6 Thoughts Following Our Conf. Call “The Massive Potential of Multi-Collateral Dai “
On November 21st, 2019, CryptoMondays and DeFi NYC hosted a conference call on Multi-Collateral Dai that featured four DeFi thought leaders:
Steven Becker, President & COO, Maker Foundation
Allison Lu, Co-Founder & COO of UMA
Tim Ogilvie, Co-Founder & CEO of Staked
Robert Leshner, Founder & CEO, Compound
It was a super interesting and informative call as they shared their views on the massive potential of multi-collateral Dai and the future of DeFi. You can watch a replay of the call below:
Or you can save some time and read our five highlights:
#1 A Vision Realized — With the introduction of MCD, the Maker protocol now includes the two financial tenets needed to create an economic engine
Steven Becker stated that Maker’s vision to create an economic engine on chain was based on creating two financial pillars, collateralization and credit generation. With single collateral Dai (Dai), only credit generation was fully functional, as collateralization was limited to ether. Now with MCD, both tenets are in place, such that the protocol can be used as an engine to underlie the growth and development of emerging economies.
#2 By Enabling Real World Assets To Be Used AS Collateral, MCD Solves The Two Biggest Problems With Dai
While enabling new cryptocurrencies, like BAT, to be used as collateral, increases the diversity of assets underlying Dai, cryptocurrencies tend to be highly correlated to one another today, so it doesn’t really solve the diversity of assets necessary to decrease volatility that real world assets will bring.
In proof of the diversity pf assets problem, Allison Lu presented a graph showing the high correlation between the Columbian peso and the price of crude, given Colombia’s heavy economic dependence on oil exports
In addition, at around $200 billion, the cryptocurrency market is still small today. So enabling real world assets that are “wrapped” as ERC-20 tokens to be used as collateral enables this market to scale massively, ahead of the scaling of the cryptocurrency market.
Among the infinite potential real world assets that could be tokenized, Steven mentioned “dead capital”, a term coined by Peruvian economist Hernando de Soto Polar, to denote the estimated $9+ trillion in assets in emerging markets related to property which is informally held and thus not legally recognized. As a result, dead capital is difficult to lend or borrow against it. Steven also believes that supply chain finance, i.e. tokenizing invoices, will not only enable loans against invoices at lower, it will also lead to innovation in supply chain finance.
#3 Putting Real World Assets On Chain Will Enable All Kinds Of Capital Structure Innovation
Traditional debt and equity financings will give way to more granular claims on organizations creating a wider spectrum of capital choices. New tokens can lay claim to revenue flows or specific assets within the organization. These new asset types will also be able to be used as new collateral types.
#4 The Dai Savings Rate (DSR) Introduces Trust Free Interest Rates
You can lock your Dai in a smart contract and receive interest via the Dai Savings Rate (DSR). The DSR is currently 2% as determined by a Maker Governance vote on November 15.
While arbitrage is the first first layer balancing mechanism keeping demand and supply of the Maker protocol balanced, the stability fee and the DSR are the second layer mechanism balancing supply and demand.
What’s profound about the DSR is that you still own it when you lock it in the smart contract. So there is no counter party risk. The risk is the inherent risk of the decentralized protocol. So the DSR isn’t risk free, but it is trust free, because there is no counter party that needs to be trusted to perform it’s obligation. Allison Lu touched on the governance risk, wondering if processes like liquidations be disputed in court?
#5 The Risk Reflected In The Lending Rates Should Decline Over Time
Tim Ogilvie from Staked shared this slide showing the difference in lending rates between a 10 year U.S. government t bond and lending DAI on Staked:
Tim posited three reasons for the significant higher rates investors can receive lending to the government vs. DeFi (via Staked):
- Constrained capital — there are not a lot of easy ways to get large amounts of capital to take advantage of the “carry trade” (the arbitrage opportunity between the two rates)
- Risks in underlying assets — of eth and BAT,
- Immaturity concerns — smart contract risks, getting money out, regulatory overhang…
It seems evident that all those risks will decrease over time.
#6 Expect The Unexpected
That statement from Robert Leshner resonated with me. The truth is, we’re in unchartered waters, and the only thing we know for sure is, what ever DeFi is going to be, it’s different from what anyone thinks it’s going to be. Just like everything else. So buckle your seat belts. We’re in for the ride of our lives.
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