Right now, Multi-Collateral Dai is like an iPhone without an App Store

The token that holds DeFi together, Dai, just went through a highly anticipated improvement. Last week it was only able to be created by giving Maker Ethereum and now the system is capable of collateralizing any ERC-20 token. Even though it’s exciting, in its current adolescent stage, it’s hard to be truly excited.

Maker is right though, Ethereum limits interest in Dai

There are a considerable amount of people who hold all Bitcoin and no Eth. That same amount of people are not able to, and are not planned to be able to collateralized their assets for Dai in the way Ethereum holders can.

If Maker wants to maintain the most adopted decentralized stablecoin, they will need ways to increase supply to match ideal demand. Before Multi-Collateral Dai, the supply was limited by the amount of Eth holders who were willing to collateralize their positions.

Now, they added compatibility for ERC-20 tokens, and are starting things off with Basic Attention Token. Still, BAT will only be able to make up about 3% of Dai’s total collateral. And this is where things get less exciting.

In reality, this MCD launch is a baby step. I won’t criticize taking things slowly, because messing up the stability of Dai would dissuade people from using it, but 3% of collateral being BAT is really just not that cool.

Like an iPhone without an App Store

Maker is giving us a revolutionary product with Multi-Collateral Dai, but it still has yet to be realized.

First of all, it lives in the Ethereum network which has its own issues. Until Proof of Stake is a thing, payments are slow. Paying with Dai is like streaming video over a 2g network, just not worth it. It’s not Maker’s fault, it’s just that the technology isn’t there yet.

Like how iPhone users had to jailbreak their device to download apps before the app store existed, Multi-Collateral Dai still is forcing potential lenders to other avenues. The extremely limited amount of assets able to be collateralized still push Bitcoin holders take out centralized loans.

Right now, sites like Celcius allow users to exchange enter a CDP with Bitcoin and receive USDC. This doesn’t make USDC the same as Dai, because it is not being created by the CDP, just lent. Yet, it still will result in people avoiding Dai because they might not be comfortable holding an Eth position.

If Ethereum’s price moves the wrong way, lenders have a chance of being liquidated, and the Bitcoin / Ethereum markets have been quite different since the 2017 bull run.

Multi-Collateral Dai could include centralized assets in the future

It is possible for a trusted custodian to tokenize real world assets like gold. It is also possible for Maker to accept those tokens as collateral. In an interview with DeFi Nation, (and possible elsewhere) Rune Christensen talked about how accepting real world assets could help Dai scale.

DeFi purists likely won’t like the idea of trusted custodians playing a role in their decentralized stablecoin, but the more types of collateral Dai can accept, the more it can expand.

Along with that, Christensen noted that Maker loves Ethereum and it can take DeFi a long way, but it didn’t seem like he felt the need to be tied to it forever. Maker is having all Sai holders manually transition to Dai, so they might not be afraid of asking all holders to manually transition to a non-Ethereum network if the opportunity arose.

Compromising to expand (and be profitable)

As long as Maker stays on a secure, decentralized network which people lock value in to create a non-custodial stablecoin, it will still be beating the competition in terms of decentralization.

Some users will definitely be turned away from accepting centralized collateral, but it can also bring a less crypto-enthusiast demographic of users into the DeFi space.

Maker’s plans are still very speculative but one thing is for sure. MakerDAO wants to expand. Just like a company trying to appease shareholders, Maker needs to increase transactions in order to increase the value of their MKR tokens. MKR hasn’t seen a lot of ups and downs, but no true bull runs thus far.



Whale controlling 50% of Multi-Collateral Dai vote

Currently, Multi-Collateral Dai has 29,000 of the 41,000 MKR needed to approve implementation. The top supporter is one whale who has contributed 50.64% of Multi-Collateral Dai’s total votes.

Multi-Collateral Dai voting

MakerDAO uses a continuous approval voting system, which means that in order for MCD to pass, it needs as many votes as the last proposal acquired. The last proposal was to keep all Dai parameters the same as they had been for the past week, which is arguably less important than a fork of the entire system.

This is not the first time a whale has controlled voting power. A month ago, one voter was worth 97% of a vote that decreased the stability fee by around 5%.

Maker has portrayed confidence in the implementation of Multi-Collateral Dai, using words like “when it releases” rather than “if it releases.”

The Ethereum core developers don’t allow holders to vote because they believe that people most active in the community should determine the future of the network. MKR is difficult to get, at least in the U.S., so the learning curve to acquire it acts as a way to filter casual users out of the voting process for Dai.

Currently, Dai is only backed by Ethereum, but once Multi-Collateral Dai is implemented, Maker will be able to back it with coins such as BAT, REP and 0x. Christensen has even talked about collateralizing Dai with real world assets, but it doesn’t seem like they plan to do that anytime soon.

If the vote is passed, all holders of Dai and users in collateralized debt positions with Maker will have to manually convert their (now-called) Sai to (MCD) Dai. You can find out how to do that here.

Dai Savings Rate will be as important as Multi-Collateral Dai

Dai is one of the most important innovations in the DeFi ecosystem, so it’s no surprise that the second iteration has garnered a lot of attention. Most people are talking about how exciting Multi-Collateral Dai is, but even the creator of Dai says that the really exciting thing will be the Dai Savings Rate.

