Rune Christensen, CEO and cofounder of MakerDAO, explains how multicollateral Dai will work, what happens if one type of collateral fails, and what happens when someone’s collateralized debt position with multicollateral Dai needs to be liquidated. He also discusses who gets to participate in the various levels of governance with the MKR token, who owns those tokens and what the purpose of the Maker Foundation is. We also cover whether the CFTC would consider collateralized debt positions to be derivatives and therefore under its purview, how Dai is being used and how much education is required for people to use the system.
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Tokensoft: https://www.tokensoft.io
Episode links:
MakerDAO: https://makerdao.com/en/
Rune Christensen: https://twitter.com/RuneKek
Previous Unchained episode on stablecoins with Rune and Philip Rosedale of High Fidelity: https://unchainedpodcast.com/why-its-so-hard-to-keep-stablecoins-stable/
Unconfirmed episode with Rune on Andreessen Horowitz’s $15 million investment: https://unchainedpodcast.com/rune-christensen-of-makerdao-on-its-15-million-from-andreessen-horowitz-ep-039/
Part 1 of my interview with Rune: https://unchainedpodcast.com/rune-christensen-of-makerdao-part-1-how-to-keep-a-crypto-collateralized-stablecoin-afloat/
Digital Asset Research report on MakerDAO: https://www.digitalassetresearch.com/our-products/#in-depth-research
CFTC smart contracts primer prohibiting derivatives contracts that are traded on exchanges that are supposed to be registered with the CFTC and are not. https://www.cftc.gov/sites/default/files/2018-11/LabCFTC_PrimerSmartContracts112718.pdf
Nice recap of how Dai has performed as ETH has dropped in price: https://medium.com/@mikeraymcdonald/single-collateral-dai-9-months-in-review-b9d9fbe45ab
MKR Tools website: https://mkr.tools/tokens/dai
Description of Maker Tools: https://medium.com/@mikeraymcdonald/announcing-the-new-mkr-tools-e32466f1c3db
Maintaining its peg as ETH dropped:
https://medium.com/makerdao/volatile-times-dai-as-a-safe-haven-2f017453e9f1
MakerDAO and Wyre partnership: https://www.prnewswire.com/news-releases/makerdao-and-wyre-give-businesses-immediate-access-to-dai-stablecoin-in-over-thirty-countries-including-usa-300696400.html
ETH in DeFi projects: https://mikemcdonald.github.io/eth-defi/
Placeholder VC blog post: https://www.placeholder.vc/blog/2019/1/23/maker-investment-thesis
Transcript:
Laura Shin:
Hi, everyone. Welcome to Unchained, your no hype resource for all things crypto. I’m your host, Laura Shin. If you’ve been enjoying Unchained, pop into iTunes to give us a top rating or review. That helps other listeners find the show.
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Laura Shin:
My guest today is Rune Christensen of MakerDAO for part two of our dive into Maker Dough. Where we left off last week, and for listeners who did not listen to that episode, I highly recommend that you check that out, plus also, Rune was on the podcast almost a year ago to discuss stablecoins generally, so if you don’t understand stablecoins, that gives a really good overview of all the different types of stablecoins, and now, in this past episode, last week’s episode, and this episode, we are diving deep into MakerDAO and how it works, and we had left off last week was we had started to talk a little bit about multi-collateral Dai. That episode kind of talked a lot about the single collateral Dai System, so Rune, can you describe for me multi-collateral Dai, and let’s do the same as we did last week where you describe the process by which somebody creates a multi-collateral Dai for themselves and then redeems it without their collateral falling below the 150 percent threshold?
