This week, Dragonfly Capital and Paradigm purchased $27.5 million worth of Maker tokens as an investment and entry into the governance of Dai. Maker tokens are mostly used for collecting fees through interest payments and Dai liquidation penalties, and being able to vote for changes in the ecosystem.
Maker has already had issues with a single voter being able to determine the outcome of things like interest rates and the release of improvements, but how much power exactly will this $27.5 million give the new whales?
To get a good understanding of how this new investment can effect governance, we need to understand how Maker’s votes are tallied and how much of the total supply $27.5 million buys.
The total supply of MKR is 1 million and each token is worth around $480, giving the coin a total market cap of $480 million. Owning $27.5 million worth in MKR would be owning 5.7% of the total supply. This was apparently a joint purchase, therefor it is unclear whether the purchase will be split between the investment firms or if they will be on the same page when it comes to voting.
5.7% of the supply is not going to determine the vote in a vacuum, but what really matters is the voter turnout. Unfortunately, I don’t have historical data on Maker governance, but on their voting dashboard, I can see the past two votes. The previous vote to adjust debt ceilings, Dai savings rate and the interest rate had 119,000 MKR in support with a top voter contributing 55% of the voting power.
As you can see, $31 million is pretty close to what Dragonfly Capital and Paradigm purchased, and they would easily be able to take a major spot in governance if others didn’t show up.
Still, votes aren’t executed by the majority in Maker - the number of MKR in support of the new vote has to surpass the number of MKR in the previous vote in order to be executed. Where voting power matters more is when there is a spectrum from either no change to a (x) amount of change.
In the end, these new investors will be whales capable of subjecting their will upon Dai holders, but it’s not as much their fault as it is voter participation. According to Etherscan, there are 16,593 MKR addresses and only 8 hold over 1% of the total supply, 2 of which are Maker’s own contracts which I don’t believe vote. The remaining 6 whales hold about 23% of the total supply.
Decrypt is a great crypto news outlet that I read on a daily basis, but something that they posted today triggered me a bit. “A truly decentralized exchange is about to go live,” read the title of their piece on an exchange called DeversiFi.
Their basis in calling this a “truly decentralized” exchange is that governance is handled by a decentralized autonomous organization, (DAO) that controls power through a system of checks and balances. This feature by itself doesn’t make the exchange decentralized as there can be other centralized factors. On top of that, Maker already has a similar system in place for Dai, where people holding Maker can essentially govern the Dai token.
Unfortunately, in order to prove my point, I will have to tear down just how non-decentralized DeversiFi is, even though I like their product. First off, 1/3 of their pairs trade against USDT, a coin that is (supposed to be) backed 1:1 with dollars. Trading with a coin that only has value because an organization is holding funds to back it is inherently centralized. Not to mention, USDT is one of the riskier backed stablecoins.
Second, they advertise “unmatched liquidity” thanks to “hybrid architecture” built off on the backend of a centralized exchange. We confirmed with DeversiFi that they do infact pull liquidity from decentralized exchanges.
“We pull liquidity from centralised exchanges, meaning that essentially it is DeversiFi that takes any counterparty risk instead of the trader,” said Ross Middleton, CFO at DeversiFi on their Telegram.
He continued to say that their model will be able to handle thousands of trades per seconds. Speed is a reason why many decentralized exchanges opt to being hybrid. “Fully” decentralized exchanges have problems with liquidity and speed.
Either way, it is not a completely decentralized exchange based solely off of the fact that they trade USDT pairs. But it’s not just them, there are no truly decentralized protocols in DeFi currently. In order to be completely decentralized, according to Kyle Kistner, an exchange has to have decentralized price feeds, margin calls, provide decentralized liquidity, determine interest rates, administer platform developments and updates all in a decentralized manner.
Kistner is one of the only people in the DeFi space to put out a criteria for decentralization, he also is a founder of the bZx protocol. We reached out to him to confirm our opinions and he believes that DeversiFi is not fully decentralized. That being said, he also says it doesn’t fit into his rating metrics because it is an exchange, not a protocol.
“STARKs have an element of centralization to them, as do matching engines. I wouldn’t say that it (DeversiFi) is 100% decentralized,” Kistner told me on Telegram.
All of this is not to say that being fully decentralized is the only way to go, but to differentiate between a marketing tactic and reality. People in crypto love decentralizing all of the things, but we are not at a place where that is a reality.
This article was updated to include quotes from Kyle Kistner and DeversiFi representatives
If you have delved into crypto Twitter, you’ve surely seen a few influencers with a bio that says “Bitcoin maximalist,” or “Ethereum maximalist.” This means that the only crypto they see working out in the future is either Bitcoin or Ethereum. When I see this, it makes me question whether they know what a smart contract is or not, because Bitcoin and Ethereum clearly have different purposes.
The only argument you can make for maximalism
Maximalism is subjective, based off of a person’s values. For instance, if the only thing you cared about was price increasing as fast as possible, Bitcoin might be your best bet. I could definitely see how a pure investor would be a Bitcoin maximalist as it has proven to perform better than any other crypto, including Ethereum, by a long run.
