Episode 56: October 10, 2019
00:00: Intro with Rich Brown
01:29: MCD Devcon5 presentation with Rune Christensen
23:30: Discussion and Questions about MCD
49:40: Dai Market Analysis with Vishesh
ES: Emergency Shutdown
SF: Stability Fee
SLP: Secondary Lending Platform
DSR: Dai Savings Rate
MCD: Multi Collateral DAI
Introduction & Governance
Summary & Introduction 00:00
- We have a special guest today, Rune Christensen, who will be talking about the recent announcement of the MCD launch date.
- Afterward, we will have Vishesh do some brief coverage on the Dai peg and other metrics.
- The theme of the next few Governance calls will be purely around migration.
- Give us feedback about the call.
- DISCUSSION HAPPENS IN THE FORUM
- As you’ve heard, we’re ready to launch MCD on November 18th.
- This presentation is meant to help internalize what that means from a governance perspective. What MCD means for DeFi in general, and the features it opens up for Maker that we’ve always wanted to have.
- The first thing we should do is take a step back and remember what the point is of what we’re doing. We’re creating a better economic system that can be a more resilient base layer for those who use it. Maker is built to benefit all the stakeholders and users of its ecosystem.
- What I want to highlight is that there are things like InstaDapp that take a bunch of DeFi protocols and put them together on one front-end which provides tremendous value for users because you are unlocking the synergy in an easy to use form.
- The Foundation is relaunching Oasis with the same approach of bundling all these services into our own branded front-ends.
- The hardest part of the next phase is scaling Dai to Billions in supply.
- Composability is the first big value unlock. The next huge thing is scaling the MakerDAO collateral portfolio. We believe MakerDAO needs real-world assets to scale the DeFi economy. We will be using blockchain to upgrade the legacy financial system.
- It’s important to talk about regulation. If we want to have real-world assets in Maker we need to understand how regulation applies. The huge question is around the need for recourse in liquidations and how to enforce legal claims on the underlying assets of security tokens.
- Approaching regulators with the strategy of diversification is very important. This helps us diversify our jurisdictional and regulatory risk.
- Synthetic assets are a way we can scale the supply side to meet the various kinds of demand there are for synthetic assets beside Dai, like EURDai, YENDai, and more.
- Creating Synetic assets involves using the same codebase of MCD, so there is no technical challenge to creating these.
- Having a central synthetic asset, like gold, for example, can include several on-chain gold solutions as collateral types to help centralize liquidity of the total on-chain gold market. A similar strategy can be used for other types of assets as well. It would create a less risky exposure to the underlying asset type.
- This is a low-res version of the new Dai logo.
23:40: LFW: Multiple Synthetic assets sounds like a terrifying amount of governance. Adding in multiple things on top of MCD sounds like it will be difficult.
- Rich: Hot topic of governance, we’ve been having a lot of conversations about that at Devcon. Governance, DAO’s, how do we manage what we’ve built, etc. There isn’t a point to point roadmap of how to do this specifically. I am confident that we will be able to iterate and accommodate the additional complexity for the new MCD. I am confident we’ll be able to handle it even if it is intimidating.
- Rune: Obviously, what it requires is the risk teams and other teams that MKR holders delegate responsibility to. It’s complicated, and no single member will be able to understand every piece and adjust based on that. The broad governance of all the MKR holders and all the participants will matter the most; proper sanity checks on what the risk teams come out with. There will be times where something falls through. We don’t try to engineer against risk; we try to be realistic about what happens.
- Rich: As the process matures, we will keep bringing in new teams. As empowered actors are released in the ecosystem, more teams of dedicated individuals will take on separate aspects of the ecosystem.
28:07: Akiva: Do you think it’s a good idea to have non-US based collateral as a plan for the collateral portfolio diversification? e.g., Russia as a good place to bring on collateral.
- Rich: As a regulatory arbitrage?
- Akiva: The concern is that the US could use allies to seize collateral unfairly. So a way to protect against that.
