDP Lifecycle( From MakerDao Purplepaper)

The user can perform a series of operations on CDP, and different operations are allowed in each stage of the CDP lifecycle.

The collateral can be decreased in the shut, lock, and wipe stages and increased in the free and draw stages, while the collateral can’t be operated in the bite and the grab and plop stages since they are liquidation stages.

Summary: Users can confirm their CDP status by checking the stage of their CDP life cycle, and then make operations to ensure asset security. This design makes MakerDao’s CDPs more flexible and user-friendly.

2.4 MKR Token

1) MKR as a utility token
When users want to redeem their collateral, they must pay the debt in the CDP with DAI and the accumulated stability fee (1% of the debt on a yearly basis) with MKRs only. The MKRs will be transferred to a contract and destroyed. The collateral will be returned to the user once he pays off the debt and stability fee.

The Number of Locked MKRs

TokenGazer believes that at present, about 526.65 MKRs have been destroyed, accounting for about five ten thousandths of the total. However, the amount of MKRs to be destroyed is related to the demand for DAI and the debt duration. If the demand for DAI increases in the future, so does the MKRs to be destroyed, which means an MKR deflation the increase of its value.

1) MKR as a Governance Token

Top 10 MKR Holders

In addition to payment of the Stability Fee on active CDPs, the MKR token plays an important role in the governance of the Maker Platform. Governance is done at the system level through election of an Active Proposal by MKR voters. The Active Proposal is the smart contract that has been empowered by MKR voting to gain root access to modify the internal governance variables of the Maker Platform. Any Ethereum account can deploy valid proposal smart contracts. MKR voters can then use their MKR tokens to cast approval votes for one or more proposals that they want to elect as the Active Proposal. The smart contract that has the highest total number of approval votes from MKR voters is elected as the Active Proposal.

1) MKR Holders’ Role in Governance

The MKR token allows holders to vote to perform the following Risk Management actions:

·Add​ ​new​ ​CDP​ ​type: Create a new CDP type with a unique set of Risk Parameters. A CDP type can either be a new type of collateral, or a new set of Risk Parameters for an existing collateral type.

·Modify​ ​existing​ ​CDP​ ​types:​ Change the Risk Parameters of one or more existing CDP types that were already added

· Modify​ ​Sensitivity​ ​Parameter:​ ​Change the sensitivity of the Target Rate Feedback Mechanism

·Modify​ ​Target​ ​Rate:​ Governance can change the Target Rate. In practice modifying the Target Rate will only be done in one specific circumstance: When MKR voters want to peg the price of DAI to its current Target Price. It will always be done in conjunction with modifying the Sensitivity Parameter. By setting both Sensitivity Parameter and Target Rate to 0%, the TRFM becomes disabled and the Target Price of DAI becomes pegged to its current value.

·Choose​ ​the​ ​set​ ​of​ ​trusted​ ​oracles: The Maker Platform derives its internal prices for collateral and the market price of DAI from a decentralized oracle infrastructure, consisting of a wide set of individual oracle nodes. MKR voters control how many nodes are in the set of trusted oracles, and who those nodes are. Up to half of the oracles can be compromised or malfunction without causing a disruption to the continued safe operation of the system

· Modify​ ​Price​ ​Feed​ ​Sensitivity:​ Change the rules that determine the largest change that the price feeds can affect on the internal price values in the system.

·Choose​ ​the​ ​set​ ​of​ ​global​ ​settlers:​ ​Global settlement is a crucial mechanic that allows the Maker Platform to survive attacks against the oracles or the governance process. The governance process chooses a set of global settlers and determines how many settlers are needed to activate global settlement.

2) The key Risk Parameters for CDPs are:

·Debt​ ​Ceiling:​ The Debt Ceiling is the maximum amount of debt that can be created by a single type of CDP. Once enough debt has been created by a CDP of any given type, it becomes impossible to create more unless existing CDPs are closed. The debt ceiling is used to ensure sufficient diversification of the collateral portfolio.

·Liquidation​ ​Ratio:​ ​The​ ​Liquidation Ratio is the collateral-to-debt ratio at which a CDP becomes vulnerable to Liquidation. A low Liquidation Ratio means MKR voters expect low price volatility of the collateral, while a high Liquidation Ratio means high volatility is expected.

·Stability​ ​Fee:​ The Stability Fee is a fee paid by every CDP. It is an annual percentage yield that is calculated on top of the existing debt of the CDP and has to be paid by the CDP user. The Stability Fee is denominated in DAI, but can only be paid using the MKR token. The amount of MKR that has to be paid is calculated based on a Price Feed of the MKR market price. When paid, the MKR is burned, permanently removing it from the supply.

