Dear friends, let me introduce to you my favorite crypto project of all. This automated market maker initiative is literally making the world a better place.
My all time favorite crypto project happens to be an Ethereum token (compatible with Ethereum wallets) that is a governance token of the Maker System. The Maker system behaves as a market maker and generates a stable coin that is pegged 1:1 to the USD and is called Dai. Through this brief conversation we are going to discuss some stats, quotes right off a paper on the Fed's website and see if there is helpful data to unpack here.
Stats:
First things first, what is MakerDao?
So briefly let me explain legacy financial institutions:
Dai is different
What is nice is rather than waiting for stress test on legacy financial institutions and trusting them, just like we did into 2008's housing fiasco, Maker provides total visibility, current stats:
Dai is not mined or minted, but rather only generated when collateral is deposited by borrowers. The stability fee is a variable rate that reflects the cost paid by borrowers who deposit collateral to generate Dai. Instead of a centralized Federal Reserve, the community of MKR token holders gets to vote on the stability rate. Each MKR token provides the owner one vote per proposal. An alternative proposal would be voting on what assets constitute collateral willing to be accepted as deposits.
The stability fee enables the Dai to be pegged to the USD. Let me explain.
Quick chart of Dai vs its top reputable competitor which is USDC:
Now here is the great part of Dai! The thing that makes this a true Gem! If the MKR community make good decisions and the system performs well, the excess surplus if it exceeds a certain point will auction off Dai, and use the proceeds to purchase more MKR tokens which are then permanently removed from circulation - which raises the value of all of our MKR tokens.
If the inverse were to occur, and if MakerDao becomes under collateralized, and there is more Dai then collateral the system will initiate an auction with new MKR being minted and sold for DAI, with that Dai then being burnt. This automated process will enable this to always maintain 1:1 parity with the USD. Again, much more sophisticated, and much safer then "fractional reserve banking" - shudder.
This project is a beautiful one, and I truly believe that if you can fix the money, you can fix the world. If someone is in a country suffering from inflation, they can open an ETH account and purchase Dai, and in essence maintain their buying power much better than the Turkish Lira for example. I believe everyone has the capacity for production, creativity, and industriousness all over the planet and this is a project that is providing infrastructure for people to access banking all through an application on their phone.
So let's talk Technical Analysis:
Currently ranging and finally broken above the EMA ribbon after consolidation following the big breakout from the ascending Triangle Pattern leading up to this:
I would advise that just as we beta-weight everything in the S&P500 one could in essence beta-weight this fairly well against Ethereum itself. I would project that they balance each other out well.
Our next breakout point after ranging will be the $2,800 ceiling, where following that it will then move parabolic till we uncover our new range:
Now an excerpt as promised from the Federal Reserve:
Some DeFi applications allow users to create collateralized debt positions and thereby issue new tokens that are backed by the collateral. To be able to create these tokens, the person must lock cryptoassets in a smart contract. The number of tokens that can be created depends on the target price of the tokens generated, the value of the cryptoassets that are being used as collateral, and the target collateralization ratio. The newly created tokens are essentially fully collateralized loans that do not require a counterparty and allow the user to get a liquid asset while maintaining market exposure through the collateral. The loan can be used for consumption, allowing the person to overcome a temporary liquidity squeeze or to acquire additional cryptoassets for leveraged exposure.
To illustrate the concept, let us use the example of MakerDAO, a decentralized protocol that is used to issue the USD-pegged Dai stablecoin. First, the user deposits ETH in a smart contract classified as a collateralized debt position (CDP) (or vault). Subsequently, they call a contract function to create and withdraw a certain number of Dai and thereby lock the collateral. This process currently requires a minimum collateralization ratio of 150 percent, meaning that for any 100 USD of ETH locked up in the contract, the user can create at most 66.66 Dai.6
Any outstanding Dai is subject to a stability fee, which in theory should correspond to the Dai debt market's maximum interest rate. This rate is set by the community, namely the MKR token holders. MKR is the governance token for the MakerDAO project. As shown in Figure 3, the stability fee has been fluctuating wildly between 0 and 20 percent.
To close a CDP, the owner must send the outstanding Dai plus the accumulated interest to the contract. The smart contract will allow the owner to withdraw their collateral once the debt is repaid. If the borrower fails to repay the debt, or if the collateral's value falls below the 150 percent threshold, where the full collateralization of the loan is at risk, the smart contract will start to liquidate the collateral at a potentially discounted rate.
Interest payments and liquidation fees are partially used to "burn" MKR, thereby decreasing the total MKR supply. In exchange, MKR holders assume the residual risk of extreme negative ETH price shocks, which may lead to a situation in which the collateral is insufficient to maintain the USD peg. In this case, new MKR will be created and sold at a discounted rate. As such, MKR holders have skin in the game, and it should be in their best interest to maintain a healthy system.
It is important to mention that the MakerDAO system is much more complicated than what is described here. Although the system is mostly decentralized, it is reliant on price oracles, which introduce some dependencies.
