The MakerDAO project is ‘…the oldest and most ambitious project on the ethereum network…’, IMO it is also one of the most interesting. At present the project does three things; it is a decentralised cryptoasset backed lending platform; it provides a ‘stable coin’ (called DAI); and it acts as a decentralised central bank for DAI, let me break this down.
Cryptoasset Backed Lending
The concept product here is very simple. Clients can deposit their cryptoassets on the MakerDAO platform and receive a loan against those assets, this is a simple mortgage or margin loan arrangement. But there are some things about it that are interesting.
Firstly, there is no loan application/approval process, not even a requirement for clients to register their name, the loan is secured against the assets pledged as security and those same assets are locked into a self executing contract which provides for release of the assets only after the loan is repaid. Secondly, each loan and transaction is visible on the platform so it is possible to the value of assets and loans are held on the platform at any one time. Thirdly, the currency of the loan itself is a cryptocurrency called DAI. DAI has a soft peg to the USD at the value of One DAI = One USD.
So for example, a client deposits $150,000 worth of Ethereum on the platform and receives a loan of $100,000 worth of DAI. The DAI can be sold on a one for one basis to USD and used then for any purpose. The loan can be repaid at any time by the client at which time a small ‘stability’ fee is paid (currently 0.5%).
Stable Coin Called DAI
The native cryptocurrency of the MakerDAO system is call DAI and it has soft peg to the USD. The ‘peg’ is kept in place simply by supply and demand economics which the platform facilitates and the decentralised ‘central bank’ administers.
Decentralised Central Bank
This aspect of the project for me is the most interesting.
The ‘Board of Governors’, of the DAI cryptocurrency are holders of the MakerDAO crypto governance token, anyone can buy this token and participate in decisions regarding the operation of the central bank. The decisions they make include; which cryptoassets can be lent against and the lending ratio; the level of ‘stability fee’; and ‘liquidation penalty’ fee.
Importantly, the MakerDAO governance responsibilities do not include the supply level of DAI, there is no monetary policy for DAI per sei, the supply is determined by the demand for DAI, this demand is driven by the desire to buy DAI to replay loans or to use DAI for the purchase of products/services. This part of the project is the most difficult to understand. The best user friendly explanation I have found is at the 7 min mark at this video, even then it took me a few listenings and readings to fully understand. A more detailed explanation can be found here.
The MakerDAO project launched just over a year ago and so far can only be considered a success. Something like 2% of Ethereum supply is now pledged on the MakerDAO platform, that in itself is huge. There is a dashboard here which provides a good summary of statistics.
One significant challenge I have is that the DAI is only stable in so far as it is pegged to the USD, which is obviously controlled by the US Federal Reserve. It is inaccurate to claim, that some have, that MakerDAO is a new form of decentralised central bank when the system itself is reliant on the biggest central bank in the world.