Troubles at MakerDAO Are Symptomatic of Shifting Narratives in Crypto


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A lot has been going on at Maker over the past few months, and not all of it bullish. In the first, the protocol has experienced a series of stability fee hikes on its collateral lending product that has the community up in arms. After that, the team’s leadership has seen a number of members leave the organization due to conflicting visions.

BTCManager finally sat down with Maker president and COO Steven Becker to find out what’s going on behind the scenes.

Breaking Down DeFi

Maker’s most promising product is its collateralized debt position, otherwise known as a CDP. This is a smart contract that operates on the Ethereum network in which users can put ether (ETH) in and get Dai (DAI), Maker’ stablecoin, in return.

Because ETH is notoriously volatile, the DeFi narrative demands that a degree of stability is introduced to build any of the world-toppling finance 2.0 infrastructures.

Flow Diagram

A simplified infographic of how CDPs are opened and closed.

(Source: Medium)

Unlike other stablecoins, DAI is staked to ETH rather than a physical asset or fiat currency. The stablecoin does, however, aim to maintain the same price as USD. There are two mechanisms that Maker implements to ensure that Maker does not go above or below $1. Regarding the former, the protocol incentivizes users to take out more DAI in exchange for ETH. Increasing the circulating supply when demand for DAI tokens is low helps keep the price from crossing the $1 threshold.

Conversely, if the price of ETH drops, Maker prevents the price of DAI from dipping below $1 by selling the ETH in a user’s CDP before the ETH moves below the amount of Dai for which it was exchanged.

Throw in an additional “stability fee,” and Maker has created a decentralized loan platform with the fee operating like an interest rate on the DAI a user borrowed.

To conclude, Maker makes it possible to evade the volatility of ETH by offering users DAI in exchange. This ETH can be recuperated and the CDP closed once the DAI is returned. Holders of DAI also need to pay a stability fee for the ability to make this exchange.

In the case of upward price swings, DAI recalibrates by incentivizing users to exchange more ETH for DAI. During more bearish market conditions, the protocol closes CDPs and sells the available ETH. For all intents of purposes, this definition of MakerDAO as a loan platform has been effective in conveying the protocol’s potential.

According to the company’s COO and president, Steven Becker, however, it has limited the community’s ability to think about what is ultimately possible.

“Although it looks like a loan, the protocol has a ton of other uses,” said Becker. “This could be from debt structuring, to supply chain finance. It could really be like the grease of the economy.”

An immediate consequence of a CDP is that users have begun exchanging ETH for DAI in order to buy more ETH. Gregory DiPrisco wrote in an introductory Medium post that users can “buy ether on margin.” When users trade on decentralized exchanges that have integrated with Maker, they can “bet on the price of ether with 2x, 3x, or more.”

Community Complaints

Although the possibilities appear endless when working with the Maker protocol, its community has focused most of its attention on the ever-changing stability fee.

The price of ether over the past 18 months has been unforgiving in its descent and as such, MKR holders have voted on a series of hikes on the stability fee. As mentioned above, this fee helps keep the stablecoin, DAI, pegged to USD.

What began as a mere .5 percent fee has jumped all the way to 19.5 percent before recently dropping down to 17.5 percent as of May 28, 2019.

Becker explained that while the increases have been harsh there are a few considerations to keep in mind. In the first, when the price of ETH is dropping, the only way to keep the peg of DAI is to close CDPs and make DAI creation unenticing. Second, it’s critical that users don’t think of CDPs as loans.

This is just one possibility, of course, but Becker outlined that leveraged speculation and loans are a very limited way of thinking about the Maker protocol. In fact, the use of “interest rate” as a term instead of stability fee has contributed to many of the misconceptions surrounding CDPs and the MakerDAO.

“The financial products that are possible with the protocol hinge on keeping the DAI peg. For instance, if people want to send something as simple as remittances, they need a stable digital currency,” Becker said. “You could even make credit default swaps with Maker, but that would still depend on this peg.”

Two forces are now emerging within the Maker community. CDP holders have indicated that the “interest rate” on their DAI is higher than most traditional bank loans, while MKR voters and folks like Becker are looking to push the envelope of the emerging digital economy.

Other commentators, like Ethereum co-founder Vitalik Buterin, see the MakerDAO as merely a component of this economy. In combining Maker’s stablecoin with market-making platform Compound and Uniswap Exchange, collateral could be established via the exchange’s liquidity.

Thought exercises of this nature paint a better picture of what a totally decentralized economy could look like.

The difficulty of course in connecting a series of decentralized technologies is the regulatory barriers in place. Herein lies the recent leadership conflict at Maker as well.

Decentralize or Die

As first reported by The Block in April 2019, members of the Maker DAO team ended up leaving the startup following a dispute over where the business was heading. A faction formed called the Purple Pill to displace the reported centralizing force of founder Rune Christensen.

Christensen allegedly forced members of the MakerDAO Ecosystem Growth Foundation (MEGF) to resign as well as taking control of the approximately ~$130 million development fund. Prior to this, multiple stakeholders had to reach a consensus on how these funds were to be allocated. Christensen eventually demanded that these individuals hand over their private keys so that he could control Maker’s direction.

Becker’s take on the matter outlined that the conflict was more than the binary decentralize-vs-centralize trope. As someone with a long resume in the traditional finance world, Becker explained that the same conflict could be reduced to abiding by regulations or “pure anarchy.”

“It’s much easier to become a licensed company when you play by the rules. This means following existing laws that are already in place,” he said. “No one will take you seriously until that happens.”

When long-time observers of the crypto and blockchain space compare these arguments with the characteristics of many in the Bitcoin community, one can be sure that the narrative is shifting. The concerns at MakerDAO are merely a symptom of this shift too.

In 2019, it is less about overthrowing the financial system, but instead using novel technologies to optimize how it functions. The demand for a formal ETF product is a high priority for many, while still others wax positive over groups like Fidelity and Goldman Sachs opening up crypto-specific trading desks.

But, as with any open-source technology, its vision is entirely up for grabs and accessible to anyone, even bankers. And with crypto spring finally blooming, the space is overflowing with suggestions about which narrative will best attract new users.

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