MakerDAO is a permissionless lending system built on Ethereum. For those unfamiliar with the project, please take a moment to read our overview here. In short, Maker is responsible for the creation of DAI, the world’s first decentralized stablecoin.

While there are plenty of other stablecoins on the market, Dai is currently the only stablecoin that is truly trustless. By using ether (ETH) as collateral, MakerDAO is able to back the Dai supply with a currency that does not rely on centralized third parties to operate smoothly. To provide more context, a stablecoin like USDC may be backed 1:1 by US Dollars, but is entirely reliant on the parent company, CENTRE, to ensure that underlying collateral is securely stored and managed. Taking this a step further, the advent of smart contracts and pooled ether (PETH) have allowed Dai to achieve a decentralized lending system unlike anything on the market.

Seeing as Maker ultimately strives to become as distributed as possible (hence the Decentralized Autonomous Organization, or DAO in MakerDAO), the community has currently been divided on an issue surrounding the upcoming launch of Multi-Collateral Dai.

What is MCD?

As it stands today, MakerDAO currently only supports the use of ETH as collateral for opening a new collateralized debt position (CDP). By staking ether to a smart contract, any user anywhere in the world can mint (create) Dai in a few clicks, without any human interaction.

Seeing as this system has been shown to work exactly as expected (with over $80M in outstanding Dai on the market today), MakerDAO is preparing for the introduction of new supported collateral type. To start, the first round of MCD supported assets were to only include other Ethereum-based tokens including Augur Reputation (REP), Brave’s Basic Attention Token (BAT) and 0x Protocol Token (ZRX).

Asset NameUnique VotersYesNoParticipation Rate
DigixDAO (DGD)4641.90%58.10%1.31%
OmiseGo (OMG)4337.95%62.05%1.23%
Ether (ETH)50100.0%0.00%4.33%
Augur (REP)4592.21%7.79%3.55%
Basic Attention Token (BAT)4599.82%0.18%2.26%
0x (ZRX)3976.07%23.93%2.32%
Golem (GNT)3816.75%83.25%1.22%

More recently, a New-York based company Fluidity introduced the concept of a Tokenized Asset Portfolio (or TAP for short), or a framework to enable real-world assets to be pledged as collateral in decentralized credit facilities. As such, the community has currently been divided over whether or not introducing TAP assets as a form of supported collateral would go against Maker’s ethos of a permissionless lending system.

For the sake of this article, let’s take a look at both sides of the coin:

Crypto-Only

As many of us in the DeFi ecosystem have come to see, the ethos of inherently permissionless systems is what has given this community so much enthusiasm. More specifically, many have come to vocalize that Dai’s main value prop over other stablecoins is almost entirely driven by the trustless nature of both the currency and its underlying collateral.

“With the “crypto-only” strategy collateral is exclusively sourced from crypto assets, making the system lighter in terms of governance and more resilient against attack.”

With this in mind, other community members have pointed out a similar sentiment, including David Hoffman’s post in the Defiant:

“Having a permissionless Stablecoin is really important. In addition to providing a stable foundation to build finance upon, if you want the financial structures on top of that foundation to be permissionless, you need that foundation to be permissionless.”

“If DeFi all ran on USDC, we would all be trusting Circle with their management of our funds. DAI is the only stablecoin that cannot be removed/revoked/burned from a users wallet via a central authority. This is why Open Finance applications can get assurances when building their application with Dai: If Dai runs in their application, no central party can remove it from their application.”

However, it’s important to recognize some potential drawbacks of the crypto-only framework:

  • Accessibility – When limiting the system to crypto-only assets, the system is inherently adding a high barrier to entry for many potentially interested parties.
  • Concentration Risk – With a rigorous framework for which assets *should* be accepted, the system will likely only be able to use a small pool of collateral types.
  • Target Audience –  The notion of decentralization has yet to be recognized by the financial system at large. This means that Maker would largely be limited to the more specialized crypto-audience who understood the importance of an entirely non-custodial system.

