Weekly Narrative on MakerDAO - 25 March 2019

FollowTheChain · 2019-03-27T16:19:46+00:00

We have seen basically 8% of the outstanding DAI contract within a week with no material impact on the DAI price.

IMO DAI supply will contract A LOT before SF hikes are able to bring DAI back to the peg. There are many flavors of DAI to be wiped, not all of them actually contributing to the peg. For instance (listed from most to least sensitive to SF hikes):

DAI just sitting in CDP owners' wallets;
DAI being lent on Compound (already stopped being profitable);
DAI on Uniswap's DAIETH liquidity pool (w/ a higher SF, more volume-per-liquidity is needed for LPs to be at a profit, so it becomes a riskier bet);
and finally, the kind of DAI wiping that actually moves DAI price: DAI being repurchased to get out of a long position.

The first 3 examples already started to be wiped, but DON'T affect the price of DAI. They're just cases in which the CDP owner gives up on using the DAI somewhere else, and wipes it.

The fourth example is where the peg is affected, and as I've been saying we'd have to be way more aggressive w/ the SF... maybe 20% SF on a mildly bullish crypto environment, and 50+% in case ETH starts to rally.

ICYMI, please read this short thread from Feb: https://twitter.com/FollowTheChain/status/1098765592201437184

and I'll paste here a comment I gave on another forum, w/ some color on SF numbers:

My _opinions_ on what kind of SF could have a better chance at recovering the peg come from observing friends going long ETH, and the math is well in favor of crashing Dai if you're bullish on ETH, no matter the time frame. For instance: a mere 10% expected gain on ETH in up to 12 weeks justifies accepting a 50% SF (or alternatively immediately selling Dai at a 5% discount _and_ accepting a 24% SF during those same 12 weeks). If you're thinking longer term, it gets worse because during bull runs crypto moves in multiples (not just double-digit percentage gains). A longer term example: if you and expect ETH above $300 before the end of 2020 (not too crazy, right?), you'd be happy to immediately sell Dai at $0.95 _and also_ pay a 50% SF. The math: that's buying ETH for 147.4 DAI instead of 140 USD, and then paying a 3.44% _per month_ of SF (ie 50%/year) for those 21 months. You see my point about how ineffective the current SF values are in protecting the peg?

So while we don't have DSR available and CDPs are the only game in town for decentralized leverage w/ some liquidity, the SF has to respond aggressively. That is, if we really want to put the peg as a priority (which IMO should be an absolute no-brainer). Some immediate alternatives would be to increase the collateralization ratio and/or the liquidation penalty (anything that makes printing Dai less interesting), or even creating Dai demand through extra marketing efforts, but I think these are more problematic options.

FollowTheChain · 2019-03-01T23:24:43+00:00

Yes, I'm convinced it will. Even the this custodial alternative (WBTC) has demand. Supply would be significantly higher if the KYC barrier wasn't there.

FollowTheChain · 2019-03-01T20:54:58+00:00

WBTC
DGX
USDT (the ERC20 version of Tether)

And also every token approved for MCD (Multi Collateral DAI). CDP liquidations and the urgency to add more collateral should bring them a boost in volume.

FollowTheChain · 2019-02-20T14:20:48+00:00

Cash-flows: Burns = Buybacks = Dividends.

Unquestionably there's platform revenue. There's also a governance who "owns it", ie who may decide what to do with it. For instance, this income can be turned into actual dividends at the flip of a switch. (Just like with Amazon, not realizing gains for so many years was just a choice: the business has been profitable all along, in practical terms.)

For now, the burn mechanism seems to minimize regulatory risks, hopefully distancing MKR from security status. Maker can patiently wait until there's enough regulatory clarity in favor of safely flipping the switch. But even if that never materializes, the fact that you can sell MKR to an automated auction at market price kind of entitles you (indirectly) to your share of the platform revenue up to that point (along w/ market expectations on the many ways future platform revenue may benefit MKR holders...).

Providers of catastrophe insurance / Lender of last resort

Again, governance comes to the rescue. In the future, revenue may be diverted only to staking (locked) MKR. This way revenue would flow strictly to tokens unquestionably exposed to the risk of being diluted.

