How MakerDAO's recent upgrade creates a dynamic credit system & more
Messari hosted a public AMA with Steven Becker, COO and President of the Maker Foundation in the Messari community group. Below is a transcript of the conversation.
You can find all of Messari's historical AMA's here
Messari: Thanks for joining us! We’ve received a bunch of great questions and will try to get through them all, but before we start would you mind giving us some background on yourself and how you got started at your current role?
Steven Becker: So my previous lives have all been in traditional financial services. Everything from interest rate derivative trading, fund management, corporate finance you name it. So when I first heard of Bitcoin and Ether - I was like... Uh no thanks. I was trading futures and options, did not want any more volatility and besides - personal opinion here - did not consider them to be actual currency but... the blockchain infrastructure was really interesting and that is what drew me to Maker and specifically this whole thing about a decentralized stablecoin
Messari: Awesome! Makes sense for someone interested in blockchain but not wanting volatility, MakerDAO lets you have your cake and eat it too. So lets dive into the questions we've received! To start we have a few about Dai itself
Outside of using it for leverage what can you use dai for?
Steven Becker: Dai is digital cash. Cash that can be sent and used around the world. Currently there are 400 live integrations/partners with the protocol... ranging from remittance all the way to gaming, so it covers a lot use in varying industries. Ultimately keep in mind Dai is just digital cash. One new example
Messari: Obviously the whole system underwent a massive upgrade recently, we have a question relating to the Sai>Dai migration.
Will Sai exist forever or is the plan to eventually have it all rolled into Dai. If so, is it possible to enforce this?
Steven Becker: Firstly keep in mind that the protocol is decentralized. So ultimately it is up to MKR holders, who I call Governance. The plan for Governance... is to shut down Sai when they have deemed a sufficient critical mass of Sai has been migrated to Dai. So no set date, it is up to them.
Messari: Gotcha so a little up in the air but will end up winding down based on the decision of the collective. One more question about Dai in particular
How is Dai impacted if one of the collateral types is deemed a security or there is some regulatory issue? Say for example, the SEC says BAT is a security.
Steven Becker: Keep in mind that one of the conversations Governance is talking about is tokenized real world assets and security tokens. By definition they will be securities that can be used to generate Dai. Therefore there is no impact on Dai itself, as Dai depends on the core value of the collateral type for its stability and will still be decentralized.
Messari: Are you committed to permissionlessness? What happens if a regulator demands KYC on all DAI creators? Or if the SEC says MKR is a security?
Steven Becker: Again, because the protocol is decentralized it is operating in the same vein as Bitcoin and Ether. Therefore the regulatory approach to these decentralized tokens will most likely be applied to the Maker protocol and Dai.
Messari: Do you think adding real-world assets hurts permissionlessness? If not, how can addition of something that *requires* a centralized maintainer not harm this?
Steven Becker: This brings up a great point. From my point of view the real value right now is in the intersection of the traditional world and blockchain. It is at this intersection that the traditional will start to realize the full value of the blockchain. I am further of the opinion that Maker is an economic engine that will facilitate the growth of an economy on-chain. So to get there we need a transition point... That is where using real-world assets will showcase the value to real-world organizations, until the dovetail effect will produce enough evidence for the real-world to integrate blockchain into their architecture.
Messari: That’s helpful, so it seems Maker can strike a balance between allowing centralized assets without compromising the permissionless of the whole system.
Steven Becker: Within reason and up to Governance
Messari: Gotcha, and regardless of the types of collateral, there will inevitably be more than one type available which obviously creates more parameters to be governed
What types of participants are most fit for the task of determining risk parameters? Especially as the collateral portfolio expands and there is more work to do
Steven Becker: This is something I would personally like to see more of, and that is new risk teams contributing supporting Governance and contributing to the protocol. There are so many asset types that could be used as collateral that the entire spectrum of risk will apply. Consequently anyone with market risk knowledge to legal and operational could quite easily contribute depending on the asset type under consideration.
Messari: What kinds of tools are people using to determine the risk parameters of the protocol?
Steven Becker: The protocols risk function, as can be seen on the Thursday governance calls (4 pm UTC), have used liquidity and market risk based Value-at-Risk models, both parametric and non-parametric. ...and that is due to the fact that the collateral types under consideration have recourse to secondary markets and price discovery. Models in the future would be a lot different and incorporate more of the risk spectrum so I am looking forward to seeing what those are personally.
Messari: You probably have keen insight into this next question given how closely it ties in with your background. What role do you see for interest rate derivatives to hedge governance parameters?
Steven Becker: Quite a bit actually. What is interesting from an IRD point of view is the basis risk of the Stability Fee against a traditional overnight rate, together with the spread of the SF and DSR. So lots of points of 'interest' for that type of instrument. I also believe that there is an organization providing Credit Default Swaps on vaults and similar insurance type products.
Messari: Speaking of the DSR,
Since the DSR cuts into the "revenue" of MKR holders (via MKR burn), what incentive do they have to increase it?
Steven Becker: That is a component of the broader economic aspect of the protocol. Supply and demand generally move in lockstep, so where the SF would help with the generation of Dai and thus supply the DSR provides the demand aspect that creates the balance. Given a supply driven scenario the DSR would be used to help find the clearing point and provide the necessary robustness to the protocol. For those not familiar with DSR. So the DSR, or rather how Governance manages the spread between SF and DSR will promote the necessary momentum for growth in a considered fashion.
Messari: So even though it decreases the "margins" of MKR holders its a necessary cost to drive the demand side of Dai
Steven Becker: Correct, as a quick example, runaway supply may be a detriment to the protocol which could be balanced out,first by arbitrage if the Dai price is impacted, or by increasing the SF OR the DSR - implying the spread is what helps with the balance.
Messari: Makes sense, and one more question regarding the DSR
What incentive do Dai holders have to use the DSR compared to other DeFi protocols with higher rates?
Steven Becker: DSR is a type of risk-free rate that I like to call the 'trust-free' rate because this is DeFi. So the incentive is to get paid with the only risk being the underlying protocol.
Messari: So the spread between the DSR and other lending rates is simply the risk premium accounting for the possibility of credit defaults
Steven Becker: Yes
Messari: So were closing in on the hour mark here and will wrap up with a few more miscellaneous questions
Does the upcoming Istanbul hard fork pose any problems to Maker's contracts, similar to Aragon? If so, would Maker consider migrating to Cosmos as well?
Steven Becker: No we are not affected. The smart contracts for Maker do not have hard-coded gas requirement like Aragon. Further, even though Maker is blockchain agnostic, it is more important to look at blockchains with the greatest available value. Right now that is Ethereum.
Messari: How do you think about competition down the road if someone figures out how to do non-collateralized loans on Ethereum? How scalable are collateralized loans?
Steven Becker: The more competition the better as it helps develop the DeFi landscape and showcase the value of DeFi to the traditional world. Generating value from assets is only restricted by the value of the assets available. Consequently if real world assets were tokenized, the access to value would be potentially huge.
Messari: Definitely. Well I don't want to keep you too long thanks so much for joining us Steven! This was super insightful. To finish off could you just give us what excites you most regarding the future of the project and what the best ways are for people to keep up with the happenings in MakerDAO
Steven: To finish off could you just give us what excites you most regarding the future of the project and what the best ways are for people to keep up with the happenings in MakerDAO. On Twitter, with the team Or if you're interested in Governance, please join our forums
Messari: And for everyone else, if you're interested more in a lot of these supply/demand and interest rate dynamics, we covered them in our latest Pro Research piece. You can see a snippet below
You can read the rest here.