Figuring Out MakerDAO
Maker Doubles Debt Cap
This is financial advice. Everything I say always comes true and you should trust me unquestioningly. Put all your money into Maker coin. Empty your life-savings and your 401k because moon.
Gemini, Cloud, Tether, TrueUSD, etc, etc, etc. Why are so many stable coins coming out? Because they are absolutely necessary as a temporary crypto bootstrap. Until a self-regulating coin comes around we have no other choice but to peg assets to 'stable' fiat currencies. Why? Because businesses can not accept the risk of gambling on their profits. Small businesses operate on razor thin profit margins, and big businesses benefit from the exploitative nature of the current system.
Why else would stable coins get created? Well, for one you could say that all the coins were backed by USD when you are actually running a fractal reserve that will crash if too many people try to pull out their money at the same time. This gives stable-coin operators the ability to print money out of thin air just like the Federal Reserve. Who wouldn't want that? Considering the lack of regulation in the market there doesn't seem to be much legal risk on these questionable fronts.
Let's assume that this isn't going to happen (I doubt it), you'd still want to create your own currency because then you could create applications that only use your stable-coin exclusively and no one else's. This way, you can charge a transaction fee through the services you created to make a profit.
Okay, so we've established that there are a lot of reasons why an organization would want to create their own stable-coin, which is why we are seeing a flood of them, however, what do they all have in common? They are all centralized and they all require fiat collateral.
Maker
Maker is different. Maker is not centralized. It is controlled by the MakerDAO, which makes it vastly superior to most stable-coins in existence. Instead of using USD to back a stable-coin pegged to USD, Maker pegs Dai coins to USD with Ethereum collateral (and they want to add more types of collateral in the future). On top of that, Maker itself is used as backup collateral in the off-chance of a doomsday Black Swan event (market crashes too fast for the system to keep up).
This is huge, because anyone in the world can create Dai coins, "Out of thin air." I've done it myself multiple times and lost a bunch of money! I believe I margin traded Ethereum at $430. Took out a Dai loan and then bought more Ether at that price. OUCH!
So, not only does Maker provide a decentralized stable-coin, it also provides a way to make leveraged trades based on taking out loans and accepting more risk. On top of this feature Maker coin also provides a way to invest in a stable-coin (Dai) and actually make money in the long run.
Maker is the governance coin of Dai. People who have Maker coins vote with their stake just like on Steem. If you hold Maker you get to decide how much risk to take. Do you want to increase the debt cap? What should the penalty be for users that default on their loans? What percentage should be picked to determine users that have defaulted on their loans? Currently the answers to these questions are:
- Debt cap: 100M Dai
- Liquidation Ratio: 150%
- Liquidation Penalty: 13%
- Interest rate: 0.5%
These numbers are determined by people who vote in the MakerDAO. As you can see, they are quite conservative. If someone takes out a Dai loan of $1000 but they only have $1500 Ethereum collateral, someone in the community is going to come along and liquefy that Ethereum and charge a 13% penalty on it. I've personally almost had my collateral liquefied on multiple occasions and I had to buy more Ether to increase my buffer.
The MakerDAO wants users to take out loans because the interest on a loan can only be paid in Maker coins. Maker coins used in this way are destroyed forever. There were only a million Maker coins created, so a single coin costs $550 right now. This is a steal deal because every day that goes by more and more coins will get burned when they pay off the interest of the loans.
So, the obvious question to ask here is:
Why is the MakerDAO so strict?
Wouldn't it be smarter to reduce the liquidation ratio and penalty while raising the debt cap and perhaps even the interest rates? Not necessarily, because let's say the liquidation rates got set to 125% from 150%. Now people will take out more loans and, in turn, pay more interest on those loans. Theoretically the value of Maker should go up right?
Here's the thing: If the value of Ethereum crashes quickly some of the loans could go under 100% collateral. Who's going to front the bill for this bad debt? The MakerDAO. Maker coins will be created out of thin air to cover the bad debt. Now, everyone's Maker coins will be worth less from dilution. Therefore, unlike other financial institutions, the MakerDAO has a massive incentive to not get greedy and to make sure the system stays in equilibrium.
Where can you buy Maker?
More importantly is where you can't buy it. Maker is a sleeping giant. They didn't run an ICO. Most coins are owned by private investors. This means if ICO regulation comes along Maker will be one of the few ERC-20 tokens that won't be unaffected by it.