- Rune: Initially, I think what we should hold onto is the stability provided by the rule of law. Focusing on diversification across the most influential legal jurisdictions will help us manage geopolitical and regulatory risk. Countries with a strong track record on standards of law and property rights are less of a risk. China and Russia come to mind as geopolitical hedges. You can imagine a scenario where the US was an antagonizer for cracking down on collateral; you could see that China might support that collateral. It’s a valid point of a top-level direction that Maker should pursue. The riskier turn is the ease of which a government could crack down on property rights. The US core economy functions on private economies of property rights and private business. Every corporation acting as a mini-government is fundamental for the economy to even work at all. So it’s expensive for the country to start causing doubts about the rule of law. Whereas China and Russia are based around state-owned enterprises. So non-geopolitically-aligned places are unicorns worth looking at. Like Singapore, for example. In general, we always want to diversify.
37:15: Renat: What may be the possible steps, milestones, and prerequisites for MCD to launch a stablecoin that tracks something other than the US Dollar, like the Argentinean Peso?
- Rune: Argentineans don’t want anything to do with their own peso. That is actually why Dai is seeing an explosion of use in Argentina. However, it may be as simple as deploying the same technology stack of MCD to efficiently facilitate new synthetic assets, Peso, or anything that has demand.
43:08: Rich: When do you think Synthetic assets will be a real topic of conversation for launch?
- Rune: I can’t answer that. From the tech, we are very close to being able to do that. I imagine the big blocker is really Governance. There will be collateral types that will have the same risk that you will be generating with them. So you may be able to port them over to CDP types that generate synthetic assets other than Dai. However, there may be differences for something like T-bills backing a Euro instead of a USD coin.
Dai Analytics 49:40
Santiment Maker Data
Graphs about Maker
Graphs about DeFi Loans
DAI 24hr VWAP Graph
- Dai supply has grown to around 85MM most recently. Given all the buzz and appreciation of MKR price, there is a renewal of optimism in the market. Partially fueled by the MCD launch date announcement.
- What was interesting is that at around the same time frame, a bit more collateral was added to the system as an apparent risk hedge. Then it was quiet. Some circulation occurred where collateral was added and removed by various users. Along with the supply increase, more collateral was added again, which is expected. As more DAI is drawn out, more collateral will go in to maintain the collective risk.
- No bites due to ETH appreciation and lack of quick downward action.
- The 24hr VWAP is slightly above $1, at $1.005 now. The general conclusion is that the peg is healthy.
- Trading volume on Dai pairs have been above average in the last 24 hours, at around 4MM, when it’s normally closer to 2MM.
- 7 Day VWAP is $1.009, with around 16MM in volume.
- Network activity has been very interesting. The transaction volume of Dai has contained a general sustained increase since late April. We’ve seen a spike in Txs in September and in the last few days (and several times since late April.) Primarily driven through increased smart contract usage, moving positions around, increasing them, etc. It will be interesting to see if we see another sustained increase in transaction volumes.
Secondary Lending Platforms
- This has been in an interesting state since the recent SF decreases to 10.5%.
- The borrowing rate on Compound has been more expensive, holding at 12%. Borrow volume has been steady. Despite the incentive to refinance through Maker.
- The new Dai supply was not a result of refinancing from other protocols. The total Dai borrowing pie has grown by a few million.
- Supply amounts on SLPs have been relatively steady. Roughly 49MM lent between dYdX and Compound. ~ 10% change upward since the SF drop.
- Excess supply has a slight increase since borrow hasn’t gone up, minor hit with some position closures.
- Utilization has taken a dip in the last couple of days.
General Q&A 58:12
- Florian Glaz: We just applied as collateral for the MCD system by opening a thread in the Maker forum. Two questions: What is the process from here? & Given that we are applying as a regulated security token, does that alter the process? What can we do to help?
