Disclaimer: Spartan Capital holds MKR tokens. The following is an abridged and adapted transcript. In the full conversation, we also discuss the technical considerations & risk factors for the MCD transition, and also examine the history of E-Gold, a permissioned gold-backed digital currency that was shut down in 2009. For those interested, the full interview can be found on Apple Podcasts, Spotify or any podcasting app under “Blockcrunch”.
MakerDao, the project behind stablecoin Dai, has just gone through a seminal upgrade called Multi-collateral Dai (MCD) that marks the official inception of the project.
The ambitions for MakerDao are broad, its security proven robust in a challenging market environment, and its adoption is just beginning. Beneath the complexity and esoteric terms such as “CDPs” and “PETH”, Dai for the non-speculator is deceptively simply to grasp.
Dai is simply digital USD that can flow freely and globally. Just as you don’t need to understand monetary policy or quantitative easing to use USD on Venmo, you don’t have to use CDPs or post collateral to use Dai.
To mention but a few examples, Dai can be used to:
- Send stable-price, cross-border payments via user-friendly wallets such as Mosendo and Argent;
- Generate passive interest for holders via Compound and Instadapp;
- Trade trustlessly on spot and derivative markets via Uniswap or dYdX;
- Bet on prediction markets via Augur, and more
It’s been used to store value against inflation, pay salaries, and write investment checks. With Dai Savings Rate, anyone anywhere with an internet connection can have access to a savings account that pays them 2% interest, higher than interest offered by banks that have historically excluded billions.
These are not things that could happen — most of these are possible today.
The Maker Foundation also understands that “banking the unbanked” cannot be achieved on whiteboards in Silicon Valley co-working spaces. Without hyper-local expertise to overcome last-mile distribution problems, technology will not proliferate. Maker chooses to rely on local partners such as Oxfam, Airtm and ShuttleOne, and will likely be partnering up with more to grow their reach.
On the technical front underneath the hood, I’ve written about Dai price dynamics and DeFi interest rates, discussed how CDP collateralization works, but like many conversations around Maker, one can lose the forest for the trees.
To understand where this is all headed, I invited Rune Christensen, founder of Maker Foundation to talk about the launch Multi-collateral Dai, and why it is the most consequential upgrade for the wider decentralized finance space.
Why is Multi Collateral Dai Important for Maker?
Rune: Maker is one of the oldest projects in Ethereum and we have been working towards creating this ultimate stable coin.
Three years ago, we launched Single Collateral Dai. So that was essentially the first version of the system that allowed us to test it out in the real world and actually allow the Ethereum ecosystem to build on top of a stablecoin and allow the DeFi movement to emerge and proliferate.
But what we’re doing now with Multi Collateral Dai is realizing the full potential of the original vision of creating a really solid stable coin that can last in the future. The reason why having multiple collateral types is critical is because of scalability. Only by allowing collateral types beyond Ethereum (and potentially crypto) will it be possible for us to create a stablecoin that can scale to serve the entire global economy.
With MCD, Maker is now a complete package that essentially solves all the major issues that need to be solved, so that DeFi can just build on top of this and not be restrained in any way.
Besides crypto-native assets that are likely more volatile than ETH, are you thinking of adding assets from the traditional finance world as collateral?
Rune: Maker exists so that we can try to re-engineer the financial system. If we really want to have that kind of impact on society, then of course we will have to go beyond just the quite niche cryptoassets.
DeFi still only exists within the bubble of crypto. It’s still very much kind of self-serving this particular community, but in the future it could be doing things like providing small business loans to people in the developing world, instead of having them completely shut off the current financial system. We also want to provide a better and fairer type of credit services to small businesses so that they’re not discriminated against in favor of the large enterprises, which is also how the current financial system works.
It doesn’t necessarily mean you need to immediately start interacting directly with concepts in the “real world” like securities, commodities, tokenized businesses or fractional real estate. The more important thing is that we need to make sure Maker is actually be able to handle the risks.
So if you want to do this correctly and actually start interacting with real world assets, you have to consider things such as regulation, the risk of getting scammed and counterparty risk. It’s a huge challenge and it’s quite unprecedented, and a lot of people are very skeptical about whether it can be done at all. But this is kind of the secret sauce of MCD — by allowing for multiple types of collateral, you can spread out the risk across many different assets and across many different types of risks.
That way if one asset crashes significantly you won’t be overexposed, especially if the asset only represents 0.01% of the total collateral pool portfolio.
Does using permissioned assets (e.g. tokenized security) compromise decentralization?
The key is diversification of risk. You can even say “decentralization of centralization”.
For instance, look at the structure of something like the Bitcoin markets, or the Ethereum markets. If you look at the way the Bitcoin market is structurally set up today or if you look at it from a regulatory perspective, what actually becomes clear is that Bitcoin is in a way completely reliant on centralized infrastructure. The Bitcoin price is entirely based on a relatively small number of centralized exchanges, mostly out of China and the US.
