Why Maker? Why Now?
As a company focused on the Ethereum ecosystem, Ether Capital is committed to finding and supporting high-quality projects that further its Web 3 vision of decentralized networks. For some background on our Web 3 vision, see our INVESTMENT THESIS.
Often, after we explain the promise of Ethereum and Web 3 our investors ask: “what specifically can you do with Ethereum?”
While there are thousands of decentralized applications (“dapps”) running on Ethereum, Maker is one of the most impressive and highlights how Ethereum truly changes the rules of the game.
Maker is a decentralized credit platform built on Ethereum in which collateral is leveraged to produce a stablecoin, Dai. Dai is a cryptocurrency that is pegged to US$1.00 and, in our view, is crucial to the adoption and growth of Ethereum.
Think about buying or selling cryptocurrencies. Instead of converting into US dollars or other fiat currencies to achieve stability, you can simply trade in and out of Dai as a crypto-native solution. Buying a cryptocollectible or participating in a prediction market is more useful with Dai instead of Bitcoin or Ether because the volatility is removed. At developer conferences, organizers often use Dai to buy and sell food and merchandise, which is easy because 1 Dai always equals 1 US dollar.
So what backstops the value of Dai? The answer is collateral.
The mechanics can get complicated but the key is vaults (“Vaults”). Opening a Vault requires a deposit of a cryptocurrency, such as Ether, as collateral into the Maker smart contract. The Vault holder can then draw an amount of Dai that is less than the value of the deposited asset, up to a certain maximum loan-to-value ratio. Where a Vault’s loan-to-value ratio rises above the maximum permitted due to a fall in the market value of the asset in the Vault, the Maker platform provides for a forced liquidation of the collateral that is algorithmic and fully transparent. Maker’s forced liquidation process reduces the Dai debt in circulation in order to keep the system overcollateralized so that Dai’s peg to the US dollar remains stable. For a more detailed, yet simplified, explanation of Maker, see THIS POST.
How does Ether Capital benefit from the growth of Dai usage? This is where the MKR token comes in. MKR is an equity-like token that provides voting and governance rights over the Maker platform and whose value derives from fees to use the credit system. If you believe in the growth of Maker and Dai, the MKR token provides the financial exposure.
So what’s the roadmap for Maker? As new cryptocurrencies have been onboarded as collateral into the system, the amount of Dai outstanding has grown substantially. The key to having billions of dollars of Dai outstanding will be the onboarding of real world assets, in a way that preserves the integrity and risk parameters of the system.
Finally, it is important to note that Dai is decentralized. You may have heard of fiat-backed stablecoins recently. These are crypto-tokens that draw their value and stability through US dollars that are held in a bank account controlled by the issuer. The problem with fiat-backed stablecoins is that they are subject to censorship and redemption risk that limit their utility. Dai is much more transparent, neutral and decentralized, which we believe is a foundational part of any Web 3 vision.
We are truly thrilled to be an investor in MKR and look forward to supporting the Maker team and the Foundation.