If you are thinking about what tech will have the biggest impact on the world, Ethereum makes more sense. Transactions are potentially faster, you can build an entire financial infrastructure inside of it, and since governance is liberal there is more room to develop.
Even though I can understand these perspectives, “maximalists” must understand that there is more than one role to fill in this industry. In consumer tech, Apple maximalists think the user experience matters most, Android maximalists think innovation and accessibility matters most. AMD maximalists value productivity and Intel maximalists value gaming. You will find super-fans of each, even though each product fulfills different roles.
Blockchain isn’t just about investing in a coin or building with a coin, it’s about both. This, again, is why I feel like maximalists are actively choosing not to look at the bigger picture.
Why you shouldn’t be a Bitcoin maximalist
Bitcoin doesn’t have smart contracts. This is an immeasurable difference because it essentially adds a programming language to Ethereum. Smart contracts allow people to build lending protocols, decentralized exchanges, stablecoins, social media sites, and more all within Ethereum.
There is a difference between gold and Amazon. In this situation, Bitcoin is gold and Ethereum is Amazon. Bitcoin’s scarcity is a huge factor in its price action, where as Ethereum depends on value settled within its ecosystem.
I like to compare Ethereum to Amazon because they both experienced what some people refer to as a bubble and others call a growth cycle. Amazon survived the dot com bubble, but was stagnant for many years after. Jeff Bezos was quoted in an interview saying that everyone was talking about their stock performance, but he was never worried because he knew his model was profitable and provided a unique service.
Ethereum’s bubble happened in 2017 during the ICO craze which has tons of similarities to the dot com craze. Just like how everyone thought they could solve the world’s problems with the web during the dot com bubble, everyone though they could solve the worlds problems with blockchain applications in 2017. Many credit the ICO craze to Ethereum’s invention of smart contracts, because it allowed people to create blockchain projects that do things other than transfer money.
Like Amazon, Ethereum is proving its use case through steady growth. The most obvious area where Ethereum has been useful is by constructing the decentralized finance (DeFi) ecosystem. This allows people with Ethereum based tokens to lend, borrow, and exchange with one another. While prices of cryptos have fluctuated to extremes since 2017, value locked in DeFi has shown consistent growth. You would not be able to build this type of ecosystem on Bitcoin, because it does not have smart contracts.
Why you shouldn’t be an Ethereum maximalist
Ethereum’s brand is nowhere near the level of Bitcoin’s. This is super important because people don’t actually understand the technology behind either assets yet, but they are being recommended to invest in crypto.
Bitcoin is the asset that people can get their hands on easily. They don’t need to fully understand it, but by sending Bitcoin from one wallet to another without a bank, a significant fee or processing time, they are able to understand why people think it’s cool.
People didn’t understand the web in the late 90s, and they still don’t today, but they use it so much that it doesn’t matter to them. Bitcoin is the most popular thing in crypto because people have found practical uses for it, mostly through investing. The two major draws to Bitcoin right now is as a store of value and as a relief from the banking system.
Though Bitcoin’s price is volatile, it continues to prove that it will not go away and die. People thought that Bitcoin was over after the 2018 crash, but it came back around in 2019 and almost reached the previous $20k high. Bitcoin needs to keep proving people wrong in this manner in order to maintain its relevancy as a store of value.
Blockchain is the internet of finance, and Bitcoin is the crypto where people can see tangible results. People want to have a bank-free place to keep money and Bitcoin gives that to them, plus decent returns. The funny thing is, they can store their value offline in any crypto, but Bitcoin’s brand is so prevalent that newcomers will choose it over alternatives a majority of the time.
I am in my early 20s, bad at saving, have an average credit score and am about to begin paying off my debt from college. For a while, I didn’t really know what was in store for the future, so I didn’t care much about planning on it. Suddenly, I heard about DeFi and became a bit more interested in my personal finance.
Not to say that I’m a crypto maximalist now, or that I’m even confident of Bitcoin lasting long into the future, but the tech behind it inspired me to learn more about money. There are two main things that appealed to me and likely appeal to others in my situation: Being your own bank, and earning real interest.
Take control of your personal finance
Like many others, I’m not a big fan of banks. I don’t care about the corruption, or whatever they’re doing with money behind the scenes. I simply don’t like them because they’re slow, hard to access and I don’t feel like even a small monthly fee is worth paying for their services.
My credit union doesn’t have many locations, so it’s always hard to deposit cash. When I return something at Best Buy, it doesn’t process on the weekend and takes 24 hours at the minimum. I get paid on the first and fifteenth, and it won’t process on Sundays. My savings account is essentially useless, with interest ranging from 0.05% to 0.15% APR.
Basically, ever since I opened a checking account at 16, I’ve experienced inefficiencies and a lack of incentives that have never changed. This effected my optimism on managing money effectively.
If I am receiving no returns from storing money, I might as well take complete ownership of it. Blockchain tech allows me to do just that. It’s pretty simple for me to get paid, convert cash to Dai, then lock a portion of it in a lending protocol to hedge against any small amount of volatility. Dai ranges +-5% of the USD, so through dollar cost averaging and earning interest through protocols, I now have a real incentive to save money.