Effectively all of the fiat-bitcoin or fiat-ether trading happens on these types of centralized trading platforms, and some of them are becoming more regulated. Many of them have close relationships to regulators in many different countries, and they all have their own KYC policies and what not.
So in many ways, Bitcoin derives its value partly from centralized infrastructure. It really isn’t much different from offering different types of real-world collateral that may be permissioned assets. The reason why this isn’t a big problem is because even though Bitcoin does benefit from centralized exchanges, there are many of them.
And so ultimately because Bitcoin has this diversification of its centralized infrastructure, in effect, it is decentralized and that’s the same thing that we have to achieve with Dai. So we have to make sure that even if Dai is dependent on things like tokenized securities that’s regulated by the SEC, or it’s dependent on tokenized commodity that’s based out of Singapore, the key principle is there’s never a critical amount of reliance on a single regulator, a single custodian or a single jurisdiction.
We need to be extremely spread out across the world across all continents, across the many different countries, the many different regulators around the world. Governance will constantly monitor regulatory developments and basically balances this risk correctly. What we will end up with is a situation where Dai doesn’t look much different from Bitcoin when it comes to reliance on centralized infrastructure.
Dai may even have advantages over Bitcoin on the reliance front. Today, maybe not everyone thinks it’s desirable that Bitcoin is mainly reliant on miners and exchanges in China and the US, but there’s no easy way to change that. That’s just how it has happened organically.
With collateral on Maker, governance can actually create guarantees such as capping US-tied permissioned collateral at 5%, or capping each continent’s exposure to 10% for any permissioned assets.
Not only will governance be able to aim for this type of diversification, because of the inherent transparency of blockchain, it will be possible for any user to audit this in real time.
Most permissioned assets have no adoption, but there are some synthetic products that replicate their exposure. Where do you think Maker will gravitate towards — actual permissioned assets, or decentralized synthetics?
In the short run it will absolutely be mainly ETH so it won’t even be that many other assets. It works really well as collateral for stablecoin Dai and grow to quite a bit beyond its current size relying almost exclusively on ETH. So in the short run, it’s actually more about just taking things step-by-step, and getting that familiarity with onboarding new assets.
Soon, we will start to vote on assets, but again it’s very important to take things slow. We can rely on ETH as the core driver of stability and underlying value for now. We’re not in a rush to onboard a lot of real assets today, but it will happen sooner rather than later.
In the short run, it’s more about setting the stage and getting prepared for how we go to scale in the future while still scaling with ETH. Setting the stage is important as it would be a major risk to regular Dai holders if one day we start hitting the limits of what ETH can handle and then suddenly having to take a lot of risks with onboarding a lot of new assets quickly.
There is a project called Kava building a MCD replica on Cosmos, betting on interchain transfers (readers can refer to my post on Cosmos to learn more). How important is interoperability on other chains for Maker and Dai?
I think that also has a very interesting avenue of new collateral. I don’t think it’s anywhere near as critically important as our current updates because when it comes to a solid decentralized collateral, I think ETH is king. The only thing that can come close to ETH in terms of its importance is of course Bitcoin.
So rather than focusing too much on many of the other blockchains. I think getting Bitcoin onto Ethereum is going to be a big step forward. Today, Wrapped BTC actually already exists, but the problem with WBTC is of course that it is custodial. So it’s just a multi-sig that basically holds Bitcoin then transport it to Ethereum.
This general issue here is that Bitcoin has limits to how much it can be programmed. It is essentially impossible to build more decentralized cross-chain solutions. So anytime that you use Bitcoin as collateral in the DeFi ecosystem, you will always be interacting with some sort of counterparty risk. The way that we have to try to solve that with Maker is rather than just for WBTC to be the sole source of Bitcoin on Ethereum, we want to have hundreds of different versions of wrapped Bitcoin.
There are different attempts of doing this — for instance there’s a project working on tBTC (Keep Network) which takes a slightly different model and actually also involves some collateralization. There’s actually many more projects as well that are doing this. So I think that’s going to be really exciting.
Why is Dai relevant when tech giants (Facebook) and nation states (China) are launching their own stablecoins?
First on nation states — the impact of centralized stablecoins will always be much less than a decentralized monetary system — so you can’t really compare them. The problem with a centralized stablecoin is that it inherently will always be denominated in your regional or national currency. Centralized money and politics are so heavily intertwined that you see things like Europe coming out and saying, “No way, we’re not going to use America’s corporate stablecoins”.
For China, they’re pushing on with their own centralized stablecoin to counter Libra, and Libra even tried to use the argument that the Chinese launching their stablecoin is a sign that Americans should be allowed to get on with theirs.
In general, there seems to be a new centralized stablecoin coming out every week. And the reason why there are so many is that if you’re a centralized stablecoin, you’re pretty much just offering a banking service. And with a banking service, your primary product is trust.
