MakerDAO — A glimpse into the future of companies? – DreamX
Tether marks one of the early attempts to create a stable cryptocurrency, and for the first time, people could actually keep dollars in their own blockchain wallets or private keys without having to resort to exchanges’ IOUs, such as the dollars used to be traded on the infamous and long-deceased BTC-e exchange, a universally accepted USD easily transferable between exchanges, the difference between the pre-Tether and post-Tether world is starkly palpable. However, like most early solutions to difficult problems, Tether isn’t perfect, Tether Limited, the company behind Tether responsible for the issuance and redemption of Tether claims every Tether issued into circulation is backed by a dollar, it is a questionable claim since the Tether is currently not audited by any external entity and the users have no choice but to take them at their words.
But Tether works great so far, it is currently the most popular stable coin and there has never been a significant incident regarding its solvency, however it is a growing concern that it is a ticking bomb waiting to explode and there is a clear demand for a better stable coin that requires less trust and provides more transparency, in response to this market demand, we have seen the emergence of next-gen stable coins such as USDC, PAX, GUSD or DAI, the former three are semi-centralized but regulated and well-audited by independent auditors, they are less liquid than USDT but are considered to be more trust-worthy, USDC and GUSD are backed by existing respectable centralized exchanges, Coinbase and Gemini respectively, but credible as they are, a significant degree of trust is still required when using a stable coin like USDC, GUSD or PAX since they all have the ability to freeze user accounts, a feature meant to be used by law enforcement required by regulators.
On the other side of the boxing ring is DAI, it brings to the fight a totally different approach to stable coins, it throws away the entire existing trust model of a centralized entity responsible for the issuance and redemption of stable coins and re-invent everything from scratch, the value of DAI isn’t backed by a centralized entity but by everybody involved in the system, in order to issue new DAIs, people must lock in an amount of ETH as collateral, this ETH gives DAI its value, but how does it stay stable as ETH price fluctuates? How is it guaranteed that the price of a DAI will always approximately equal to a dollar? This is accomplished by having a few mechanisms in place to control its supply and demand in a decentralized manner, the primary one being the Dai Savings Rate (DSR), DAI can be deposited into a special smart contract which acts as a saving account, once deposited, this contract occasionally pays out an amount of interest according to a pre-determined rate, this rate is variable, it increases when demand is low and decreases when demand is high to correct the token’s price by adjusting its demand, another mechanism is the stability fee, stability fee is the fee that must be paid when creating new DAIs, this fee is also variable and increases when demand is high and decreases when it is low, the increasing and decreasing of the stability fee either incentivizes or discourages the creation of new DAIs, in contrast to the DSR, which controls DAI price by adjusting its demand, the stability fee does so by adjusting its supply, another natural stablizing mechanism is arbitrage, arbitragers can take advantage of discrepancies in DAI price and trade it across exchanges, in doing so they unwittingly even the price out.
Of course no decentralized project is complete without decentralized governance, unlike USDC or GUSD, DAI is not governed by an LLC or an Inc, it is governed by a DAO, which is to say, decentrally, issues and proposals are created, discussed and voted upon in the open, the discussions take place mainly on their public forum at https://forum.makerdao.com/ and the voting take place on their voting dashboard at https://vote.makerdao.com/, it is important to note that this dashboard is only an interface to simplify the interaction with the Ethereum blockchain, where the votes are actually casted and recorded, the forum is open for everybody to participate and contribute their thoughts and ideas, the voting platform is, however, limited to be used only by stakeholders — people who own MKR, a multi-purpose token that derives its value from both its utility as the only token accepted as payment for the stability fee incurred in the creation of DAIs and the voting right it grants its owners, by this design, MKR price is tied directly to the success of Dai, the more widely adopted Dai becomes, the more demand there is for MKR both as a utility token and a governance token. The issues that are frequently discussed and voted upon ranging from adjustments to the DSR or the stability fee, new collateral types all the way to funding and hiring decisions, protocol changes and system upgrades.
Dai is surely a project rich in innovation and out-of-the-box ideas, but what does the future hold? Will it stand the trial of time? Let’s find out together!
Published at Sat, 15 Feb 2020 07:16:00 +0000