I may not have ownership of the Dai while it is earning interest, but I have the ability to choose where it goes or to leave it in cold storage.
Earn actual interest in DeFi
Because of Maker splitting into Sai and Dai, this isn’t a great time to brag about how high potential interest is, but I can still earn about 80x more than my savings account. The APR for MakerDAO’s Dai Savings Rate is 4% right now, and by taking on more risk through other platforms, you can get up to 7.5%. Also, if you are more comfortable using a stablecoin backed by fiat dollars, loaning USDC can return around 3.6% of your cash.
Some money management protocols lock your coins into a contract that expires after a certain amount of time, and others allow you to pull out coins whenever you’d like. Similarly, some protocols have higher risk than others. For instance, protocols that let users take money out as they please are pooled, and pay higher interest depending on how full that pool is. If the protocol is paying 7.5% and is loaning 75 million out of 80 million, then 25 people with 100k decide to pull out, your money will be stuck until more people put their money in. At the same time, this will likely increase the interest paid.
So as long as you know what you’re getting into, these managing money through decentralized applications can be relatively safe. You may need to monitor lending pool usages and be wary of the amount you put into one protocol. For people like me who are saving a couple thousand dollars, I don’t worry about anything besides hackers.
DeFi isn’t perfect for everyone yet
Decentralized Finance is supremely illiquid, so people with real money to manage don’t like it. What it is able to do is trigger the interest of people like me who just haven’t been impressed by the traditional financial system. I’ve introduced DeFi lending protocols to a friend who cares about personal finance and is almost completely uninterested in crypto, and he couldn’t help but gravitate towards it.
I’m sure there are ways to earn similar interest rates through the traditional means but there’s a very small learning curve to get into crypto. You literally start a Coinbase account, send Dai to Maker and start earning 4% APR.
The theme of Coinbase’s Winter 2019 Hackathon was “Bring DeFi to the World” which is kind of crazy considering they are one of the most centralized entities in crypto. Coinbase is a centralized exchange that abides by tight regulation and operates a centrally backed stablecoin, USDC, with Circle.
The hacking continues on day two of our Winter 2019 hackathon. With dozens of projects focused on bringing DeFi to the world, we're inspired by the energy and excitement from our teams around the globe. pic.twitter.com/FRG7xMlK7C
DeFi, or decentralized finance, aims to compete with Coinbase in all aspects other than onboarding. Ironically, Coinbase likely sells many Ether tokens that are part of the relatively large locked value of the DeFi ecosystem.
The most obvious sector where Coinbase and DeFi compete is in personal finance. They both allow users to earn interest on tokens, and DeFi gives much higher APR. In 2019, Coinbase started allowing USDC holders to earn interest on any tokens lying in their portfolio with an APR of 1.25%.
Dharma, an app that requires users to sign up with their Coinbase account, offers 3.6% APR on USDC with little difficulty. They are able to offer higher interest by using Compound, a decentralized lending pool. All it takes to earn more interest in this situation is to take the USDC you have on Coinbase and send it to your Dharma address.
Another way that Coinbase competes/cooperates with DeFi is that they, along with Circle, created a stablecoin. At the same time, they sell the Dai stablecoin on their platform. Dai uses an algorithm and incentives to keep the token pegged to the dollar while USDC is backed 1:1 by USD. USDC cremes Dai in total market cap, but Dai has been gaining notoriety in recent months. On top of that, DeFi lending pools often offer more interest for Dai holdings than USDC.
And finally, they compete because Coinbase is a centralized way to exchange tokens, where as DeFi offers a way to do that straight from one wallet to the other. Exchanges like Uniswap or even aggregated exchanges like DEX.AG act as a forum for users to match orders with each other. Coinbase and other centralized exchanges always win in terms of slippage, but someone who values privacy and decentralization will likely opt for a decentralized exchange.
Is Coinbase promoting DeFi for the culture?
“DeFi, or decentralized finance, is an essential part of an open financial system. DeFi tools are censorship-resistant, unbiased, programmable, and available to anyone with a smartphone. For this hackathon, we’re focusing on bringing DeFi to the world. (Costumes not required.)” - Coinbase
This quote from Coinbase is advertising the opposite of what Coinbase is. Maybe they have accepted the role they play in the space, but as enthusiasts of decentralization, they appreciate breaking boundaries in finance.
One thing that is forsure, is Coinbase has been keen on decentralized projects. ChainLink is a decentralized oracle service, 0x is a decentralized liquidity tool, Dai is a decentralized stablecoin, and ofcourse, Ethereum is the platform to build dApps. Also, the aforementioned projects are on the bottom half of the ranks on Coinbase in terms of market cap, which could imply that Coinbase is sort of sticking their neck out for the ideas.
My theory is that like many others, Coinbase finds DeFi to be one of the more interesting and tangible things coming out of Blockchain tech. I am a bit biased, but listing 0x and Dai doesn’t seem like a decision that was made to rake tons of money and new users in. It seems more like a long-term bet.