Consultant with Bankless Consulting and Tokenomics DAO. Writer and Researcher for Web 3. Crypto Class of 2016
Consultant with Bankless Consulting and Tokenomics DAO. Writer and Researcher for Web 3. Crypto Class of 2016
Subscribe to Cloud Base Crypto
Subscribe to Cloud Base Crypto
Share Dialog
Share Dialog
<100 subscribers
<100 subscribers
Written by: ZJ and Joe_King
Type of Stable Coin: Over Collateralized
Who’s behind the project: DAI stablecoin was created by MakerDAO which is a Decentralized Autonomous Organization. MakerDAO was established in 2014 by Danish entrepreneur Rune Christensen. The DAO operates in a globally decentralized fashion using smart contracts and governance using a digital token called MKR. MakerDAO is managed in a democratic way where MKR token holders vote on decisions to be made regarding changes to MakerDAO, Maker Protocol, and DAI. The voting power of each community member is proportional to the number of Maker tokens they possess. Dai token and its smart contracts were officially launched on the Ethereum blockchain on Dec. 18, 2017. Venture capital firm Andreessen Horowitz invested $15 million in MakerDAO in September 2018, making it the owner of 6% of the total MKR token.
Reserve / Peg Mechanism: How does DAI work?
The simple lifecycle of DAI starts when users borrow DAI Stablecoin against locked collateral, and they are destroyed when the loans are repaid. Anyone can generate new Dai using Maker’s smart contracts called CDP — Collateralized Debt Positions by depositing the required collateral amount. Users generate Dai by depositing collateral assets into Maker Vaults within the Maker Protocol. Locked collateral can be withdrawn anytime by paying back the borrowed Dai with an additional fee called stability fees, which is the interest.
There are three types of users who use the DAI ecosystem. One is Dai Stablecoin users who use Dai in circulation for any transactions or simply held as savings using a feature of Maker protocol called Dai Savings Rate (DSR). They do not have to be connected with the Dai system as Dai in circulation can be purchased from any crypto exchange. The second is CDP issuers or borrowers who generate Dai. They are risky investors but get the advantages of leverage investment with Dai. The third one, who can overlap with Dai borrowers, is the MKR token holders.
MKR token is the on-chain governance token of the Dai system. Holding MKR tokens enables one to be part of all decentralized decisions made in the Dai system. Every Dai in circulation is directly backed by excess collateral, meaning that the value of the collateral is higher than the value of the Dai debt, and all Dai transactions are publicly viewable on the Ethereum blockchain. The collateral ratio is called the Liquidation Ratio in the Maker protocol. The Liquidation Ratio parameter limits the maximum amount of DAI debt that a vault user can draw from their vault given the value of their collateral locked in that vault. In practice, it expresses the minimum collateral in percentage terms that can support a given DAI debt. If the ratio of a Vault user’s collateral to their debt drops below this value their vault can be liquidated.
Each vault type has its own Liquidation Ratio that can be adjusted by Maker Governance. The liquidation ratio in DAI will always be higher than 100% which means that there is a higher chance the protocol can recover the full value of DAI debt in cases of high volatility. But the trade-off to this is a lower capital efficiency to vault users which leads to lower scalability and lower liquidity associated with the protocol. To generate Dai, the Maker Protocol accepts as collateral any Ethereum-based asset that has been approved by MKR holders based on their risk tolerance already decided by MKR holders. All accepted collateral assets can be leveraged to generate Dai in the Maker Protocol through smart contracts called Maker Vaults.
Here is a short summary to how a user can interact with a Maker vault:
Step 1: Create and Collateralize a Vault
A user can create a vault using any interface like Zerion or MyEtherWallet by funding it with the specific type and amount of collateral that is used to generate DAI
Step 2: Generate DAI from the Collateralized Vault
The user initiates and confirms a transaction in his or her wallet for the collateral deposited and locked in a vault in exchange for the DAI created.
