Why Ether Bank When We Have MakerDAO?

A recipe for a better crypto-collateralized stablecoin on Ethereum

We are often asked why we keep working on Ether Bank and Ether Dollar while MakerDAO and DAI are doing alright.

Our answer is simple:

Simple is better!

Everyone agrees that MakerDAO suffers from its complexity.

No doubt it is frustrating to figure out all those CDP, MKR, WETH, PETH, …

But is creating a smart contract on Ethereum to provide stable tokens backed by ETH so hard and complex?

No!

Stability is achieved by backing tokens by collateral and ensuring that there’s enough collateral in the smart contract to support the tokens’ value.

So, as long as ETH collateral in the smart contract is worth more than DAI tokens it has issued, the peg won’t break. On the other hand, if ETH falls in price so fast that smart contract cannot liquidate ETH collateral before they are worth less than the loans, the peg will definitely break.

The only thing the smart contract should put into consideration is raising the costs of receiving loans when demand for them exceeds the demand for holding the issued stable tokens.

Ether Bank as a Simple Solution

Take Ether Bank as an example. It has a short 300-line-code smart contract which receives ETH as collateral and provides Ether Dollars based on a collateralization ratio. It automatically increases the minimum collateral for the loans whenever there are higher demand increases too much. But, It does all that without any CDP, MKR, WETH, PETH, …

So, if stability can be achieved without any of those complexities, why does MakerDAO have thousands of lines of code and define so many kinds of tokens?

Simply put, the answer lies in MakerDAO’s business model. It is only natural for all founders to think about the revenue model and how they profit from their project. In blockchain space, founders should define utility tokens that can be sold in order to raise funds.

In fact, all such systems would be simpler and better without any of those extra tokens being squeezed into them. The catch is no utility token means no fundraising

Similarly, in a token sale, MakerDAO initially raised $15 M and gave out share tokens called MKR.

But, how is MKR practically utilized?

Well, they gave governance to MKR holders and defined a number of fees in the system to profit them.

Unnecessary Governance

Wait!

Can’t we just get rid of governance when there’s a smart contract that can do all the governing functions based on the rule of law and in the form of predefined codes? Isn’t that the whole point of decentralization and blockchain?

Yes, we can. And yes it is.

Do you know what MKR holders actually do for governing?

For instance, in a vote a few months ago, they decided on a 5x increase in the fees they receive from ETH holders who receive DAI as loans. They practically voted on 5 times more benefits for themselves and at ETH holders’ expense.

It is completely acceptable to increase the costs of receiving loans when demands for receiving loans exceeds demands for holding stable tokens. This is done to balance supply and demand for DAI.

But, in an ideal decentralized system, you could increase the costs either by asking for higher amounts of collateral to make the stable tokens more reliable, or ask for higher fees and distribute the resulted revenues among those who hold your stable tokens and support the system by their demand.

In MakerDAO however, such revenues do not belong to DAI holders who support the peg by their demand. They actually belong to MKR holders.

MakerDAO without MKR

Let’s imagine MakerDAO without MKR, WETH, PETH, CDP, and all that stuff.

• It has much simpler and fewer lines of codes in the smart contract.
• It does not have to ask for stability fees and liquidation penalties to feed MKR holders.
• Eliminating complexities and promising zero fees will lead into the expansion of stablecoins market which will, in turn, expand Ethereum ecosystem.
• All decentralized governance activities are done in an immutable smart contract and according to the rule of law.
• When demand rises, the costs are automatically increased by asking for higher amounts of collateral which practically add more reliability to the issued stable tokens.
• Providing price feed and other activities are done by oracles who are selected by the main users of the system who receive loans or hold stable tokens.

We might even call it Ether Bank! (wink wink)

Isn’t that closer to an ideal decentralized crypto-collateralized stablecoin system on smart contract friendly Ethereum network?

MakerDAO Is Great As It Is

With all that in mind, MakerDAO doesn’t work so bad. It has actually kept its peg in the most bearish winters ever and attracted so many users.

Adding another stablecoin will not only expand the possibilities in the system, but also create competition that will push MakerDAO to lower their costs and fees and provide better service to their customers. Otherwise, it is only natural for MKR holders to vote on higher fees and penalties to maximize their own profit instead of maximizing the profits for DAI and ETH holders.