- Cyrus: The next steps are that after MCD launches, the first few collateral types will be assessed and added. After that, our Risk team or some other risk team will be able to pick up applications from the forum and begin to evaluate them. In terms of being a security token, one thing that will likely be critical, there is to have some legal-focused review. We are working to facilitate the creation of a process for this kind of need. Depend
- David: Clarification about the role of the Asset Priority Poll, and whether risk teams do work outside of this priority list?
- Cyrus: The Asset Priority poll is not something that locks in asset review in stone per se. Risk teams are welcome to choose which collaterals they want to produce reports on. The Asset Priority List is guidance on community preference.
- Florian: Regarding these Risk Teams, are they all in-house? Or do you work with outside experts? Is there anything we can provide for reviews on security tokens that might help with this process.
- The short answer is that yes, we will need to have external risk teams since it is not feasible for the in-house risk team to handle of MCD collateral onboarding. The vision has always been to have multiple external risk teams that are either generalists or specialist risk teams.
- Rune: For security tokens, in general, we should expect a lot of technical overhead for supporting things like whitelists and backdoors. Building external adapters for security tokens will be one thing that significantly impacts the timeline since the Maker protocol doesn’t support those natively. One primary concern is how to deal with a situation where when the token is redeemed for the underlying asset; there needs to be a strict compliance process that needs to happen. Another major issue is how to deal with anti-money-laundering regulations that govern these assets. Just because you have a token on a blockchain doesn’t guarantee a legal claim on the underlying asset. Usually, you prove the chain of custody on an off-chain basis, by showing ownership through an issuer and that there weren’t any compliance conflicts.
- Florian: There is no whitelist on the token level, and we complied with the Gem-join standard adapter.
- As for the legal claim on the underlying token, we don’t see the need to evaluate its chain of custody for the entire lifetime once we redeem its base-value. When you want to redeem the token at the end of the lifetime of the fund, then the owner of that address will have to KYC, potentially via video. If they aren’t on the blacklist, then they could redeem the Euro balance. If they can’t redeem, then it’s recommended they sell it on a secondary market to someone who can redeem it.
- Rune: The edge cases have to be considered here. Especially if you can prove that an asset was used for terrorist financing, for example. You need to be very careful about keeping tokens clean. If tokens do end up having legal claims as a risk, then one solution is building a specific KYC compliance layer just for that coin used in the CDP. So we can greenlight the asset before it enters a CDP. This prevents the DAI generated from becoming insolvent in the future due to legal claims. It’s not black and white, it’s always a risk decision, but it can extrapolate out, so the SF or the debt ceiling is affected by this.
- Florian: Thank you, and we’re happy to have these discussions with the risk team. Maybe we can produce a framework around security tokens as a result.
- David: We released our governance roadmap for things that need to happen before the launch of MCD, for example, the DSR initial values poll, collateral inclusion poll, risk assessment of initial collateral, polls on all other configurable parameters, including their auction parameters. With the Nov 18th launch date, how many of these need to happen? Does it have to launch with these completed?
- Rune: The basic thinking is that the launch of MCD is going to be functional. Cool new features will be available immediately. Bridging to new DAI is going to be available immediately. The broader governance will take longer to get up and running. How governance takes full control and has a proper rationale for every decision, and ultimately every parameter in the system, is an open question. There has to be a clear prioritization about what are the most important parts to configure as quickly as possible. In the beginning, the priority is the migration itself. We want to do that sooner than later; the bigger the ecosystem, the harder the upgrade. Critical base risk parameters Debt ceiling, Liquidation Ratio, SF for collateral types, will likely come first.
- The Foundation will propose interim values for all of these things. The community can then scrutinize these and offer rational arguments for changes that need to be made. Because it’s already tough for governance to wrap their heads around the current major parameters. The granular details can be proposed upfront by the risk team in the launch proposal.
- The system is going to always be in flux. Governance has to view the system as prioritizing correctly and helping the system grow. If certain mistakes are made and we learn, that’s part of the evolutionary process. Bigger picture matters first.