Dai – Stablecoin System by MakerDAO


Link to white paper.

Github link.

Crypto Ticker (DAI): https://coinmarketcap.com/currencies/dai/

(MKR) Maker (Administrative)Token: https://coinmarketcap.com/currencies/maker/

MakerDAO is a Santas Cruz, California based company co-founded by Rune Christensen and team. Mainstream investors like Andreessen Horowitz has invested $15 million in MakerDAO. DAI is a ERC-20 token built on top of Ethereum and is pegged to USD. MKR is another ERC-20 token which is used my global administrative purposes to maintain Dai Stablecoin System.

The problem with current cryptocurrencies is that they are extremely volatile. With the current crash of crypto prices, its obvious that the crypto-currencies cannot be used for any logical transactions. They being treated as assets or investments instead of transaction based currencies. Also, regulatory environment has been making this transition even harder.

Maker is a smart contract platform on Ethereum that backs and stabilizes the value of Dai through a dynamic system of Collateralized Debt Positions (CDPs), autonomous feedback mechanisms, and appropriately incentivized external actors.

Let me explain with an example: Let’s assume in 2011, a pizza costed 10,000 Bitcoins = 10$ or 10 DAI, which at current valuations in 2018 would be approx = 34 million $. Is it a great transaction? So, instead of paying the Pizza guy using BTC, you could lock BTC’s as collateral and generate DAI as debt. And pay the Pizza guy using DAI. And whenever your ready, you could buy 20  DAI tokens from open market and get back your 10,000 BTC’s for just 20 DAI tokens or 20$.

Maker DAO works with the unique concept of Collateralized Debt Position Smart Contracts. Which means, that they hold Ethereum based tokens or other assets as collateral to generate DAI tokens. This debt effectively locks the deposited collateral assets inside the CDP until it is later covered by paying back an equivalent amount of Dai, at which point the owner can again withdraw their collateral . Active CDPs are always collateralized in excess, meaning that the value of the collateral is higher than the value of the debt.

MakerDAO plans to address the world fiat currency model controlled by a specific country. MakerDAO, through DAI would like to decentralized the global currency model through a USD pegged token DAI which has global and decentralized stakes of global players using MKR tokens.

Minimum collateral amount of ETH has to be 150% of the value of DAI . And the liquidation fee is 13% if the ETH prices goes closer to that 150% amount.

The Good:

  • DAI is not as centralized as Tether.
  • MKR holding, builds more trust and inclusiveness in DAI stable coin as compared to competitors.
  • MakerDAO started with a novel philosophy of building a world currency with decentralization, democratization and inclusiveness with power of stability which is lacking in current cryptocurrencies.
  • One of the early Ethereum initiatives and Dai credit system has been live for more than 1 year.
  • MakerDAO has a big team of 50+ employees working on the Dai Stablecoin System.
  • Ethereum with their tokenized assets can make use of Dai stable coin for various decentralized apps in financial industry and gaming.
  • Very useful for implementation of decentralized margin trading.
  • DAI plans to be the Ethereum stable cash supply.

The Bad:

  • Currently DAI only supports Ethereum as collateral.
  • 150% + collateral makes the use case very narrow for DAI tokens.
  • Process is extremely complex and convoluted to generate a collateralized DAI token.
  • Excess collateralized loans might be detrimental to the eco-system on why someone might need a loan.
  • Competitors like Tether has greater market cap and adoption.
  • There are no live players using MakerDAO for margin trading or collateralized debt yet.
  • Maker DAI is only applicable for Ethereum assets.
  • DAI is also built on top of Ethereum instead of being its own blockchain. Which means any changes to governance will affect MakerDAO platform as well.
  • Competitors are Tether are simple to use.
  • With significant crash and volatility of crypto assets, the efficiency of Collateralized debt positioned smart contracts needs validation.

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