If customers pick your stablecoin, it’s because they trust you to keep their money safe, just like when you pick a bank to deposit your money into. There’s always going to be preferences between people — maybe they trust the Chinese government, but they don’t trust Facebook or the other way round. As long as the element of trust is there, there’s going to be so much fragmentation. Couple that with the political aspect — where you have these geopolitical fights over who gets to control which money in different areas. I just think we will definitely end up in a world where there’s going to be tons and tons of centralized stablecoins, and they’re going to be very heavily regulated and they’re going to be, to a certain extent, promoted by the authorities that control them.
There’s also going to be elements of like protectionism in place to prevent foreign authorities from encroaching on the sovereignty of a particular nation through their money. I’ve actually spoken to a lot of bankers from the top central banks around the world that are considering this very issue, and it’s almost looking like it will be a bit of an arms race. The opinion that I very often hear is that they actually all think that Dai is a superior model.
This is particularly true when you are a small country. You’ve already been dealing with centuries of getting pushed around by the big countries. So chances are it’s not going to be very attractive to again hand over your monetary sovereignty to one of these big countries during the digital currency arms race, and that’s why Dai is an appealing alternative to some of these central bankers because Dai is actual unbiased and carries no geopolitical connotations, because it’s a completely decentralized system and you have just as much say as everyone else.
There’s actually also another really interesting way that all of this fits together — Dai will probably be able to utilize many or most of these centralized stablecoins as collateral! I actually think there’s a good chance that in the future where every country has their own stablecoin, Dai would be very well positioned to be a bridge between them. So if you want to go from the Chinese stablecoin into Libra, there’s a good chance that the way you do that is by going into Dai. There are pairs into Dai that are going to be extremely liquid because people will use them as collateral and that will give market makers access to extremely cheap Inventory management.
If Dai is supposed to be neutral, why is it pegged to USD?
An SDR was certainly the original vision.
But then when it was time to actually launch single collateral Dai and actually bring the system into the real world, we started to really dive into the market research and realized how deeply ingrained the USD is currently into the international financial and monetary system.
It’s also the universal currency that regular people trust if they don’t want to hold their own currency (due to hyperinflation) or in some in some situations — such as in some areas in South America — it’s actually the only currency that people trust. So that’s why we decided that for the launch, it would be so much better to just peg it to the USD because that would be the easiest to onboard users onto.
Of course, all aspects of Maker is completely under the control of Maker governance, so it is not impossible that in the future, maybe as the global landscape changes and the role of the USD changes, or maybe even if Dai becomes extremely important, that it would actually be possible for Maker governance to change the peg. We can create something like a basket of currencies, or maybe even a currency that’s purely focused on independent purchasing power.
On top of that, it is also possible to still provide assets pegged to the US dollar, because Maker doesn’t have to be limited to just one type of peg. There can also be a Euro Dai and so on. We can have a separate new stable coin called US Dai and still offer everything I mentioned before. As a rule, it’s always important to try to meet all the needs of your users right now, and try to provide something that’s useful to everyone first.
How can Dai possibly compete with the distribution of something like Libra?
The advantage that DeFi has over established players is that DeFi is a neutral and unbiased playing field where anyone can build. Versus if you look at something like Facebook, or Tencent, or any of the tech giants — they have their established ecosystems and the lines are already drawn around who’s working together with who and who’s competing with who. Whereas for DeFi, we have this chance to just create a completely new clean slate, where everyone can collaborate and work together because of the permissionless nature. This creates the conditions for explosive innovation.
One of my favorite examples is certainly InstaDapp. First because it’s a really awesome product. What InstaDapp does is it combines the advantages of multiple DeFi protocols. So for instance, you can access Maker, Compound and Uniswap together on one interface. And it’s not only just a place where you have access to three different types of services, but it’s also a place where you can combine them together and create new ways to interact with them.
So for instance, you can generate Dai and you can immediately swap it into ETH in a very seamless process. It just makes it very easy to take a leverage bet on ETH, but another thing that’s so cool about it is that it’s built by two young men out of India that had no connections to Maker at all. They were never in touch with the Maker Foundation. They just looked at the documentation and they just built a product and it just became a success purely through the strength of the product and that’s really how I can see DeFi growing around the world. That type of organic, permissionless growth will be useful for the 1.7 billion unbanked as they start to leapfrog the current system.
There’s also Argent wallet — an example of a project building on Dai and DeFi. They are just focused on making it really easy and seamless to use DeFi by hiding the complexity behind the app, and that’s the direction I think a lot of apps will be heading.
There’s also the Burner Wallet — which has probably the fastest financial onboarding experience possible right now because all you need is just a browser. It’s also hooked up to a sidechain that allows for very fast and very secure transactions.
Some interesting experiments this enables include creating pop-up local economies that spread beyond crypto. We’ve seen this happen at events that weren’t even crypto related, but where the organizers thought this would be like a cool thing to use blockchain for.
There are so many more — and it’s impossible for us to keep count of the different projects out there so that every day you discover some new project that’s already been running and successful for months and we had no idea they even existed!
That’s exciting for sure. What are some resources that people can use to follow Maker?
Thanks to Kelvin Koh for suggestions & edits.