DeFi Field Unicorn MakerDAO major upgrade, but may face the risk of geometry?

Original: Five fireball masters

In the stable currency rankings, DAI is the second-best, and its popularity and popularity are second only to USDT. Among the DeFi themes that have been touted by many people in the past two years, MakerDAO is the undisciplined (ie, boss) level.

Many investors don't really understand how the stability of DAI is actually operated. It only knows that it is a decentralized loan. In fact, in essence, DAI is the ETH that uses leverage to do more.


01 The essence of DAI is to do more ETH

For example, Zhang San has a $1,500 ETH in his hand and deposits it into DAI's smart contract, which lends $1,000, or 1000DAI (DAI and USD 1:1 anchor).

This is the maximum lending method because DAI's mortgage rate requires no less than 150%. Zhang San can also choose to only borrow 500DAI, so the mortgage rate is 300%, relatively speaking, it will be much safer. When the mortgage rate is 150%, if ETH falls by about 30%, it will trigger automatic clearing, and the mortgaged ETH will be forced to sell.

Of course, you can go beyond maximizing the loan method and adopt a more radical approach. That is to take the borrowed 1000DAI and then buy it as ETH, then come back to MakerDAO to mortgage, lend 666DAI, then buy ETH… This cycle, the whole leverage ratio can be mentioned about 4 times.

In general, no one will do this. First, because the risk is too big, it will be liquidated if it falls. Second, if you are so optimistic about ETH, you can go directly to the trading platform to open a multi-sheet with 5 times leverage.

MakerDAO's specific mortgage and clearing process is actually more complicated than many people think, but for most people, there is no need to care about this process.

As for how to maintain DAI and USD 1:1 anchor, it is more biased towards financial technology. To put it simply, it is to adjust the supply and demand situation of DAI in the market by setting the target interest rate (the interest paid by borrowing), which is similar to the central bank's adjustment of the money supply through interest rates.

Of course, DAI's interest rate fluctuations are also very large. At the end of last year, DAI's interest rate was still around 0.5%. In less than half a year, it raised interest rates to 20%, and now it has fallen back to around 5% per annum.

02 MCD: From single mortgage to multiple mortgages

In the previous MakerDAO, there was only one mortgage source, and that was ETH. Starting from the 18th of this month, the mortgage source has become a variety of cryptocurrencies, a bit like the "a basket of currencies" of the traditional financial circle. From a risk perspective, it is a risk dispersion method that puts eggs in multiple baskets.

The first batch of added assets, if not accidental, should be these Tokens: Augur (REP), Basic Attention Token (BAT), DigixDAO (DGD), Ether (ETH), Golem (GNT), OmiseGo (OMG), 0x (ZRX).

This may be the most important upgrade to MakerDAO so far.

However, just in the case of a promising market, it may be worth to pour some cold water. After all, the world of blockchains can accommodate different voices.

03 What are the minor problems facing MakerDAO?

1. Daily users of MakerDAO

What is the daily life of MakerDAO as the whole of the DeFi field? According to DappRadar's data, it is less than 2000… a more awkward number.

If you are a day, you can imagine the daily life of other DeFi projects. As a traditional and centralized financial DeFi, its current daily life is completely out of the "big cake" of painting.

2. Governance of MakerDAO

This is a headache for all blockchains and even the traditional world, whether it is the presidential election in the real world, or the proposal and voting of the blockchain world. The EOS blockchain with a particularly large audience has a low turnout rate, and MakerDAO is even more unconventional.

A MakerDAO vote at the end of last month decided whether the interest rate of DAI would be raised from 12% to 13.5% or 5.5%. It was originally more than 2,400 votes. The last big one came in and directly voted for more than 40,000 votes. Accounted for 97% of the total number of votes.

This is the so-called "decentralization" or "chain governance."

3. What are the advantages compared with centralized lending?

As mentioned above, MakerDAO is essentially a leveraged tool. It used to be a lot of ETH and will soon be changed to a basket of Tokens including ETH.

So, what is the advantage compared to the mortgage lending on the trading platform? In addition to the true decentralization, or the use of KYC, I really can't think of any other benefits, and experience the devotion of the centralized trading platform to explode MakerDAO.