· Penalty​ ​Ratio:​ The Penalty Ratio is used to determined the maximum amount of DAI raised from a Liquidation Auction that is used to buy up and remove MKR from the supply, with excess collateral getting returned to the CDP user who owned the CDP prior to its liquidation. The Penalty Ratio is used to cover the inefficiency of the liquidation mechanism. During the phase of Single-Collateral DAI, the Liquidation Penalty goes to buy and burn of PETH, benefitting the PETH to ETH ratio.

TokenGazer believes that MakerDao has well designed architecture its voting system is perfect in theory, but MKRs are highly concentrated. MakerDao Foundation holds the largest share of MKR tokens, accounting for 27% of the total. According to Pan Chao, director of the MakerDao Foundation and Maker’s head in China, the Foundation’s MKR tokens will not be used in the voting for the Active Proposal. However, the top ten MKR addresses hold 72.82% of the total MKR tokens. These holders are powerful enough to decide the voting results, so the governance of MakerDao has a certain centralization risk.

2.5 DAI 2.0

The code for Multi-Collateral DAI (MCD) has been published and its contracts have been deployed to the Kovan testnet in preparation for release. The new contracts of DAI 2.0 make many updates:

1) DAI Savings Rate (DSR)

The MCD release will include a user interface that allows for switching DAI into Savings mode to earn interest.

2) Better Price Feed Oracles(https://blog.makerdao.com/the-road-to-mainnet-release

The first generation price feeds each publish their own prices to the blockchain, each one sending a costly transaction for every update. The MCD version, however, will use the Secure Scuttlebutt to communicate prices between each other first, before submitting the combined result to the blockchain in a single transaction. A combination of Scuttlebutt and signing price data with Ethereum keys ensures that the correctness of this aggregated signal can still be verified independently.

3) Multiple Collateral Types

The Maker Risk team is evaluating the viable types of collateral. The final list will be determined by a public voting (vote.makerdao.com).

4) The existing collateral model still works(According to MakerDao’s official postings on www.jianshu.com

According to MakerDao’s official blog, after the release of MCD, Single-Collateral DAI will remain available for at least 6 months before Emergency Shutdown might be initiated. This transition period will allow DAI holders and CDP owners to migrate to MCD without a problem, and Maker will publish the necessary guides and tools to further support this process.

TokenGazer’s review: MakerDao is a smart contract platform based on Ethereum, which focuses on economic model and code security construction. DAI 2.0 has many updates and maintains the existing collateral model. While the project team has not disclosed MakerDao 2.0 release time, thus leaving the project untested by the market and somewhat risky.

3 Market & On-Chain Data

3.1 Market Analysis of MKR and DAI

According to www.feixiaohao.com, 10 exchanges have listed a total of 30 DAI trading pairs and 45% of DAI’s trading volume is concentrated on TOP.ONE. There are 61,327,681 DAI in circulation but the turnover rate is merely 2.02%. 32 MKR trading pairs have been listed on 14 exchanges, while 92% of the transaction volume are concentrated on the three trading pairs listed on OKEx. The two tokens are in lack of liquidity, and their transactions are over-concentrated.

3.2 Correlation between Active Addresses and On-Chain Users

MKR and DAI’s Prices and Active Addresses
Total ETH Locked

MKR and DAI’s on-chain active addresses keep increasing despite the continuous market downturn since 2018, which means MakerDao is gaining popularity as well as a growing number of users, though the daily active users remain at about a thousand at most. The growing number of MakerDao’s active users, deposited ETHs and new CPDs is a bullish signal in the long run. However, the short-term growth in active on-chain addresses have not triggered a significant increase in the price of MKR, indicating that the two factors are not highly correlated with each other.

3.3 Collateral on MakerDao

Total ETH Locked( https://mkr.tools/

As of January 25th, 2019, MakerDao has released 74,352,712 DAI in the Single-Collateral DAI phase and created13,535 DAI addresses. There are 19,58,487 ETHs on MakerDao platform, which accounts for 1.9% of the total supply of ETH. It is quite impressive for a Dapp to collect such a large amount of ETH, which is still on the rise.

3.4 Analysis of Top-Ranking CDPs

The top-100 CDPs possess 60% of all deposited ETHs. According to TokenGazer’s research, the collateral-to-debt ratio of these high ranking CDPs are mostly around 300%, enabling them to neutralize sudden market downturn.
3.5 High-Risk CDP

From December 21, 2018, the CDP with a collateral-to-debt ratio lower than 200% is classified as a high-risk CDP. According to the data analysis, there are 107 high-risk CDPs, possessing 59,420 ETHs.

