The cryptocurrency market’s focus has shifted over the course of 2018. Earlier this year, we saw an attempt to put everything on to the blockchain – including entire industries that may or may not have benefitted from the attempt. Now, as the prolonged market downturn approaches its first anniversary, the focus seems to be on maturing the technology itself. Ultimately, this will benefit the market long-term and help provide infrastructure for later projects.
Maker and the associated MKR and Dai coins are an example of this trend. Presented as a stablecoin pegged to the US Dollar, Dai coins are unique compared with other asset-backed stablecoins. Where traditional stablecoins like Tether (USDT) are backed by a private entity holding large sums of USD, Maker’s Dai coin is instead backed directly by investor collateral.
A Decentralized Stablecoin
When discussing Maker, there are two coins to consider – MKR and Dai. MKR serves as a utility token and governance token – it can be used to vote on the terms of Dai contracts offered, or to pay back fees on the Dai ‘loans’ issued by smart contract. As such, it is not pegged to the US Dollar. Instead, it has more in common with the average token available on cryptocurrency exchanges.
Dai, on the other hand, is a pegged stablecoin available directly through the Maker system. Collateralized Debt Positions, or CDPs, are smart contracts that automatically shift collateral into Dai coins. Collateral is held in the form of Ether (ETH) and is returned to the user when the Dai coins are paid back into the system. Should the price of ETH start to drop, the CDP triggers an auction. This mechanism ensures that the collateral is always an appropriate value to support the Dai coin’s pegging to $1 USD per unit.
The Stablecoin Scramble
Prior to 2018, investors had few options in the stablecoin market. If they wanted a less volatile store of value, they had to use Tether. Tether is a pegged stablecoin produced by Tether Limited and supposedly backed by a considerable amount of US Dollars held in trust. However, Tether’s lack of transparency and willingness to create more USDT has left investors suspicious. Further, their refusal to submit to a public audit opened the window for additional stablecoins.
Maker may be one of the most decentralized options available, but they are far from the only alternative. Winklevoss Twins run exchange Gemini produced the Gemini Dollar, while Coinbase introduced the USD Coin. Both groups are US-based and subject to considerably more oversight than the shadowy organization that produced Tether.
Article By: Adam Stone