Some people say that MakerDAO is less than 2,000 days of life, in fact, most of them are arbitrage users. How to arbitrage? Arbitrage based on the interest rate spread between Maker and the platforms such as Compound and Dydx.

In addition, the entire stable currency market, more than 50 billion market share, DAI less than 100 million, accounting for less than 2%, USDT still maintains an unassailable position with a market share of about 80%.

4. Is the overrated MKR?

MakerDAO designed a dual Token mechanism, where DAI is a stable currency and MKR is a token for equity and governance.

The voting is mainly the interest rate voting mentioned above. The equity is the income model. The fee for user borrowing and the penalty fee for compulsory liquidation caused by the decline must be paid by MKR, and MKR will be destroyed after recycling, resulting in deflation market. .

So the question is, is the current MKR overrated?

Use a minimalist model to compare MKR to BNB. In the third quarter of 2019, the company destroyed 2 million BNBs, worth about 30 million yuan. BNB's market value at that time was 2.5 billion dollars. If the parameters are fixed, simply calculate, destroy 30 million X 4 = 120 million US dollars per year, you can see the component red, compared to 2.5 billion US dollars, the price-earnings ratio is about 20, which is not counting 1E0, voting, deduction fees, etc. Other benefits.

MakerDAO If you look at the current burning rate, 8000MKR a year, worth 5 million US dollars, compared to the market value of more than 6 billion, the price-earnings ratio is more than 100.

Although it is biased to compare the MKR and the platform currency BNB, it is still a clue to see the leopard.

04 MakerDAO may face the biggest problem

Finally, let's talk about the possible black swan event – the ETH death spiral .

Investors familiar with A-shares, especially those who have experienced the 2015 stock market crash, may not be familiar with the term “death spiral”. At that time, in the case of almost all people with leverage, once the stock market suddenly plunged for any reason, it would cause a lot of automatic liquidation, resulting in the asset being sold out, and a large number of closed positions further aggravated the decline in asset prices. Leading to more liquidation and automatic liquidation… In this way, the spiral can't stop falling, nicknamed "Death Spiral".

In theory, MakerDAO also has this risk, although this risk does not seem to be large.

In the current MakerDAO, more than 1.8 million ETHs are locked, accounting for 1.7% of the total circulation. If one day, DeFi is popular, it is locked with 18 million ETH, that is, 17% of ETH, is it possible?

ETH If the upgrade 2.0 fails, or if one day proves that the underlying idea is wrong, or is replaced by an emerging public chain, or if the entire industry encounters a certain black swan that causes the ETH price to plummet, is it possible?

Although the possibility is not great, ETH is still the most promising king of the public chain at present, but if the black swan event occurs, the time is when a large amount of ETH is mortgaged at MakerDAO, then the A shares The Death Spiral is likely to repeat itself on MakerDAO : ETH plunges, DAI Smart Contracts automatically closes and sells a large amount of ETH, and a large number of ETHs are sold, causing ETH prices to fall further, triggering more collateral on MakerDAO to be sold out by contract ……

Upgrading from a single ETH mortgage to multiple collaterals, some of which are also considered in this regard. However, if you look at the first batch of Tokens, it is not difficult to find that their price correlation with ETH is relatively high. When ETH or the entire cryptocurrency market plunges, these encrypted assets are also not spared. Therefore, the security protection effect of various Token collaterals is actually very limited.

To avoid this black swan, the introduction of BTC and even traditional financial assets may be a more secure approach. This is also the current competitive advantage of some DeFi projects on Cosmos and Polkadot . For example, ChainX in the Polkadot ecosystem can map BTC to Token and enhance the functionality and liquidity of BTC as an asset. Although there is a similar WBTC on ETH, it has always been in a state of ignorance.

05 conclusion

All in all, both MakerDAO and the entire DeFi industry have a long way to go, and even bluntly say that they need to prove the correctness of their blockchain direction in the next few years.

Can you pass the "falsification" test and have to wait patiently for the time to tell us the answer.

Message Mining No. 375: Have you used MakerDAO? Are you optimistic about MakerDAO or DeFi for stable currency? Feel free to share your opinion in the message area.


『Declaration : This article is the author's independent point of view. It does not represent the vernacular blockchain position, nor does it constitute any investment opinion or suggestion. The copyright and final interpretation rights of the article belong to the vernacular blockchain.