Step 3: Pay Down the Debt and the Stability Fee
To retrieve a portion or all of the collateral a vault owner must pay back all of the DAI plus a stability fee which is the interest and can only be paid in DAI.
Step 4: Withdraw Collateral
Once all the DAI is returned and stability fees paid to the vault the collateral is returned to the user’s wallet until the user makes another deposit into the vault for DAI creation.
Price Stability Mechanisms:
Maker Protocol Auctions are a mechanism used to ensure that there is always enough collateral in the Maker protocol to cover all the value of outstanding debt measured in the DAI target price. Any vault which is deemed as risky when the collateral falls below the required minimum level is called the liquidation ratio. An automated entity called Keepers is incentivized to identify risky vaults that qualify for immediate liquidation. During the Liquidation process, enough collateral is sold using automated Maker protocol auctions to cover the debt along with a Liquidation Penalty, leaving the remaining collateral available for withdrawal. If the Collateral Auction does not raise enough Dai to cover the Vault’s outstanding obligation, the deficit is converted into Protocol debt. Protocol debt is covered by Dai allocated in the Maker Buffer. If there is not enough Dai in the Buffer, the Protocol triggers a Debt Auction. During a Debt Auction, MKR is minted by the system and then sold to bidders for Dai. In order to obtain the market price of collateral assets at any time Maker protocol uses its decentralized Oracle Feed nodes.
The DAI Target price is 1 USD translating to a 1:1 USD soft peg. The emergency shutdown is another mechanism that is used as a last resort to directly enforce the target price to holders of DAI and CDPs. Emergency shutdown stops all normal functions of the Maker system and gracefully settles users as they receive the net value of assets they are entitled to. But the Emergency shutdown is the last resort to protect Maker against serious irreversible threats such as long-term market irrationality, hacks, and security breaches. The emergency shutdown is initiated through a consensus mechanism of MKR holders. It is critical to minimize the disruption to DAI service during an Emergency shutdown and relaunch the Multi-collateral DAI system with the deployment of new smart contracts.
Reserve Assets / Mix: A pie chart or graph showing the reserve make up
You can find DAI reserve makeup on this site
Where can it be used: What places, Defi protocols, and chains (doesn’t need to be all of them, just a few examples)
DAI stablecoin can be generated using the MakerDAO platform or purchased from any exchanges.
One of the best places to use DAI is the Oasis App developed by Maker DAO. Oasis has multiple features you can make use for your borrowed DAI. Oasis Multiply is a feature that allows you to immediately utilize your borrowed Dai to buy more collateral within Oasis.app. As a user you can deposit collateral in a Vault to self-generate Dai as a funding source to purchase more collateral, multiplying your exposure to the asset all in one single transaction. With the Borrow feature, you can borrow DAI against your favorite crypto asset with the lowest Stability fee and the cheapest Vault.
Places to borrow or lend: just list the top 2–3 to borrow and lend (https://defirate.com/)
You could get some decent return rates for DAI from some of the CeFi products like BlockFi and Nexo by just depositing and holding your DAI in these products. DAI can be used for lending in many popular DeFi products like Compound, Aave, dYdX, Curve, and Oasis app which is the native DeFi app by Maker. Currently, the DAI Savings Rate (DSR) in Oasis app is very low.
Closing Comments: Stablecoins are on the watch out after the Terra meltdown. With the bear market fully on, crypto markets have switched to tokens prioritizing security instead of scale. We all need to understand that the crypto markets and technology behind it are still in the very early stages of experiments and adoption. So security is more important than scalability. This is where Bitcoin fully excelled over all other crypto and has stabilized as a global store of value. Terra collapsed because of the overabundance of UST. Unsustainable APR rates for UST in Anchor protocol and subsidized easily mintable UST produced huge liability when the demand collapsed all of a sudden. MakerDAO’s design of DAI is the antithesis of UST design. DAI supply is designed to lag the market demand. New DAI only gets generated when there is sustainable long-term market demand for stablecoins. Combined with the over-collateralization and decentralization mechanisms used in DAI, makes it one of the best revenue-to-risk maximizing stablecoin crypto assets.