Final comment guys, the best oracle is LINK, which I am also bullish on & will touch on in a future date.
Additional Citations:
-Federal Reserve Bank of St. Louis: https://research.stlouisfed.org/publications/review/2021/02/05/decentralized-finance-on-blockchain-and-smart-contract-based-financial-markets?fbclid=IwAR24J84jLkMWWuuGeaCFLA6XbPq5JuACh1hpgS4cR5fnz7I1lO6uQly-gG8
-Whitepaper https://makerdao.com/en/whitepaper/#abstract
-Similar to how as shareholders we can vote with our underlying equity. MKR holders can go onto the Maker Governance Dashboard and vote on proposals and decisions and in a decentralized manner make decisions that will benefit the stability of MakerDao.
-Maker Governance Dashboard: https://vote.makerdao.com/
-How to vote:
We can likewise see the mean (red line has caught up to price and is strongly pointing up). The mean reverting to price, or mean reversion indicates to me that we may tag it and then continue higher on our trend as the mean continues higher. A great way to spot the trend is just to see what direction it is pointing.
My all time favorite crypto project happens to be an Ethereum token (compatible with Ethereum wallets) that is a governance token of the Maker System. The Maker system behaves as a market maker and generates a stable coin that is pegged 1:1 to the USD and is called Dai. Through this brief conversation we are going to discuss some stats, quotes right off a paper on the Fed's website and see if there is helpful data to unpack here.
Stats:
- Market Cap $2.6B
- Circulating Supply 995,700 Tokens
- Protocol that Generates Dai Stable Coins
First things first, what is MakerDao?
- Decentralized Organization that offers two tokens Dai & MKR
- The Protocol enables users to supply collateral which they can then use to borrow funds. Being that it runs via smart contracts, this negates counterparty risk all together.
- Imagine in essence you are the vendor with goods within a vending machine, and the user wants to purchase something from the vending machine - the autonomous vending machine administers the transaction securely where both parties can remain anonymous and have total trust in each other, and not need to run credit checks, nor balk at payment terms etc. I do not know if this is a helpful example for understanding Smart Contracts, but it is the best I can think of. Just imagine now that the vending machine runs on an immutable blockchain that is practically impenetrable. Technically a quantum computer could penetrate it, but then again a quantum computer could penetrate all of legacy financial institutions - as Russia proved - even super computers can.
- MKR is one of the largest players on the Eth Blockchain, and is currently the 14th most popular crypto project on Coinbase.
- Through collateral MKR generates Dai, which is a stable coin that targets parity 1:1 with the USD. We will reference the Federal Reserves source to learn more about Dai in a few moments.
So briefly let me explain legacy financial institutions:
- First off we are dealing with Fractional Reserve Banking
- Banks need to be stress tested as they only have a fraction of bank deposits of actual cash on hand and readily available for withdrawal.
- The Federal Funds rate acts as a lever or a tool controlling reserves, and if they were to force legacy institutions to increase their reserves it would reduce the loans that could be administered which could then cripple businesses, and prevent new home purchases - etc. Hence higher interest rates would strengthen the dollar, and integrity of financial institutions but the consequence would be hampering the money supply and risk deflation. People would purchase less homes, vehicles, not be able to start new businesses - etc.
Dai is different
- Dai does not rely on fractional reserves in an account, similar to what Tether is accused of doing now (although Tether has far higher reserves then legacy financial institutions using fractional reserve banking)
- Dai is generated when users use a smart contract on the ETH network and deposit assets as collateral that has been audited and is publicly viewable for all to see at any time.
- There are a SURPLUS of assets that generate Dai, so in essence the Dai has actual reserves backing it with real collateral rather then legacy financial institutions "fractional reserves"
- MKR is a token that maintains Dai is pegged to the actual value of the USD
- The fact Dai is decentralized, unbiased, collateral-backed makes it a wonderful tool for countries experiencing inflation concerns. And the surplus collateral make it actually safer then financial institutions fractional reserves. Ever hear of a "run on the banks" - this would not be a problem if you are banking using Dai - as every dollar has collateral backing it.
What is nice is rather than waiting for stress test on legacy financial institutions and trusting them, just like we did into 2008's housing fiasco, Maker provides total visibility, current stats:
- Total Dai - $2,324,560,767 Dai
- Dai Debt Ceiling - $3,039,965,535 Dai
- Surplus Dollars - $8,431,217 Dai
Dai is not mined or minted, but rather only generated when collateral is deposited by borrowers. The stability fee is a variable rate that reflects the cost paid by borrowers who deposit collateral to generate Dai. Instead of a centralized Federal Reserve, the community of MKR token holders gets to vote on the stability rate. Each MKR token provides the owner one vote per proposal. An alternative proposal would be voting on what assets constitute collateral willing to be accepted as deposits.
The stability fee enables the Dai to be pegged to the USD. Let me explain.
- If Dai's market price falls below one dollar, the community could vote to increase the stability fee. This would then decrease the amount of Dai in circulation which will raise the price of Dai.