Rune Christensen:
Yes, absolutely. So, I mean, it’s actually the same process, right, it’s just now you have a choice of using many different tokens, so it could be a tokenized stock, right, so like Apple shares that have been turned into tokens that are available, usually 20 tokens in Ethereum in some sort of regulated environment, like some that are regulated frontend, and you then just deposit them into the system just like you do with Ethereum in single collateral Dai, and then the system will have some specific risk parameters for that particular type of collateral your using that depends on how risky it is, right, so something like stocks is going to have sort of a medium level of risk parameters to it, right, so it’s not going to be considered as risky and as expensive, like it’s expensive to borrow with something like Ethereum or cryptocurrencies, but also, it’s not as stable, considered as stable, as something like tokenized bonds or maybe other Stablecoins, and yeah, so you put in your asset, you take out a loan, and you can then choose to wait for as long as you want before you pay back that loan, but of course, when you pay back that loan, you also have to pay what’s in Maker called the stability fee, which is, basically, the interest rate of the system, right, the cost to borrow the Dai from the system over time, and once you pay it back, the system automatically unlocks your collateral and it allows you to retrieve your tokenized stock out again, and the reason why this is interesting to do is because it allows you to keep your exposure to the tokenized stock but still unlock, like you know still access liquidity in it, right, and actually sort of spend the money that’s in the stock without actually selling your stock, so if the price of the stock goes up, you actually still get the benefit of that, and then later, you can choose to pay back your debt and then just get your full access and sort of like take it back into your own wallet.
Laura Shin:
Yeah. Yeah. I find this system so interesting because it’s, basically, a way to just give yourself a loan out of assets that you already have. One thing that I want to ask though is so with multi-collateral Dai, let’s say eventually there comes a point where there’s maybe 20 different assets that are allowed as collateral for the MakerDAO system, so let’s say that I own only two of those assets, can I create a Dai for myself with only two or what if I only have one, could I make a single collateral Dai for myself at that point or how much diversification will you require from people who are making multi-collateral Dai for themselves?
Rune Christensen:
Yeah, so I mean, let me be clear here, like multi-collateral Dai doesn’t mean that you have to use multiple collateral like as a user when you take a loan from the system, so it really works exactly the same way, it’s just you have different choices in what kind of collateral you want to use, so if you only have, let’s say, a tokenized stock or you only have, let’s say, Augur REP tokens or DGX tokens or Bitcoins or whatever, even if there’s a thousand different collateral types, you can still get direct access to the loan just like the way the system currently works.
Laura Shin:
And the reason is because the risk is pooled across all users?
Rune Christensen:
Yeah, exactly, and like I said, the only thing that’s different is the actual risk parameters, right, so if you use, let’s say, Bitcoin as collateral, like if you use something like WBTC, you know like a tokenized bitcoin in Ethereum, that’s going to probably have you know a higher stability fee and require a higher level of collateralization than if you use something like a tokenized government bond or something, right, like some sort of asset that is very stable and very unlikely to crash.
Laura Shin:
Okay, so basically, you charge essentially the users for the risk that they’re taking based on the asset that they put up for collateral?
Rune Christensen:
Yeah, and this actually ties back into the dynamic we were talking about last time, which is that when things go well, MKR holders get paid, right, and MKR holders are in addition to the Dai holders and like in addition to Dai in a system that’s a stable environment, you have the MKR holders, which run the governance of the system and who actually decides, like makes the decisions on something like how much is the stability fee for tokenized bonds and what is the liquidation ratio, and so on, and they try to set these parameters so they make as much money as possible, but also make the system very attractive for users, right, and as long as everything goes well, they keep getting money from the system, right, the stability fee goes to actually buy and burn the MKR supply, so the supply of MKR falls over time, but, and this is how the risk is pooled, right, like if there’s 20 different collateral types, and one of them fails or something like that, right, then it doesn’t matter which collateral type it is because the whole system is sort of tied together, right, so as long as any collateral fails anywhere, the MKR token and sort of the whole governance community, as a whole, is always responsible for recapitalizing that through inflation of the MKR token, so MKR is really what ties it all together, right, because it means that even though some Dai is created out of tokenized stocks and some Dai is created out of Bitcoins, ultimately, the thing that sort of fundamentally underwrites the stability and sort of like guarantees liquidity and fungibility in the system, is the fact that all the Dai is also protected by MKR inflation, right, in case that the first line of defense, the collateral fails, there is that second line of defense, which is the MKR inflation, that can then step in and make sure that even if your Dai was created out of some terrible collateral that soon after failed, that doesn’t matter because that Dai still has the same protection as all other Dai from the MKR function.
Laura Shin:
So, you keep talking about the MKR holders, who gets to be an MKR holder?
