While many DeFi users know that DAI has long serves as one of the crucial building blocks of the ecosystem as a whole, users unfamiliar with MakerDAO’s interworking may not know that a cap of 100M DAI was set in July of 2018. The original debt ceiling was set at 50M and raised to 100M through a governance poll.
This past week, DAI hit a historical milestone as it reached its debt ceiling of 100M outstanding supply. From a high level, this signals that demand for DAI has never been higher, a direct correlation with the Maker system responsible for the issuance of new coins. As of writing, Maker continues to hold it’s #1 position in terms of total locked value, leading all DeFi applications with $341M locked ether and counting.
As it relates to the existing debt ceiling, The MakerDAO team and community members executed a governance vote to raise the debt ceiling to $120M. Moving forward, the protocol will look to always maintain a $10M buffer to avoid excess demand breaking the peg. In these situations, the MakerDAO core team is considering executive powers that would allow the core team to increase the debt ceiling in the case of an “emergency”.
Why Does This Matter?
This news simply could not have come at a more ideal team. For those who have been keeping tabs on MakerDAO, the protocol is currently preparing for the launch of Multi-Collateral Dai, an upgrade that enables new forms of collateral to be used for the minting of new Dai. Seeing as ether is currently the only form of collateral used to mint Dai, Multi-Collateral Dai opens an entirely new realm of possibilities when it comes to permissionless lending. In a recent article by MakerDAO’s head of business development, Greg Di Prisco stated:
“In these few lines of code, we have effectively created (a) a better form of money, (b) a decentralized credit facility for secured lending, (c) a more efficient central bank (d) a decentralized insurance company, and (e) the infrastructure to create any kind of derivative in a trustless environment”
Taking this a step further, Dai also presents what may be cryptocurrencies first form of sound money. Unlike Bitcoin (or any other top digital asset), Dai’s price is stable, meaning that is can be spent in a variety of ways that many existing currencies suffer from a usability standpoint.
What Makes The Protocol Valuable?
For those who are not entirely sold on the concept of permissionless lending, let’s take a deeper look at what makes this system so unique.
For one, Maker eliminates the possibility of creating money from nothing. Dai can only be created by borrowing against existing assets. On a macro level, this creates a diversified pool of collateral that backs the currency, rather than relying on the credibility of a central bank.
Secondly, Maker eliminates intermediaries. Loans come directly from the “central bank”, removing intermediary rent-seeking which permits Maker to charge fees that are far more in line with market demand and far less swayed by government influence. This direct lending process makes it very easy for the Maker governors to control the supply of Dai via interest rates and the collateralization ratio as opposed to lobbying and cross-border policies.
As for Dai itself, the currency’s value is derived from pledged collateral, and its supply is dynamic because it’s created and destroyed based on loans made relative to that collateral. Dai supply does not expand as a reaction to price but in response to a demand for credit and a surplus of acceptable collateral. Its supply does not contract solely due to a lack of demand, but due to a scarcity of acceptable collateral.
Expediting User Adoption
Earlier this month, Maker announced a branding change to rename Collateralized Debt Positions (CDPs) to Vaults. In doing so, Maker aims to make the system easier to digest for users who are new to the blockchain ecosystem as a whole.
The Maker Vault in MCD is where a user deposits collateral and generates Dai. Importantly, each collateral asset deposited will have its own Vault.
With the upcoming launch of Multi-Collateral Dai, a variety of new collateral types will be used to mint (or create) Dai. In doing so, the shift to “vault” terminology should be easier for users to recognize that each collateral type will have a unique vault.
This change will happen automatically, meaning users will not be required to update any positions or upgrade any code. Similarly, users can expect an enhanced UI and UX with the unveiling of MCD. Dai will also see a slight transition with Single-Collateral DAI being renamed to Sai and Multi-Collateral Dai inhibiting the name Dai.
In a world where the Federal Reserve can print US Dollars at whim, watching a system grow that theoretically solves this issue is fascinating to watch. As we continue to build the next generation of globally accessible financial products, Maker is shaping up to be a core facilitator of DeFi’s primary currency.
While there are certainly other stablecoins on the market, up to this point Dai has shown to be the most resilient to centralized influence and risk. With this being said, it appears that Maker fully intends to introduce centralized collateral types into the system with MCD.
While some may be upset by this news, I personally believe that further diversifying the underlying collateral pool with assets that have a long history is a fantastic way to introduce a new set of users to the system as a whole.
Moving forward, one can expect to see Dai being used in just about every major Ethereum application on the market. Taking this a step further, it’s only logical that it’s a matter of time until Dai is being represented across every major blockchain and being utilized as a foundational currency that defines the cryptocurrency ecosystem as a whole.
Cooper is focused on building compelling blockchain products. He currently works as the managing director at Fitzner Blockchain Consulting and is a contributor to DAOs like MetaCartel and Moloch. He is an active member of the Ethereum community and has a strong interest in for-profit businesses such as The Block Crypto and Messari.