MKR.tools creator Mike McDonald raised a celebratory alarm on Twitter yesterday morning. According to the Ethereum blockchain, about 1 million ether – or almost 1 percent of the total Ethereum supply – is presently locked in MakerDAO smart contracts.
— Mike McDonald (@mikeraymcdonald) November 13, 2018
MakerDAO is the project behind Dai, a second-generation stablecoin offering which very carefully enables the issuance of the US dollar on the Ethereum blockchain. The mechanics can appear complex, but Maker offers a helpful “for dummies” explanation that does not require one to be an expert economist or Ethereum developer to grasp. Author Gregory DiPrisco explains the difference between Dai and, for instance, Tether:
“You’re most likely familiar with stablecoins that hold USD in bank accounts and issue tokens on a blockchain that are ‘backed’ by these dollars. I call this legally-backed crypto, or an IOU coin, because if those bank accounts should ever be frozen or if the accountants defrauded token holders, the stablecoin now becomes an IOU on whatever’s left when they eventually get the bank accounts back (if they ever regain the bank accounts). Relying on the legal system to maintain crypto-tokens inserts an unreliable middle-man into the blockchain.”
Not All of This Ether is Contributing to Dai’s Market Cap
Although the blockchain shows around 1 million Eth locked up in Maker smart contracts, the Dai token’s market capitalization is actually somewhere around 1/3rd of that figure, at time of writing sitting around ~357,000 ETH / $72+ million.
The way the Maker system works is that users pool ether together (referred to as PETH) and are issued Dai tokens which are collateralized by the deposited ether and, through various mechanisms, are stabilized at $1. A term frequently used in these discussions is “WETH,” which is short for “wrapped Ether.” WETH is more of a concept than a product of the MakerDAO – PETH and Dai are respectively tokens issued by Maker.
A total of 967,507.91 ETH were locked in the primary Maker contract, PETH, at time of writing.
A total of just over 103 million ETH have been generated since the smart contract platform’s funding and subsequent inception on July 30, 2015. This figure includes the initial 72 million coins that were issued as part of the Ethereum crowdsale or ICO-style funding mechanism that took place the year before.
Which is to say that MakerDAO, which launched the PETH token and related products near the end of last year, presently accounts for nearly one full percent of all ether in existence. While some feel that Dai’s practical applications are limited, it is taking a radical approach to a complex problem, with results that have not been overly disappointing. It has built-in mechanisms to liquidate positions which might destabilize the system at large:
“[…] there remains the possibility of the incentive structures not working as expected — especially when the price of ETH keeps dipping and its value is worth less than the amount of Dai that it is supposed to be backing. […] In this situation [undercollateralization], the Maker system triggers a liquidation of the CDP’s collateral, automatically selling it off to the highest bidders for Dai as fast as possible to recapitalize and ensure that the Dai that it issued to the original user is fully collateralized.”
It also has a massive amount of Silicon Valley venture dollars in it, after Andreessen Horowitz’s (a16z) new crypto holding fund, initially capitalized at $300 million, went into Maker to the tune of $15 million last month.