Trusted Assets

While many in the DeFi ecosystem are quick to point out the drawbacks of introducing centralized asset types, it’s important to recognize that companies like Fluidity are proposing frameworks that they see as being necessary to finally connect permissionless services like Maker with traditional markets.

“Ultimately, our goal is to bridge the gap between the traditional capital markets and the growing ecosystem of open, decentralized financial applications, enabling the free and efficient flow of capital between the two. While these applications are emerging rapidly, they remain largely inaccessible to the vast majority of individuals and institutions that lack blockchain-specific technical knowledge and skills. We aim to connect these two paradigms, allowing DeFi to expand at ever-increasing rates, while also expanding access to financial services for legacy participants.”

Taking this a step further, the implementation of trusted assets does not inherently compromise the permissionless nature of MakerDAO as a protocol. Founder Rune Christenson chimed in when tweeting:

“Dai can be backed by a properly risk managed diversified basket of crypto and uncorrelated regulated assets, and remain trustless, because the protocol is trustless. Just like BTC & ETH can derive their value from tether and centralized exchanges and remain trustless.”

In short, it’s evident that the introduction of trusted assets would likely allow Maker to scale to a much wider audience, ultimately allowing the system to be adopted and governed by a much deeper pool of capital. So, what some of the potential implications of this approach?

  • Regulatory Pressure – If trusted assets were introduced into the system, it would seem likely that the system could be influenced by different regulatory bodies deeming which assets were and were not “trusted”. This would directly counter the notion of the Maker community having the ultimate say over which assets are to be trusted.
  • Mandatory KYC – The introduction of government-issued assets would likely imply that Maker would need to keep a closer eye on who is providing trusted assets. In this sense, it would seem likely that there may be a mandatory KYC process in order to utilize certain (if not all) collateral types when opening a CDP.
  • Diminished Reputation – As mentioned above, many have come to love Maker because of it’s trustless nature. If trusted assets were to be introduced, it’s likely that a large segment of the community may take their collateral elsewhere, possibly even hard forking the network back to a completely trustless base.

What’s the Point?

Now that we’ve considered both sides of the coin, it’s important to recognize why this discussion is even happening in the first place. As mentioned in the last section, the ultimate goal of Maker and DeFi at large is to provide financial services to the world at large. Seeing as this encompasses the largely unbanked citizens of many underdeveloped countries, Maker strives to create a system that is robust and adaptive to any major changes in not only the digital asset economy, but the financial ecosystem at large.

With this in mind, the Maker team has pointed out that as it currently stands, a crypto-only approach provides a crucial bottleneck in the unlikely event that there were to be a global crackdown on cryptocurrencies as a whole. In this sense, it would make sense to “diversify” the system’s underlying collateral by taking advantage of a much larger pool, i.e. the trillions of dollars in trusted assets that exist in our financial system today.

Moving forward, it’s crucial to understand that the introduction of trusted assets is not driven by profit, but rather by long-term stability. Whereas MKR token holders are likely to profit from an increased number of CDPs (thus increasing the amount of fees paid and MKR burned), this discussion largely focuses on how Maker can evolve beyond the niche market that it currently operates in.

Conclusion

As it stands today, the amount of institutions that would feel comfortable supplying a volatile currency such as Basic Attention Token drastically dwarfs those that would be willing to stake a tokenized treasury bond. With this in mind, the community should recognize that in order for there to be even the slightest degree of mainstream adoption, there must be some leniency.

Regardless of which side of the fence you fall on, it’s crucial that you voice your opinion by keeping an eye on active polls via the Maker Governance Dashboard.

As stated by Rune, Diversification is the path Maker collateral must take. The beauty of MakerDAO is that however these collateral types actually shape up are entirely determined by us.

For those interested in keeping up on this topic, the Maker Reddit is likely to be the main source of communication in between weekly governance calls. Weekly recaps of these call (including the most recent discussion with Fluidity) are posted on Maker’s Youtube channel. The most active place to quickly review Maker comments, questions and concerns are via the official Discord channel or by reading the official blog.