“At launch, the exciting thing really is the DSR, right, that really is going to be the big game changer, because it will make it just more easier to manage the system and keep it growing even as dynamics change.” Rune Christensen, MakerDAO

How the Dai Savings Rate works

If you know about Dai, you know that there is a stability fee. Maker’s governance increases the fee as Dai goes over the $1 in order to cut demand. The savings rate acts inversely, increasing as the peg goes under $1 which helps increase demand.

“The stability fee really just tamps down on demand but really what you need is to attract supply, you need monetary policy to pull both the levers of supply and demand” “we probably wouldn’t have the crazy upswings and stability fee up to 20% if they were just able to pull that lever for the stability fee and get some more lenders in there.” - Kyle Kistner, Co-founder bZx

Theoretically, this will give Maker more control over the price of Dai. There will be one oracle, voted in by governance who can change the savings rate whenever necessary. They will only be able to change it within a range voted in by the governance.

The DSR will be funded by the stability fee, so it will always be a certain percentage lower than what they borrowers are paying.

It doesn’t work well without Multi-Collateral Dai

Christensen said that DSR is the most exciting part of the upgrade, but it can’t work well without Multi-Collateral Dai. They are looking trying to accomplish a low risk - low reward or medium risk - medium reward model, and Dai being backed only by Eth creates higher risk.

“That is also where multiple collateral types become important because if you want to provide an attractive DSR that is asking as this risk free base level, you need to be able to consistently attract a large amount of users at the supply level that can collateralize.” - Rune Christensen, MakerDAO

Still if users want to take on a bit more risk, Lending platforms should be able to implement the Dai Savings Rate on their backend. This would combine the DSR with the risk of throwing your money into a lending pool, allowing for higher interest rates for lenders.

Multi-Collateral Dai will still mostly be backed by Ethereum at launch

Rune Christensen clarified during a DeFi Nation conference call that he expects Ethereum to be the primary backer of Dai even after the Multi-Collateral iteration is released.

“I totally expect that in the beginning it will just be Eth primarily that will be used” - Rune Christiansen

He added that releasing MCD at this time is mostly so that Maker can start figuring out what happens when they have multiple collateral types.

Tokens included in Multi-Collateral Dai aren’t widely used

The initial tokens that can be collateralized for Dai in addition to Ethereum and Augur’s REP, Basic Attention Token, and 0x. While these are widely known within the crypto space, the are all around under the top 25 in terms of market cap.

It’s no surprise that Christensen expects that Ethereum will be the dominant collateral as it still holds a spot as the second highest market cap coin.

Since all three are Ethereum based tokens, they should allow for easy integration into Maker’s network. That could be one reason for the choices along with not having a significant amount of users, or room to drop in price could allow for easy testing.

Maker still likes Ethereum

“Eth is a very good asset that can carry DeFi very far.”

Christensen showed optimism in Ethereum in the immediate sense, but also recognized that DeFi shouldn’t be the only thing that grows the Ethereum network. He compared DeFi pushing Ethereum as the cart pushing the horse. Dai is supposed to pull the stability out of Ethereum rather than push its price.

Still, transactions are Ethereum’s life blood, and adding more collateral means more transactions. Christensen even played with the idea of backing Dai with real world assets, and mentioned how that could push the price of Ethereum.

At the end of the day, Maker wants to push it’s product to as many people as possible and believes that if DeFi continues to scale, it can’t be backed by only Ethereum.

MakerDAO founder says DeFi driving the price of Ethereum isn’t a good thing

Investors might look at DeFi’s growth as a reason to expect Ethereum’s price to rise, but MakerDAO’s founder says that entire worldview is just wrong.

During a DeFi Nation conference call yesterday, Rune Christensen clarified his philosophy behind how DAI impacts the value of Ethereum.

“if you think that a stablecoin should drive the price of Eth, then you’re thinking about it the wrong way. Eth needs to inherently have that value and Dai can draw the stability out of it.”

Christensen acknowledges that DAI could increase Eth’s price in the short term 

Decentralized finance has contributed tangible products and growth to the Ethereum network. In comparison to Ethereum based video games, collectables and social networks, DeFi has proven to be useful to anyone who owns money, and garnered the interest of even institutional minds in 2019.

Crypto Chico’s video is an example of retail traders interpreting DeFi as a catalyst for price movement. Christensen seemed to acknowledge the potential of DAI’s impact on the price of Eth, but only in the short term.

“if you try to do it the other way (grow Eth through DeFi), it’s like you’re putting the cart before the horse. sure its gonna be fun on the way up because you can really pump a lot of value into Eth. The problem is once things start going down, it will have the opposite effect. You will have Dai totally destroying the price of Eth as you get this liquidation cascade.”

Christensen views people who think that DeFi will only be used on Eth similarly to Bitcoin maximalists. He says that it is impossible to scale a singularly collateralized stablecoin.

In the long run, it’s about Ethereum’s transactions

MakerDAO ultimately wants to provide services to as many users as possible. Multi-Collateral Dai will allow 7 new ERC-20 tokens to collateralize for DAI, but Christensen is open to adding real world assets in the future.

“Eth’s value comes from proof of stake, staking and earning the fees. the value of eth comes from the transactions happening on the blockchain, not from it getting pumped up by defi. Having real world assets (coming into Eth) will be really beneficial.”

Christensen says that backing DAI with centralized assets will fuel Ethereum as it creates more transactions on the chain, as will the seven new decentralized assets.

Watch the full conversation here: