DeFi — A Buzzword Or A Working Technology 【Vol.3】
Multi — Collateral DAI
Welcome back DeFi enthusiasts!
Something big is happening in DeFi next month. The date is the 18th of November, the project is the #1 DeFi app — MakerDAO. Some even say MakerDAO is the Bitcoin in DeFi market where its dominance reached 51,65%. The long-awaited update announced for the 18th of Nov is called “Multi — Collateral DAI”. It is a major goal pursued by Maker’s team for several years and it seems like this time they are about to achieve it.
But first, let me remind you why DeFi.
CoinGecko came out with its Quarterly Report for Q3 2019. Let’s have a look. https://assets.coingecko.com/reports/2019-Q3-Report/CoinGecko-2019-Q3-Report.pdf
As they stated in the report “The DeFi movement is all about creating a money market that is more efficient”.
And DeFi sector is really growing by over 3x — from ~900k ETH to ~2.9m ETH (>$500M!) in the span of one year. The main use cases are lending, derivatives, DEXes and payment solutions.
Maker is the #1 DeFi app (data by DeFiPulse) with over 1.5M ETH (~$267M) locked in. MakerDAO is the most popular and pioneer DeFi lending platform which led to the creation of other lending and borrowing platforms such as Compound and dYdX.
MakerDAO definitely performs well and it will probably continue or will even go higher after the 18th of Nov when Multi — Collateral DAI (MCD) is going to be introduced.
What is Multi — Collateral DAI?
Current users of the platform can borrow DAI after locking ETH as the only available collateral at the moment but MCD will change that. Multi — Collateral DAI is an important update that will give you the opportunity to use other assets as collateral.
As Maker is a DAO, each decision should be taken after community voting. So a poll was conducted where MakerDAO token holders cast their vote for a list of seven tokens assessed by the MakerDAO Foundation’s Risk Team.
Why do we need Multi — Collateral DAI?
For two main reasons:
First, MakerDAO needs to diversify its collateral portfolio in order to seek protection from rapid price crashes and instabilities. If Dai continues to be backed by only one collateral type, that makes it highly sensitive to the collateral’s price fluctuations. Let’s remember that ETH’s all-time high was $1,432.88 USD and now it is below 200$. If a collateral asset crashes in value, CDPs with that collateral start getting auto-liquidated. But having a diversified portfolio will help Dai mitigate the negative effects of such crashes.
Second, by adding more types of collateral, MakerDAO attracts more people interested in other assets. Some users want to take out a loan backed by ETH, other by BAT, in future probably by BTC or gold. The more CDPs are opened, the more DAI is issued, which increases the token supply and the project scalability.
Each new collateral should have its own specific risk parameters:
- stability fee — interest rate
- penalty ratio — punishment fee for triggering an auto-liquidation process
- liquidation ratio — a critical point below which the system will trigger auto-liquidation (current liquidation ratio is 150%)
- debt ceiling — how many DAI can be issued for one CDP of the particular collateral
What is Dai Savings Rate (DSR)?
You now have a good reason to become a DAI Hodler.
MakerDAO is adding one more option to its smart contract during the big update on the 18th of November — the DAI Savings Rate. Maker will launch a simple dApp which will issue a Dai interest rate for simply holding Dai. Anyone can lock and unlock a certain amount of Dai into the DSR contract at any time. Let’s say the DSR rate is 3%. If you lock 100 Dai into a DSR contract for one year, you will automatically receive 3 more DAI at the end of the year when you unlock them.
Where do these additional Dai tokens come from?
They are funded from the Stability Fee paid by CDPs (the interest you pay for your Dai loan). In other words, the DSR is a value transfer from CDP owners to Dai holders.
Why launching a DSR?
The reason behind launching a DSR is simple — to stimulate more demand for Dai and to maintain Dai’s soft-peg to the US Dollar.
When the market price of Dai falls below 1$, the Dai Savings Rate will rise to boost the demand and increase the market price of Dai back to 1$.
When the market price of Dai jumps above 1$, the Dai Savings Rate will decrease to shrink the demand and reduce the market price of Dai down to 1$.
Conclusion
DeFi continues evolving and updates such as MCD and DSR give more reasons for new users to join the financial disruption. All these improvements follow one major idea — adoption. We start to see signs of adoption all around. As Coinsource Company soon announced, it will add Dai to its ATMs across the USA (or BTMs as it is more accurate to say — Bitcoin Teller Machines).
Of course, there is still a long list of challenges in front of MakerDAO. One of them, for instance, is including non-native assets to its collateral portfolio i.e. BTC. How is it going to happen — through some kind of atomic swap and 3rd layer solution?
Another challenge is that in order to take a loan from the DAI platform, you first need to have the collateral to back the DAI issued by the CDP. What if you don’t have the assets to back the loan just like the traditional unsecured loans?
As seen in the CoinGecko Report mentioned above, lending/borrowing is the main branch of DeFi at the moment, so, in the near future, I expect an outburst of further innovations in this field. See you next time!
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