Security Tokens – Not Bitcoin – is MakerDAO’s Most Exciting New Feature
Originally published on: CCN
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March 16, 2019
Rune Christensen, the CEO and founder of MakerDAO, came to the United States this week to visit the MIT Bitcoin Expo, among other things. Christensen took some time to talk to CCN about the status of MakerDAO’s full release.
Any Real Value Asset Can Potentially Back a Dai
He says the multi-collateral Dai release will have two major features, but the most important is, well, the addition of other types of collateral.
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“The first one is that it can support multiple collateral types. This of course means ERC-20 tokens. It also means Bitcoin through WBTC. A range of cross-chain assets that are emerging now. Also there will be other stablecoins. Centralized stablecoins that already exist on the Ethereum blockchain. But most importantly, security tokens.”
MKR token holders govern the actual assets allowed. However, it’s safe to say that things like Bitcoin and most ERC-20 tokens will be locked up in Dai CDPs before long.
Dai’s Approach to Crypto Governance
Governance is extremely important in the MakerDAO system. It’s what can make or break it. The MakerDAO foundation originally owned all the MKR tokens, but, as Christensen explains, they sold them off to key players in the Ethereum world to help fund their team of 100 people. These players included risk experts, economists, developers, and institutional investors.
“The fundamental reason why MKR exists is to vote in the system. It also has in-built incentive to ensure that people are actually going to do that.”
The system also rewards people who hold CDPs without using the Dai. Over time, a small reward builds up, called a risk premium.
When things are going well, the total supply of MKR – initially 1 million – is reduced through an automated system. Tokens are burned off, increasing the value of the remaining tokens.
If there is mismanagement in the system, and suddenly there is insolvency, the system regenerates MKR to re-capitalize the system. MKR voters are therefore held accountable, as such inflation lowers the value of their holdings.
Stablecoins Versus Pegged Crypto Assets
The Dai is relatively unique in its functionality, and some consider it the “real stablecoin” as opposed to “pegged coins” which rely on centralized banks. It’s an open system, so people with cryptocurrencies in far-flung corners of the world can access the stability of its oracle system, which provides real-time pricing information to the network. MakerDAO’s oracles will see an upgrade for multiple assets.
Christensen goes on to explain that the emergence of real security tokens opens up the world of traditional assets to the blockchain.
Security Tokens – The Most Exciting Emerging Trend for MakerDAO’s CEO
Real security tokens can represent things like real estate or ownership in companies. Later in the call, Christensen says they are the most exciting prospect to him as regards the blockchain.
“Security tokens are still something that are quite new. But what that really represents to Maker is the ability to now interact with real-world assets. The ability to interact with real-world finance and provide arbitrage opportunities between the traditional finance world and the tokenized world. That means that in the future the Dai will not just be backed by volatile cryptocurrencies, but things like real estate, bonds, and stocks.”
Christensen was a very early adopter of cryptocurrency, entering the market around 2011. Not long after that, BitShares was launched, and he took an immediate interest in the mechanics of the first attempt at a decentralized stablecoin.
BitShares Done Right
One might consider MakerDAO a highly improved version of BitShares, built at a more opportune point in blockchain history. Readers may recall BitShares suffering a worldwide liquidity crisis not so long ago.
Every Dai (which represents $1 worth of Ethereum) has more than $1 worth of Ether behind it. Christensen explained that this is how the Dai survived the 2018 bear market. Even as the price went down, there was enough Ether in the smart contract to cover the amount of Dai issued. He estimated that figure to be about 92 million today, but there is almost 300% that amount of Ether actually locked up in the contract. MakerDAO first came to this reporter’s attention when its collateralized debt positions reportedly took up 1% of the Ether supply. That figure has since increased.
People use the Dai in all sorts of ways. Commonly, users create CDPs to take advantage of lower Ether prices. To redeem the Ethereum you have locked up in the smart contract, you must have the same amount of Dai to return. It’s just one way that people can make use of it.
Enabling the Global Blockchainization of All Things
This reporter asked Christiansen what he will do when the foundation eventually becomes unnecessary, a prospect he says he is looking forward to. He says he will probably create or join a company that services Dai, in some way shape or form. Christensen also explains that there is an industry growing up around the Dai.
He anticipates hundreds, if not thousands, of companies founded specifically to work around the Dai. Companies might facilitate the swap of different types of CDPs – trade your Ether CDP for a Bitcoin one, and vice versa. There will be companies helping merchants, and, all importantly, companies offering new types of lending to unbanked regions.
Multi-collateral Dai contracts are just around the corner. They will mean that Bitcoin holders can essentially get usable $1 tokens based on their holdings. One way to use them is to buy BTC with them when the price goes low. You then buy back the Dai when the price goes back up again, to pay off the CDP. That’s just one way to use the Dai, of course.
Perhaps the most important way to use it is as a stablecoin, like any other – except it has more collateral than a 1:1 ratio. A serious crash in the price of Ether could negatively affect the market. Such a situation would test the limits of MakerDAO, but it’s hard to imagine them going through much worse than they already have through the course of 2018.