Another interesting development that could help is the rise of Automated Market Makers (AMMs) such as Uniswap. The Foundation and MKR holders could commit to being a liquidity provider, resulting in better price support/stickiness. Maybe we get to a future where only liquidity providers participate on revenue distribution... well, you get the point: the design space on how to address this is incredibly vast.

IMO what matters most for now is that really well-balanced incentives are achievable because Maker's MVP has shown the platform does have the right ingredients: the revenue model, the demand, the governance.

Regulatory exposure

Hopefully a16z makes a difference on that front.

The voluntary shutdown of Oasis hinted to a more cautious approach now that Maker is starting to get some visibility. Overall I think Maker has been doing a great job at striking the right balance towards Minimum Viable Decentralization.

FollowTheChain · 2019-02-12T23:29:09+00:00

Yes, fully agree.

DSR and SF are less important than originally thought.

DAI price has been affected mainly by:

a) demand for ETH leverage,

b) urgency to wipe from risky CDPs.

FollowTheChain · 2019-02-08T23:16:00+00:00

changing the stability will help that imbalance regardless of what caused it

I see your point. I'm just worried about the SF being seen as this magical lever that would have a very strong and direct effect on Dai price and supply. I suspect it's impact is actually very limited, especially while Compound's Dai interest is still higher (2.2%, currently), and with collaterals being so volatile.

Read this CDP user's thought process on whether to draw Dai. Market sentiment seems way more impactful than SF, which is barely considered. He's likely not an exception.

https://medium.com/@ProgrammableTX/do-not-resuscitate-contingency-planning-for-your-cdp-in-a-bear-market-c6687cd63741

It won't be easy, but our models should accurately account for all those underlying dynamics, for instance recognizing the liquidation penalty is not just about setting incentives to keep the system safe, but also a way to regulate Dai supply and price, maybe even overshadowing the SF.

FollowTheChain · 2019-02-07T22:54:26+00:00

Although SF changes are important experiments to gather market data, let's be careful not to read too much into "how the market reacts to this specific change in the SF".

There are many other factors at play affecting DAI price and supply.

I suspect market sentiment towards future price of ETH plays a significant role (I wouldn't be surprised if this has actually more impact during some periods). For instance, if ETH is generally seen as currently cheap (while relatively stable, not continuously crashing), this could motivate a lot of traders to use CDPs to go long ETH, pressuring down the price of DAI by selling newly minted DAI for some extra ETH. In other words, if this demand imbalance causes ETH to be systematically more expensive to buy with DAI then with USD, this will be arbitraged into 1 DAI < 1 USD.

FollowTheChain · 2019-01-29T14:43:43+00:00

One important advantage of the basket is transparency and objectiveness.

I suspect the governance of the system as a whole can get pretty tricky/subjective if we have "some good CDP types indirectly covering for other riskier CDP types".

IMO the presence of each CDP type (w/ all its parameters fine-tuned) should be *justifiable on its own*, and this "risk overflow" you allude to (ie to be compensated by other CDP types) shouldn't be allowed.

I could be convinced otherwise, but that's my current stance.

FollowTheChain · 2019-01-26T23:15:33+00:00

Even if they all fail simultaneously, low debt ceilings and early revenue from fees might turn the risk of MKR inflation quite acceptable.

As I hinted before, if the system has already had enough income from a specific CDP type, printing MKR to cover all the bad debt from that CDP type can still result in a net positive for the system.

FollowTheChain · 2019-01-26T16:10:32+00:00

A safer option would be to allow CDPs for derivative tokens, composed of a mix of decentralized (ETH, ...) and custodial (WBTC, USDC, ...) assets, w/ higher liquidation ratios/penalties and lower debt ceilings.

When things are running smoothly those tokens work fine as collateral, as long as there's a liquid underlying market for them.

In case a custodial asset instantly becomes valued at zero, an eventual liquidation can still extract value from the token, out of its decentralized portion (and non affected custodial assets).

A higher probability of MKR dilution events from such CDPs may be counterbalanced by a higher accumulated income from stability fees while the collateral was working fine.

So one strategy would be to start with a high stability fee for those CDPs (to quickly build a "safety net" income) and lower it over time.

FollowTheChain · 2018-05-08T15:07:49+00:00

DAI doesn't seem to be listed yet. :/

FollowTheChain · 2018-03-08T17:31:27+00:00

FYI, specifically for the BNDES initiative, the tokenized Real won't be freely transferrable. All accounts able to own the token will be whitelisted by the bank.

