MakerDAO and the DAI
In this episode of CRYPTO 101, Matthew Aaron had the opportunity to talk with Rune Christensen, CEO and co-founder of MakerDAO and creator of the Maker Foundation. MakerDAO is the engine behind the Dai stablecoin.
What is a Stable Coin?
A stablecoin is a cryptographic asset that is pegged to a fixed value by virtue of it being backed by real-world assets, or other assets of steady value. In this sense a stablecoin is almost like a tokenised version of a fraction of an asset. perhaps the most well-known stablecoin is TetherUSD which claims to be backed 1–1 by US dollars. If this is true — or at least, if people believe this to be true, then the value of 1 Tether token will be approximately the value of 1USD. This should also remain the case even if Bitcoin soars to $50000 or plummets to $5.
“I mean in general I just realized that this kind of volatility… the effect of volatility and the effect of losing money from your money would mean that Bitcoin wouldn’t really be adopted until that problem was solved. And from that I got into stable coins… I realized, okay, we need a system that can actually provide stability so you can actually use it as money. Right?”
What is the Dai?
This is Where the Dai stablecoin comes in. According to their own website: “Dai is an asset-backed, hard currency for the 21st century. The first decentralized stablecoin on the Ethereum blockchain.” This summarises it perfectly. The Dai is backed not by gold or fiat currency, but by other blockchain assets with a relatively steady value (compared to the market as a whole).
Dai is created when an individual opens up what is called a ‘collateralised debt position’ or ‘ CDP’. By handing over digital assets like Bitcoin or Ethereum as collateral, lenders are then issued dai to the dollar value of the collateral’s market value at that time. The Dai can then be sold on the open market for cash or other digital assets, including to leverage trade on supporting exchanges.
What is MakerDAO?
MakerDAO is a decentralized platform for the issuance of crypto-backed loans. The loans are paid out in the Dai stablecoin after digital assets have been handed over to serve as collateral.
Christensen describes MakerDAO as the engine behind the Dai stablecoin. The fascinating thing about this engine is that it is decentralised. There aren't brokers who arbitrarily decide who to give loans to, and there is no one who has access to private keys of the collateral deposited.
The way this is done is through smart contracts on the Ethereum blockchain. a smart contract is basically an ‘if-this-then-that’ style algorithm that resolves on a blockchain. This means that the entire system is governed in a decentralised fashion. The MKR token holders take part in the governance of the system by voting for which types of digital assets should be accrued as collateral.
“The value of MKR comes from the fact that Maker is the governance of this whole system. So there’s this interaction where on one side there are people who hold the stablecoin and they use it as money. Then there are these people who borrow the stable coin with the collateral and then immediately sell it to those who want to hold it so they can go in and use it for something. And then finally there’s the governance that sort of decides on which terms this interaction happens. [That’s Maker]. When they buy Dai, it’s actually backed by very legitimate assets and it’s not going to crash.”
Additionally, all of the workings of the MakerDAO are transparent and are locatable on the blockchain using a block scanner like MakerScan.
Who is Rune Christensen?
Rune self describes as a “regular Danish kid” who grew up on the island of Zealand in the town of Roskilde. At the age of 18 he moved to China after completing high school to teach English in kindergartens. It was at this time that he discovered Bitcoin.
“Like it was just a really fascinating concept. Right? And especially because I was already traveling so much and living in different countries, I really saw the advantage of this kind of like global money. I was really faced with how annoying it is to transfer money abroad, for instance. And then that really drew me to Bitcoin and blockchain.”
With such high amounts of volatility in the crypto space there is undeniably a need for the kind of service a stablecoin can offer. While there are other services on the market that deal in the business of crypto-loans like Block-fi and stablecoins like TetherUSD, what sets MakerDAO apart is that they truly are a decentralised solution based entirely on smart contracts. This eliminates many of the problems the space has already recognised in centrlaised banking and lending models.
“Another really interesting thing is that it’s actually very likely that a lot of these centralized lending service already actually are using Maker to source some of the credit because, it’s not really a product in itself, right?”
Be sure to check out the podcast and take a look at MakerDAO’s contribution to the space.