Written by: ZJ and Joe_King
Type of Stable Coin: Over Collateralized
Who’s behind the project: DAI stablecoin was created by MakerDAO which is a Decentralized Autonomous Organization. MakerDAO was established in 2014 by Danish entrepreneur Rune Christensen. The DAO operates in a globally decentralized fashion using smart contracts and governance using a digital token called MKR. MakerDAO is managed in a democratic way where MKR token holders vote on decisions to be made regarding changes to MakerDAO, Maker Protocol, and DAI. The voting power of each community member is proportional to the number of Maker tokens they possess. Dai token and its smart contracts were officially launched on the Ethereum blockchain on Dec. 18, 2017. Venture capital firm Andreessen Horowitz invested $15 million in MakerDAO in September 2018, making it the owner of 6% of the total MKR token.
Reserve / Peg Mechanism: How does DAI work?
The simple lifecycle of DAI starts when users borrow DAI Stablecoin against locked collateral, and they are destroyed when the loans are repaid. Anyone can generate new Dai using Maker’s smart contracts called CDP — Collateralized Debt Positions by depositing the required collateral amount. Users generate Dai by depositing collateral assets into Maker Vaults within the Maker Protocol. Locked collateral can be withdrawn anytime by paying back the borrowed Dai with an additional fee called stability fees, which is the interest.
There are three types of users who use the DAI ecosystem. One is Dai Stablecoin users who use Dai in circulation for any transactions or simply held as savings using a feature of Maker protocol called Dai Savings Rate (DSR). They do not have to be connected with the Dai system as Dai in circulation can be purchased from any crypto exchange. The second is CDP issuers or borrowers who generate Dai. They are risky investors but get the advantages of leverage investment with Dai. The third one, who can overlap with Dai borrowers, is the MKR token holders.
MKR token is the on-chain governance token of the Dai system. Holding MKR tokens enables one to be part of all decentralized decisions made in the Dai system. Every Dai in circulation is directly backed by excess collateral, meaning that the value of the collateral is higher than the value of the Dai debt, and all Dai transactions are publicly viewable on the Ethereum blockchain. The collateral ratio is called the Liquidation Ratio in the Maker protocol. The Liquidation Ratio parameter limits the maximum amount of DAI debt that a vault user can draw from their vault given the value of their collateral locked in that vault. In practice, it expresses the minimum collateral in percentage terms that can support a given DAI debt. If the ratio of a Vault user’s collateral to their debt drops below this value their vault can be liquidated.
Each vault type has its own Liquidation Ratio that can be adjusted by Maker Governance. The liquidation ratio in DAI will always be higher than 100% which means that there is a higher chance the protocol can recover the full value of DAI debt in cases of high volatility. But the trade-off to this is a lower capital efficiency to vault users which leads to lower scalability and lower liquidity associated with the protocol. To generate Dai, the Maker Protocol accepts as collateral any Ethereum-based asset that has been approved by MKR holders based on their risk tolerance already decided by MKR holders. All accepted collateral assets can be leveraged to generate Dai in the Maker Protocol through smart contracts called Maker Vaults.
Here is a short summary to how a user can interact with a Maker vault:
Step 1: Create and Collateralize a Vault
A user can create a vault using any interface like Zerion or MyEtherWallet by funding it with the specific type and amount of collateral that is used to generate DAI
Step 2: Generate DAI from the Collateralized Vault
The user initiates and confirms a transaction in his or her wallet for the collateral deposited and locked in a vault in exchange for the DAI created.
Step 3: Pay Down the Debt and the Stability Fee
To retrieve a portion or all of the collateral a vault owner must pay back all of the DAI plus a stability fee which is the interest and can only be paid in DAI.