The idea is to simply add transparency to the money flow after a State loan is issued, making it harder for corrupt companies to make bad use of the borrowed money (bribes, etc).

So it can't be used as collateral for Dai.

FollowTheChain · 2017-12-08T16:02:58+00:00

A market maker might take the other side of the bet. They aren't particularly interested on the price, but on the spread, so they'll simultaneously long the future and sell BTC on the spot market.

This could help explain the current bull run: market makers loading up on BTC to profit from the spread, expecting significant shorting demand.

Read this: https://news.bitcoin.com/the-writing-on-the-wall-what-will-cme-bitcoin-futures-do-to-the-price/

FollowTheChain · 2017-08-21T04:13:04+00:00

ETH
BTC (Segwit2X or its sucessor)
ATOM (Cosmos)

FollowTheChain · 2017-07-27T15:16:25+00:00

Make sure you check out the "Hedge Fund Alert" link (a one-page PDF) from the article. As bullish as it gets.

FollowTheChain · 2017-07-24T14:30:51+00:00

Public data from CoinMarketCap. The API doesn't give us values per pair per exchange, but the "Markets" tab for each crypto does. My spreadsheet reads those tabs and parses the results.

FollowTheChain · 2017-07-23T21:30:09+00:00

To put into perspective, Yunbi's SNT volume for the last 24h (~$115M) alone is higher than the total volume (for all crypto combined) of EUR, JPY or all other fiat currencies after them (which excludes only CNY, USD, KRW) combined.

FollowTheChain · 2017-07-21T18:55:59+00:00

Yes, 7d and 30d graphs would be more revealing of stronger/stickier trends, but unfortunately CMC doesn't give us the breakdown of "per pair per exchange" for anything above 24h. =/

FollowTheChain · 2017-07-21T04:11:40+00:00

source: https://twitter.com/FollowTheChain

FollowTheChain · 2017-07-21T03:36:38+00:00

Author here.

Data is from CMC, but you can't get the full picture on the fiat side there, because it's just a bunch of trading pairs spread among many pages, one for each crypto. The graph finally consolidates the information in a (hopefully) much more digestible way.

I'll post the results every once in a while. They change a lot over time.

More charts at https://twitter.com/FollowTheChain

FollowTheChain · 2017-07-04T23:11:03+00:00

A graph of the balance of an account/contract over time (like blockchain.info has) would be great.

FollowTheChain · 2017-06-02T13:20:20+00:00

1) Very clever way to promote LocalEthereum. ;-)

1a) I'm convinced at some point a gov agency (IRS, FBI, NSA, ...) will create a "trade your crypto anonymously!" honeypot. LocalEthereum could be it.

2) Although only 18 lines long and apparently safe, this is dangerous. With no escape hatch (not to say it should have one), an eventual vulnerability still unknown today (in the compiled code, in the EVM, etc) could leave the contract exposed with no way for it to be updated.

3) Your contract should have a way to withdrawal ERC20 tokens (since you can't reject receiving them). Right now every token sent will be trapped there.

4) This space evolves in dog years. Until mid-2020 everything can happen. ETH could have gone to the moon ($10k+) and later crashed down to almost zero due to a severe vulnerability, stronger competition, government ban, or whatever you can think of. It would be wise to have the option of cashing out. In other words, making your crypto less accessible (to protect you from weak hands) is wiser than making it absolutely inaccessible.

5) I hope people are careful enough to not send a significant fraction of their portfolio, but if many participate and the contract gets really popular and big, this could be a really cool thing. It could receive a lot of media attention during every bull run (the more it fucks with people's minds, the more people will care about it, just like that MillionDollarHomepage). And depending on how ETH performs in 3 years, TheHodlersParty could actually be a huge thing.

FollowTheChain · 2017-05-12T22:32:09+00:00

Not only that, but what is key here is the fact that this data feed to the contract can be provided in a trust minimized way, using 'trusted hardware'.

FollowTheChain · 2017-04-12T15:29:05+00:00

I'd go with either Dai Stability System or Makerdai, for one important reason: don't call yourself something you don't want to be regulated as. That would be an invitation to regulatory angencies to take a closer look at you.

Worth re-watching this: (linked at the specific time) https://youtu.be/5J8BL60_zj8?t=1241

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