3.4 CDP Users’ Operations

CDPs Created Every Day
DAI Returned Every Day
DAI Released Every Day

The on-chain data reflects a growth in the number of CDPs as well as returned and released DAI, which indicates a good development momentum of the project.

3 Risk & Investment Opportunity

4.1 Liquidation Risk and Riskless Arbitrage

ETH Price and Liquidated DAI

The present CDP liquidation Ratio is 150%. With no additional collateral assets, a lot of CDPs will be liquidated when the ETH price is between 50 and 70 USD. In that case MakerDao will sell the liquidated assets with a price discount of 3%, which means any user can make a riskless profit by using their DAI to pay other people’s risky CDP debts.

However, there are not so many such transactions at present because only when there is a continuous drastic market downturn will there be a large number of collateral assets on sale, and the buyer can only get the 3% discount with an auto-buy-in program and a high “gas” limit. Besides, the buyer has to sell the ETH as soon as possible to prevent the risk of market downturn.

4.2 MakerDao’s Usage in Bull Market and Bear Market

In traditional industries, house mortgages, vehicle mortgages, etc. are caused by the fact that asset owners do not want to sell their assets while they want to get a certain amount of liquidity. In the blockchain industry, cryptocurrency is also an asset. For those who are optimistic about the cryptocurrency industry, they do not want to sell their cryptoassets and miss the uptrend, despite the need of some funds for other activities. The MakerDao platform featuring decentralized cryptocurrency backed stablecoins can help them solve this problem.

1) Bear market: You can make a downside risk hedge to reduce the losses caused by the market downturn on your own assets.
2) Bull Market: DAI generated on MakerDao can be used to purchase more ETHs to be deposited in CDPs, thereby reinforcing the leverage, or to invest in other cryptoassets.

4.3 MKR’s PE Ratio

Changes in DAI’s Amount

According to the data on the current Single-Collateral model, the total amount of DAI is 74,352,712. If the amount remains unchanged, the profit is 371,763 US dollars/year based on the stability fee of 0.5%/year. As the token of MakerDao project, MKR’s deflation which will be reduced when the growth of the stability fee is outpaced by the price increase of MKR. On the contrary, MKR’s deflation will accelerate when the growth of the stability fee is faster than the price increase of MKR.

4.4 Using DAI to Hedge against Downside Risk
Undoubtedly, the loss caused by the cryptocurrency market downturn is huge for major ETH or other cryptoasset holders, however, there are a variety of cryptocurrency derivatives on the market that can hedge the cryptoasset depreciation, such as put options, short-selling futures contract, ect. Now asset loss hedging can also be achieved on MakerDao.

1) Users can open a CDP to borrow DAI and pay a stability fee of merely 0.5%/year in the case of DAI price increase.

2) When the collateral’s price declines, users can buy back the collateral with the DAI generated by the CDP, thus lowering the average price of their held collateral.

The above operations cannot achieve a complete hedging, so users need to prepare enough risk margin to avoid the risk of a margin call caused by further market downturn.

5 Project Review
MakerDao is a project to generate stable coins by cryptoasset collateral. Although with a certain risk of margin call, cryptoasset collateralization is more transparent and decentralized. The governance token MKR’s distribution is concentrated, therefore has centralization risks, but the project governance is open and transparent. The number of MakerDao’s on-chain active addresses are on the rise, but its daily active users remain at about 1400 at most. Dai and MKR are only listed on a limited number of exchanges with insufficient liquidity. Although it is not launched yet, MakerDao has developed several asset collateralization models and released a lot of updates, worth investors’ continuous attention

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This paper does not constitute a recommendation or take into account the particular investment objectives, financial situations, or needs of investors. Investors are not to construe the contents of this research as legal, tax or investment advice, and should consult their own advisors concerning an investment in digital assets.

The price and value of assets referred to in this research and the income from them may fluctuate. Past performance is not indicative of the future performance of any assets referred to herein. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.

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Certain Risk Factors

PRICE VOLATILITY:Digital assets have historically experienced significant intraday and long-term price swings.

MARKET ADOPTION:It is possible that digital assets generally or any digital asset in particular will never be broadly adopted by either the retail or commercial marketplace, in which case, one or more digital assets may lose most, if not all, of its value.

GOVERNMENT REGULATION:The regulatory framework of digital assets remains unclear and application of existing regulations and/or future restrictions by authorities may have a significant impact on the value of digital assets.

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