Rune Christensen:
Yeah, so MKR is actually the first ERC20 token as far as I’m aware, and it’s one of the only ERC20 tokens that wasn’t distributed in ICO but rather was sold in this very you know like deliberate fashion to community members early on, so MKR was distributed by the foundation very slowly over time, and initially, in this very kind of like deliberately obscure manner where only those who really knew what they were doing and really was seeking out a Stablecoin project and then came upon Maker and found out about it, were able to buy into those assets, and then over time, it started…
Laura Shin:
And how did you find those people and verify their identity and give it to them, if it wasn’t through a traditional ICO?
Rune Christensen:
I mean, it was actually just people coming into a chatroom, and basically, buying MKR. I mean, initially, it really was like just individuals in the community that sort of joined and started contributing and then actually were able to buy MKR, and at the very beginning, of course, at very low prices because we didn’t actually really, you know in the early days, when we started distributing MKR token, we didn’t really have much of a burn rate, and everyone was kind of volunteers, and in fact, actually, the initial MKR distribution was primarily as a reward for those who were volunteering, right, because it was a very low value asset, but people sort of were willing to put in the work because they could see the long-term potential, and then after a while, like the people who had been rewarded with MKR and as well as those who had been doing those direct purchases from the foundation then started trading them on secondary markets such as actually Oasis DEX, which is our own decentralized exchange that the foundation created.
Yeah, then the next phase was when we started selling to institutions, so that was kind of when the price MKR actually started increasing and sort of crypto started going mainstream, we stopped doing any sort of sales to regular individuals but rather started selling to institutions, who were then able to do these larger purchases and sort of where everything was probably compliant and done sort of in a proper professional fashion, and people continued to be able to then buy…
Laura Shin:
And so, for instance, that would be like Andreesen Horowitz?
Rune Christensen:
Yeah.
Laura Shin:
Who were some of the other big names?
Rune Christensen:
Yeah, so I mean, Andreesen Horowitz is probably the best example, but actually, it’s a very large amount of institutions, at this point, as well. There’s also Polychain, that’s very prominent. They were actually the very first institution, and what’s kind of interesting is that they actually went and proposed…like the deal they made was kind of like they negotiated with the entire community, and they actually made like a public proposal to the community and had the community like ratify or kind of like agree to that proposal kind of like as a part of the decentralized governance process.
Laura Shin:
Yeah, and it’s kind of funny because isn’t that on Reddit, they proposed it on Reddit?
Rune Christensen:
Yeah, we also had a forum, and yeah, like we had a lot of very radical experiments when it came to like direct community participation and kind of like direct democracy, I guess you can say, and like direct control of the project, but in the end, that was actually only possible during the very early stage when the community was basically tiny. There a came a point where you know the community like started really growing and then like it was just no longer possible to have that kind of total democratization of everything, right, and the foundation started becoming more structured, and then it just kept doing the same kind of deals as the very first one with Polychain.
Laura Shin:
When you say that, it was because like once it got bigger, you couldn’t get enough votes, you know because random people that weren’t kind of paying attention to everything, you know they had these tokens, but they weren’t participating in votes and stuff like that, is that why?
Rune Christensen:
I mean, so we do use votes, and I do talk about voting in terms of controlling Maker, but when we think about governance in terms of like how the community makes decisions at the social layer, you know like as the group of people, basically, rather than doing it based on voting, we do it based on consensus decision making, so it’s not really about who approves, it’s about who opposes, and then something can be done if there’s no one in opposition or there’s no like significant opposition, and like that works really well when you aren’t super aligned and have like a very defined objective, which is why you know, for instance, it works in science, right, like you can have scientific consensus on very complicated topics because ultimately everyone follows the scientific method, right, but you can’t get consensus at scale on some topic such as like how does a startup navigate its competition or something, so like we actually thought it was going to be possible initially, but at some point, we started realizing that because we were letting literally anyone come in and join the decision-making process, and in fact, sort of giving everyone a veto, and amazingly, it worked for two years, but eventually, you know like it just became too big, right, like we didn’t actually have any instances of someone sort of trolling us and just like abusing the process, but it became clear to everyone, like the entire community, basically, it reached a consensus on the fact that it was time to sort of structure, and in order to start focusing on actually delivering the project, the foundation had to become more structured and sort of more centralized, basically, right, and based on a more traditional process of just having a core team that makes the decisions, right, and then from there…
Laura Shin:
And so now, is that the foundation?