- If Dai's market price rises above on dollar, the community could vote to decrease the stability fee. This would then increase the amount of Dai in circulation which would lower the price of Dai back to $1 parity.
Quick chart of Dai vs its top reputable competitor which is USDC:
Now here is the great part of Dai! The thing that makes this a true Gem! If the MKR community make good decisions and the system performs well, the excess surplus if it exceeds a certain point will auction off Dai, and use the proceeds to purchase more MKR tokens which are then permanently removed from circulation - which raises the value of all of our MKR tokens.
If the inverse were to occur, and if MakerDao becomes under collateralized, and there is more Dai then collateral the system will initiate an auction with new MKR being minted and sold for DAI, with that Dai then being burnt. This automated process will enable this to always maintain 1:1 parity with the USD. Again, much more sophisticated, and much safer then "fractional reserve banking" - shudder.
This project is a beautiful one, and I truly believe that if you can fix the money, you can fix the world. If someone is in a country suffering from inflation, they can open an ETH account and purchase Dai, and in essence maintain their buying power much better than the Turkish Lira for example. I believe everyone has the capacity for production, creativity, and industriousness all over the planet and this is a project that is providing infrastructure for people to access banking all through an application on their phone.
So let's talk Technical Analysis:
Currently ranging and finally broken above the EMA ribbon after consolidation following the big breakout from the ascending Triangle Pattern leading up to this:
I would advise that just as we beta-weight everything in the S&P500 one could in essence beta-weight this fairly well against Ethereum itself. I would project that they balance each other out well.
Our next breakout point after ranging will be the $2,800 ceiling, where following that it will then move parabolic till we uncover our new range:
Now an excerpt as promised from the Federal Reserve:
Some DeFi applications allow users to create collateralized debt positions and thereby issue new tokens that are backed by the collateral. To be able to create these tokens, the person must lock cryptoassets in a smart contract. The number of tokens that can be created depends on the target price of the tokens generated, the value of the cryptoassets that are being used as collateral, and the target collateralization ratio. The newly created tokens are essentially fully collateralized loans that do not require a counterparty and allow the user to get a liquid asset while maintaining market exposure through the collateral. The loan can be used for consumption, allowing the person to overcome a temporary liquidity squeeze or to acquire additional cryptoassets for leveraged exposure.
To illustrate the concept, let us use the example of MakerDAO, a decentralized protocol that is used to issue the USD-pegged Dai stablecoin. First, the user deposits ETH in a smart contract classified as a collateralized debt position (CDP) (or vault). Subsequently, they call a contract function to create and withdraw a certain number of Dai and thereby lock the collateral. This process currently requires a minimum collateralization ratio of 150 percent, meaning that for any 100 USD of ETH locked up in the contract, the user can create at most 66.66 Dai.6
Any outstanding Dai is subject to a stability fee, which in theory should correspond to the Dai debt market's maximum interest rate. This rate is set by the community, namely the MKR token holders. MKR is the governance token for the MakerDAO project. As shown in Figure 3, the stability fee has been fluctuating wildly between 0 and 20 percent.
To close a CDP, the owner must send the outstanding Dai plus the accumulated interest to the contract. The smart contract will allow the owner to withdraw their collateral once the debt is repaid. If the borrower fails to repay the debt, or if the collateral's value falls below the 150 percent threshold, where the full collateralization of the loan is at risk, the smart contract will start to liquidate the collateral at a potentially discounted rate.
Interest payments and liquidation fees are partially used to "burn" MKR, thereby decreasing the total MKR supply. In exchange, MKR holders assume the residual risk of extreme negative ETH price shocks, which may lead to a situation in which the collateral is insufficient to maintain the USD peg. In this case, new MKR will be created and sold at a discounted rate. As such, MKR holders have skin in the game, and it should be in their best interest to maintain a healthy system.
It is important to mention that the MakerDAO system is much more complicated than what is described here. Although the system is mostly decentralized, it is reliant on price oracles, which introduce some dependencies.
Final comment guys, the best oracle is LINK, which I am also bullish on & will touch on in a future date.
Additional Citations:
-Federal Reserve Bank of St. Louis: https://research.stlouisfed.org/publications/review/2021/02/05/decentralized-finance-on-blockchain-and-smart-contract-based-financial-markets?fbclid=IwAR24J84jLkMWWuuGeaCFLA6XbPq5JuACh1hpgS4cR5fnz7I1lO6uQly-gG8
-Whitepaper https://makerdao.com/en/whitepaper/#abstract
-Similar to how as shareholders we can vote with our underlying equity. MKR holders can go onto the Maker Governance Dashboard and vote on proposals and decisions and in a decentralized manner make decisions that will benefit the stability of MakerDao.
-Maker Governance Dashboard: https://vote.makerdao.com/
-How to vote:
We can likewise see the mean (red line has caught up to price and is strongly pointing up). The mean reverting to price, or mean reversion indicates to me that we may tag it and then continue higher on our trend as the mean continues higher. A great way to spot the trend is just to see what direction it is pointing.