In our very first Token Tuesday report, we broke down MakerDAO, a permissionless lending system responsible for the creation of DAI, the world’s first decentralized stablecoin. Flash forward three months later and we’ve decided to revisit this token economy in lieu of the upcoming launch of Multi-Collateral Dai (MCD) on November 18th.
For those unfamiliar with how Maker works today, users post collateral in the form of ether to mint new Dai through Collateralized Debt Positions (CDPs). With the launch of Multi-Collateral Dai, users will be able to post new collateral outside of ether to mint Dai through Vaults (the new terminology used to describe CDPs).
Dai Potential in MCD
Just this past week, Dai hit its debt ceiling of 100M, a major feat when it comes to proving real demand for the currency thanks largely to the proliferation of DeFi. As it stands today, Dai’s current supply of $100M is drastically smaller than other stablecoins on the market. In particular, stablecoins like Tether (USDT) boasts a market cap of $4.1B with other competitors like Coinbase’s US Dollar Coin (USDC) at $450M.
With this in mind, it’s important to recognize that there is a high potential for Dai to experience exponential market growth in the coming years. Multi-Collateral Dai will start out by allowing other Ethereum-based assets (think ERC20 tokens like BAT) to be used as collateral. As time goes on, the core team has been vocal that they fully intend to introduce real-world assets such as real-estate, treasury bonds, and banknotes through something like the Tokenized Asset Portfolio. As stated in a recent article, Maker (and Dai) have the potential to become:
“(a) a better form of money, (b) a decentralized credit facility for secured lending, (c) a more efficient central bank (d) a decentralized insurance company, and (e) an infrastructure layer to create any kind of derivative in a trustless environment”
Rounding this point out, we expect that MCD will be the perfect catalyst for Maker to expand beyond a niche crypto audience to a wider range of real-world assets that aggregate trillions in collective value.
Why Does it Matter?
In short, the larger Dai’s outstanding supply becomes, the more value MKR holders capture in the form of governance over the system and scarcity through token burns. In order to incentivize keepers (those responsible for ensuring the system functions smoothly), Maker leverages a Stability Fee, better known as an interest rate that accrues on a Maker loan over time. This stability fee must be paid back when a user closes their loan, in which debt repayments are used to purchase and burn MKR.
With the introduction of MCD, we expect Dai supply to grow at an exponential rate over the course of the next few years with the introduction of new assets and a more flexible supply cap. As such, the amount of accrued Stability Fees will also grow, thus leading to more MKR being burned (or removed from the circulating supply) as the system scales.
Furthermore, MKR tokens are used to vote on how the overarching system functions. Seeing as token weight dictates how influential any one party’s vote is, we can assume that as the system grows, more users are likely to become interested in influencing the system by purchasing MKR to participate in governance decisions.
To date, just under 5,000 MKR (or roughly $3M) has been burned through stability fees. Based on the total amount of outstanding loans, we can expect a minimum of $5M (or roughly 7,807 MKR at today’s prices) to be burned in the future. Based on MKR’s supply of 1M tokens, this means that roughly 1% of the total supply will be burned at some point in the future based on existing loans. Taking this a step further, let’s take a look at how MKR burning is likely to increase as the outstanding supply of DAI grows with the introduction of MCD.
As it currently stands today, the Stability Fee is set at 5%. As the system continues to scale, we can assume that the Stability Fee will *likely* average out at around 2% in the medium-long term. Furthermore, it’s been stated that Stability Fees will be used to fund the Dai Savings Rate along with compensating oracle providers. As such, we decided to make a conservative estimate that roughly 25% of future SFs would be used to burn MKR tokens.
Based on these assumptions, we can theorize that roughly $225M USD worth of tokens could accrue to be burned over the course of the next 5 years. Seeing as the price of MKR is certain to fluctuate, it’s difficult to assume exactly how many tokens this net burn amount will correlate to.
We’d like to note that this is a highly simplistic model with conservative numbers and is not meant to be an accurate forecast on Dai’s growth in the future. Instead, we hope that the table above can give our readers a sense of how MKR will be burned in the future as the total supply of Dai continues to increase.
Drawback & Concerns
While we’re quite excited about the future potential of MCD, it remains quite clear that the community is still divided over whether or not introducing trusted assets defies the project’s decentralized nature. As such, there remains a chance that Maker’s governance schema may stagnate future growth in the event that the broader community decides to not allow for real-world assets to be included as future collateral.
As it was stated in our original post on Maker, governance participation remains particularly low. Out of the total amount of MKR, we’ve generally seen less than 10% of the supply participate in governance decisions with an average of less than 100 individual voters. While this does suggest a high potential for growth, it’s evident that more measures will need to be taken to encourage voting (i.e. through delegation, enhanced UX or extended marketing) in the future.
Finally, we noted above that MCD will cause SF’s to be used to fund a wider number of operations in the system. For MKR holders, this is definitely somewhat discouraging as the token value would be likely to be influenced more heavily by the entirety of SFs used to burn MKR as it’s currently designed. With this being said, there’s no denying that using SFs to fund the Dai Savings Rate (DSR) and oracles is a logical and intuitive decision.
In short, MakerDAO has been nothing short of a silver lining during the most recent crypto winter. Token value aside, the project has displayed a strong ability to adapt to change, signaling that the core team is more than capable of handling a smooth deployment of MCD. In an ecosystem where DeFi is quickly taking over as Ethereum’s largest selling point, it’s likely that Dai will continue to see integrations from reputable projects in the space.
Moving forward, we encourage users to learn more about Dai through the following Coinbase Earn campaign. Seeing as we believe that Dai has a strong potential to be the leading stablecoin in the next 3-4 years, we hope you’re able to capture some of the upsides by acting as a keeper in the short term. To stay up to date with the most recent announcements, be sure to subscribe to the official Maker blog or join their chat channel. We look forward to a historic day for Maker and the blockchain ecosystem at large next Monday!