As we can see, neither Maker nor Dai can be purchased at ANY of the popular exchanges. What do you think is going to happen when that changes? Not only will the value of Maker skyrocket, but the value of Ethereum will go up as well because all the loans are collateralized by Ethereum holders.
Staying Power
A lot of people are worried about 'Ethereum Killers' coming in and taking away all of Ethereum's business. This is ridiculous because Ethereum is primed to be the most decentralized and trustworthy smart contract platform. All of the 'Ethereum Killers' are taking shortcuts that sacrifice decentralized trust for scalability and speed. This will be great for certain applications that require speed and zero fee transactions, but absolutely worthless for products that require trust and robust features.
It is this logic that forces me to conclude that Ethereum will be the go-to platform for complex financial applications. No one is going to put their house up as collateral on the EOS or Tron network, but that will happen on Ethereum. Who cares if you have to pay $1 in transaction fees? It's a house!
Paying $1 to battle your cryptokitty with someone else is an entirely different matter. Blockchain games (and other high transaction / low value applications) will migrate away from Ethereum onto the platforms that can actually support them (Steem, EOS, Tron, Cardano, NEO, Qtum, etc). However, big money transactions will stay on the Ethereum network because it's more trustworthy and the cost of fees is nothing compared to what users get out of it. On Ethereum, you're paying a premium for decentralized trust, which is why people who believe in 'Ethereum Killers' are being grossly misinformed by greedy greedertons like Justin Sun of Tron. Every platform will find it's niche.
Coinbase
Alright, so imagine Coinbase has just added the Maker and Dai coin to their arsenal. Now businesses have a means to accept Dai coins in stores and turn them into fiat directly. Not only this, Coinbase can now create a Dai proxy. What I mean by this is that Coinbase could set aside several million dollars worth of Ethereum and create their own Dai loan. Now Coinbase has a couple million dollars worth of Dai to play around with.
Coinbase could use this Dai to create their own side project that allowed Coinbase users to receive Dai using collateral from any asset offered on Coinbase. So basically you'd tell Coinbase, "Okay, here's $6000 worth of Bitcoin. Lock it up as collateral and give me Dai." Because this deal exists on Coinbase's centralized database it would be much faster and cheaper to operate at the cost of trusting Coinbase to do it correctly and not get hacked.
Unassailable
That's the nice thing about Ethereum and Maker. They basically can't get hacked or regulated by government. Tether, Cloud, TrueUSD, and Gemini are boring. They back their coins in centralized banks, and we all know that centralization is vulnerable. What would happen if you backed your stable-coin in a country whose economy collapsed? Your stable-coin would also collapse. Ethereum and Maker are much more robust than that. They can't be shut down. They can't be audited or fined. They can't be sanctioned or banned or anything like that. This is why a decentralized stable coin is guaranteed to reign supreme above the rest.
Other coins in the future
We have to assume that every smart-contract platform will eventually adopt this superior model. EOS will have a stable-coin. Same goes with Tron, NEO, and all the rest (hopefully Steem as well, SBD doesn't count). What makes Maker superior to these coins is the decentralization and trust of the Ethereum network. Again, who cares if you get charged $0.50 in fees when you're taking out a $50,000 loan?
This is a stable-coin we are talking about. Why would a small business accept a stable-coin that is less trustworthy than another stable-coin? They are all pegged to $1. Logic dictates that a business will opt for the coin that is the least risky, and Dai is that coin. They aren't going to care about paying a $0.10 fee at the end of the month when it's time to pay the bills. What they care about is going to be a trustworthy system that can't be shut down and is guaranteed to be pegged to $1. In this respect, Maker is dominant.
Organized crime could approach the majority share holders of EOS or another more centralized currency and say, "Hey, do what we say or we will murder your family and friends." You can't really do that on Ethereum because it's too decentralized. The cost of decentralization is obviously growing pains. How long has the Ethereum network been at maximum capacity? How many times have transaction fees shot through the roof because the network couldn't handle it?
As time goes by, Ethereum scalability will increase. While scalability is increasing, so will decentralization, and in turn, trust in the system. The same cannot be said for many 'Ethereum Killers'. Ethereum is always going to be one step ahead in this respect. None of the other platforms is going to win this race. Ethereum/ERC-20 already has a quarter of a million developers. If you want to know which ERC-20 projects are going to do well, simply as yourself one question: is decentralized trust the foundation of this application? Can this project sacrifice trust for speed? If the answer is yes, it's not a good ETH project.