Rune Christensen:
Yeah, so that is the Maker Foundation, and from there, we were then able to actually launch the actual you know Maker platform and the Dai Stablecoin System on the blockchain, and then, when that happened, that’s when the real governance started, right, because that’s when the voting actually became a thing on the blockchain, and you could use the tokens to vote on stuff like the risk parameters.
Laura Shin:
So, essentially now, the Maker holders, that’s what their main function is, but it’s not to choose who else becomes these kinds of institutional votes, like the big Maker holders, that will still be decided by the foundation, and then, the general population of Maker holders are deciding which assets can be used as collateral and kind of how much risk each asset presents, is that it?
Rune Christensen:
Yeah, and what’s important about how the risk assessment is done is it’s very important it doesn’t become a popularity contest, right, and it’s very important it doesn’t become kind of like arbitrary ruled by MKR holders or even MKR whales because in that case, you can very easily imagine that there’d be a lot of bias institutes, and it would end up becoming kind of like a contest of like what other tokens do the MKR holders hold most of because then they’ll let’s give that one some really good risk parameters so we can pump our backs, basically, right.
Laura Shin:
Yeah.
Rune Christensen:
And that’s, obviously, very bad for stability, right.
Laura Shin:
That was my next question.
Rune Christensen:
Yeah. I mean, and that’s really like the fundamental issue we’ve graveled with when trying to design the governance process, and what we came up with is, yeah, it’s basically, what I was talking about earlier, right, it’s consensus decision-making process, and it’s trying to emulate a scientific process, right, so it’s kind of like a two-layer process where the first layer is kind of like it’s this scientific debate, basically, like a place where people who are actually subject matter experts, openly debate based on data and on models and on theory that all is kind of like known by the community and especially known by the experts to be the scientifically approved way you do risk management, right, and here the key really is to look at existing traditional mechanisms, right, so we’re not really trying to reinvent the wheel, rather we’re trying to build a system where we can apply all that existing knowledge to, so we can apply it in a more efficient way, but we don’t claim to have reinvented math or something or reinvented various risk models that exist, rather we want to actually apply those very rigorously and in a very transparent manner, so we have these various risk experts, who are basically a part of the community and ultimately, like the very best of them and the very most dedicated of them, they actually end up getting chosen by MKR governance, like they get essentially elected into what we call risk teams and actually receive salary directly from the Maker System, so they actually will receive a part of the stability fee income stream, and they will then sort of present the data and the models and preside over the scientific debate that ultimately should result in scientific consensus under things that are clear enough that you can actually reach a consensus on them, and the job of the MKR holders, from a crypto economic point of view, is to then act as essentially kind of like a very slow auricle in this process, and right now, it’s envisioned to be every quarter, so basically, every quarter, there will be the end of a cycle of the risk assessment debate, basically, and the things that the experts and the risk community was able to reach scientific consensus on is then sort of proposed for MKR holders to vote into the core of the system and actually change the parameters in the system, and MKR holders then have to ensure that the process was actually followed right and it’s not some sort of attack or like there’s some sort of bias in there or something, and there’s multiple things in play here because there’s even the possibility that the proposal is malicious but then a big MKR whale still tries to push it through because he just has more votes than the others despite this proposal being actually not the outcome of the scientific process, then other MKR holders can actually trigger an emergency shutdown by considering that a governance attack and then redeploy the system without the malicious voter in there, so there’s really a lot of complexity.
Laura Shin:
Wow.
Rune Christensen:
Like the MKR holders have this kind of like very mechanical or kind of like very security focused role, I guess you can say.
Laura Shin:
Oh, that’s very interesting. It’s essentially like hard forking that whale out of the system.
Rune Christensen:
Yeah, exactly.
Laura Shin:
Does this mean that for the various assets that are added that they will all have different minimum thresholds and points at which they’ll be liquidated because of the risk profiles…
Rune Christensen:
Yeah.
Laura Shin:
And then, they’ll all have different stability fees and etcetera and also liquidation penalties?
Rune Christensen:
Yeah. I mean, in theory, they will all be completely unique based entirely around like the exact data for that particular asset and the models that apply to it, and then MKR holders, their job is to, basically…like those of them that do have the ability to participate in the debate will, of course, participate in the scientific debate directly, but those that don’t, then just have to sort of be of service that like this is indeed the result of a scientific debate, right, and it’s not some guy that’s trying to push something through because he has a lot of MKR, and this is his favorite token or something, right. That’s really the role that like the average MKR holder plays.