Step 4: Withdraw Collateral
Once all the DAI is returned and stability fees paid to the vault the collateral is returned to the user’s wallet until the user makes another deposit into the vault for DAI creation.
Price Stability Mechanisms:
Maker Protocol Auctions are a mechanism used to ensure that there is always enough collateral in the Maker protocol to cover all the value of outstanding debt measured in the DAI target price. Any vault which is deemed as risky when the collateral falls below the required minimum level is called the liquidation ratio. An automated entity called Keepers is incentivized to identify risky vaults that qualify for immediate liquidation. During the Liquidation process, enough collateral is sold using automated Maker protocol auctions to cover the debt along with a Liquidation Penalty, leaving the remaining collateral available for withdrawal. If the Collateral Auction does not raise enough Dai to cover the Vault’s outstanding obligation, the deficit is converted into Protocol debt. Protocol debt is covered by Dai allocated in the Maker Buffer. If there is not enough Dai in the Buffer, the Protocol triggers a Debt Auction. During a Debt Auction, MKR is minted by the system and then sold to bidders for Dai. In order to obtain the market price of collateral assets at any time Maker protocol uses its decentralized Oracle Feed nodes.
The DAI Target price is 1 USD translating to a 1:1 USD soft peg. The emergency shutdown is another mechanism that is used as a last resort to directly enforce the target price to holders of DAI and CDPs. Emergency shutdown stops all normal functions of the Maker system and gracefully settles users as they receive the net value of assets they are entitled to. But the Emergency shutdown is the last resort to protect Maker against serious irreversible threats such as long-term market irrationality, hacks, and security breaches. The emergency shutdown is initiated through a consensus mechanism of MKR holders. It is critical to minimize the disruption to DAI service during an Emergency shutdown and relaunch the Multi-collateral DAI system with the deployment of new smart contracts.
Reserve Assets / Mix: A pie chart or graph showing the reserve make up
You can find DAI reserve makeup on this site
Where can it be used: What places, Defi protocols, and chains (doesn’t need to be all of them, just a few examples)
DAI stablecoin can be generated using the MakerDAO platform or purchased from any exchanges.
One of the best places to use DAI is the Oasis App developed by Maker DAO. Oasis has multiple features you can make use for your borrowed DAI. Oasis Multiply is a feature that allows you to immediately utilize your borrowed Dai to buy more collateral within Oasis.app. As a user you can deposit collateral in a Vault to self-generate Dai as a funding source to purchase more collateral, multiplying your exposure to the asset all in one single transaction. With the Borrow feature, you can borrow DAI against your favorite crypto asset with the lowest Stability fee and the cheapest Vault.
Places to borrow or lend: just list the top 2–3 to borrow and lend (https://defirate.com/)
You could get some decent return rates for DAI from some of the CeFi products like BlockFi and Nexo by just depositing and holding your DAI in these products. DAI can be used for lending in many popular DeFi products like Compound, Aave, dYdX, Curve, and Oasis app which is the native DeFi app by Maker. Currently, the DAI Savings Rate (DSR) in Oasis app is very low.
Closing Comments: Stablecoins are on the watch out after the Terra meltdown. With the bear market fully on, crypto markets have switched to tokens prioritizing security instead of scale. We all need to understand that the crypto markets and technology behind it are still in the very early stages of experiments and adoption. So security is more important than scalability. This is where Bitcoin fully excelled over all other crypto and has stabilized as a global store of value. Terra collapsed because of the overabundance of UST. Unsustainable APR rates for UST in Anchor protocol and subsidized easily mintable UST produced huge liability when the demand collapsed all of a sudden. MakerDAO’s design of DAI is the antithesis of UST design. DAI supply is designed to lag the market demand. New DAI only gets generated when there is sustainable long-term market demand for stablecoins. Combined with the over-collateralization and decentralization mechanisms used in DAI, makes it one of the best revenue-to-risk maximizing stablecoin crypto assets.
No activity yet