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DAI – Emergence of the Decentralized Stablecoin

There are very few projects that have managed to consistently execute on their product roadmaps after all the hype and hoopla of the 2017-18 ICO boom. Along with 0x and Augur, MakerDAO is definitely one of them. The stablecoin project has been receiving a fair bit of (well-deserved) attention and has managed to build out a decentralized community-driven ecosystem for DAI. Over the past 12 months the MKR team has successfully managed to counter the strongest criticism leveled at the project, which has been that the stability mechanism would fail if ETH were to suffer a steep crash. Essentially, as opposed to fiat-backed stablecoins, that for instance, back every one cryptodollar issued with a real USD in some bank account, DAI is decentralized, and the cryptodollar (DAI) issued is collateralized ( over collateralized) by ETH currently, to the tune of 1.5 Eth to every 1 DAI token issued. (For more insight into how DAI CDPs work, check out this earlier post.)

% of ETH Supply Locked Up in CDPs
% of ETH Supply Locked Up in CDPs. Source: https://mkr.tools/system

As you can see from the figure above, almost 1.95% of overall outstanding Ethereum Supply (which is approx $247M as per current prices) is locked up as CDPs with equivalent DAI issued.

During the slow motion train wreck that has been Ethereum’s collapse from $1400 to sub $100 over the past 12 months or so, DAI’s stabilization mechanism has remained firmly intact and the price of DAI has maintained its $1 peg. 2019 is going to be an important year as the project moves to a multi-asset collateral model, opening up a wider range of crypto assets that can potentially be collateralized in exchange of DAI. Drawing from the success of DAI and MakerDAO, the prospect of forking DAI to other regional currency stablecoins is something that is attracting a fair bit of interest. Let us explore the idea of creating a DAI-inspired stablecoin by forking MakerDAO in some more details.

The first choice to be made when looking at forking MakerDAO is to decide whether to keep or to do away with the MKR token that governs the DAI ecosystem. MKR token is a governance token that allows stakeholders to vote on project update proposals in the DAI community. Besides the governance aspect, MKR token derives its utility from DAI users, who at the end of the loan period (returning DAI for collateral deposited at the beginning) have to pay a stability fee in MKR. Some crypto purists believe this creates an additional layer of friction for users and can be done away with for a smoother experience. While removing the governance token could improve user experience to a certain extent, the project might have to rely on a group of developers and key personnel to make active decisions about future project upgrades, much like how BTC and ETH operate.

When DAI is forked to create say SDAI (SGD-pegged stablecoin), the entire CDP mechanism essentially remains the same with ETH as collateral, priced in SGD, and SDAI issued instead of DAI. However, as the health of every collateralized debt position is measured against the price of Ethereum, there needs to be a price oracle that is legitimate and tracks the price of Ethereum in the external world. In the case of SDAI, ETH/SGD market should be very liquid and the price discovery mechanism should be fair. Given that not many ETH-fiat pairs exhibit the same rich liquidity that the ETH/USD pair has, the concept of creating a DAI-like non-USD stablecoin, at least for the moment, is limited to geographies that have a robust Ethereum market denominated in their local currency.

Trade DAI on ForDeX.Co

Trade DAI on ForDeX

Meanwhile in Crypto Wonderland….

“Growth in Switzerland and Liechtenstein Crypto” With 750 companies as of the end of December 2018, Switzerland and Liechtenstein’s Crypto Valley has grown significantly in the past year with 121 new companies being established or a growth of 20% in the number of crypto companies, according to a study, produced by investment company CV VC, PwC Strategy and inacta. The study provides an overview of the current state of Switzerland and Liechtenstein’s Crypto Valley, highlighting the rapid growth of the ecosystem despite the industry’s “crypto winter”.

“Chainalysis Raises $30 Million” Blockchain intelligence platform Chainalysis has raised $30 million in new investment, led by venture firm Accel Partners. The 75-person startup, which has offices in New York, Washington D.C. and Copenhagen, provides financial institutions, cryptocurrency exchanges and law enforcement with a platform to detect and investigate cryptocurrency money laundering, fraud and compliance violations. It also sells its bitcoin-tracing technology and compliance software to banks and brokers to monitor and link digital identities to cryptocurrencies.

“FSB On Crypto as a Challenge to Financial Stability” The growth of cryptocurrencies as an asset class “may challenge any framework” for financial stability, according to remarks from the chair of the Financial Stability Board (FSB). Speaking at a Bank of International Settlements’ (BIS) special governors meeting in Hong Kong, Randal K. Quarles, stated that the FSB “decided to undertake a review of its framework for assessing vulnerabilities to ensure that we are at the cutting edge of financial stability vulnerability assessment”.

“Fundstrat’s New Report”New York-based research company Fundstrat Global Advisors has released its 2019 crypto outlook which describes incremental improvements that will purportedly support higher prices for cryptocurrencies. The company states that negative headwinds, such as the initial coin offering (ICO) post-hangover, adverse regulatory developments and excessive exuberance have reversed some of crypto’s achievements, including the launch of the Lightning Network and wallet growth. As a result, the year was more like a “morning after sobering”, the report reads.

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