So, even if you have no idea about risk assessment, there’s still a role to play as an MKR holder because you can still be sort of the final line of security, right, like the final sanity check to ensure that the system isn’t getting abused.
Laura Shin:
And what was the name of these MKR holders that have this special role, what was their name again?
Rune Christensen:
I mean, so there is this type of actor in the ecosystem called a risk team, so these are actual risk professionals that sort of form these teams and are then elected by MKR holders to actually receive a salary, like receive a compensation out of the system to then work full-time on building the risk models and gathering the data and sort of presiding over the overall scientific debate.
Laura Shin:
Right, and you guys hired one recently…or not that recently, but I guess last year, who worked in traditional finance in a role like this, correct?
Rune Christensen:
Yeah, and actually, you’re probably referring to Steven Becker, who was hired as our head of risk, but today, is actually the president of the foundation, and that’s correct, so today, he is the president, and he’s very deeply involved in a lot of the operations of the foundation, but he is also still running what we call the temporary foundation risk team, so because today, is still the very early days, you know we are making sure that the bare minimum is there, which means that one risk team that actually have risk professionals that can actually produce these models and actually produce something that is very sound and you know, again, made based on these objective scientific models, right, from the traditional space for MKR holders to then approve.
Laura Shin:
I’m not sure exactly how well those work. I guess, we’ll find out. But one thing I wanted to ask was, so earlier, we walked through what happens if someone creates multi-collateral Dai and then just redeems it without their collateral falling below this threshold, but let’s walk through what happens if their collateral does fall below their minimum threshold, then what happens.
Rune Christensen:
So, what happens is the price auricles see that the price has now crashed by whatever some amount, let’s say 20 percent, so they send in the price of this asset is now 20 percent lower, and you know if that’s enough to get your precision below let’s say 150 percent, if that’s the cutoff point, then the moment that the data is pushed into the system that changes the calculation in the system to below 150 percent, then the keepers, you know the external agents that monitor the system and act to exploit profit opportunities they see in the system, they will immediately trigger an auction, so a liquidation auction, and then they’ll trigger it, and they’ll place a bid for the collateral, and basically, the auction just says, hey, I want to sell this collateral, how much do you want to pay for it, and people can choose to bid zero if they want to, but of course, that’s not really a good strategy, right, it’s better to try to bid something where you can get a cheap rate that’s below the market rate but still pretty close, so no one else is going to be able to bid better than you.
Laura Shin:
Right, but then, so what happens is I think they try to recoup the amount in Dai that was in that CDP, but then, once they do that, then they try to recoup as much of the value of the collateral as possible for the owner, right?
Rune Christensen:
Yeah, that’s correct.
Laura Shin:
Like there’s two different auctions…
Rune Christensen:
Yeah, and of course…
Laura Shin:
Yeah, can you describe that part?
Rune Christensen:
Yeah, so I mean, this is actually really complicated, right, but yeah, the first and main goal of the system is to recapitalize the Dai, right, so ensure that there’s enough collateral in the system to back the outstanding value of Dai, so first order of business is to, basically, say this CDP, like this loan is now no longer safe, so the Dai that has been backed by this loan needs to be removed from the supply, so we need to contract the supply to be in line with the fact that the collateral base has now contracted.
Yeah, so the first thing that the system tries to do is like first, it actually assumes it’s not able to recoup all of the Dai from the market. So first, it just says, here’s all the collateral, how much Dai are you willing to pay for that, and if someone then bids, and in this scenario, let’s say that the debt is 100 and the liquidation point is 150 percent, so there’s 150 dollars’ worth of collateral, and there’s 100 dollars’ worth of debt, right, the system will then take the 150 dollars’ worth of collateral and be like does someone want to buy this. Basically, anyone can submit a bid, and a keeper will then most likely submit, you know and maybe someone’s going to be cheeky first and be like, I’ll pay 5 dollars for the 150 dollars’ worth of collateral, but because the value of the collateral, if it actually is 150 dollars or maybe slightly lower than that because it’s in the middle of a crash or something, right, then soon enough, someone will say, I’m willing to pay 100 dollars for the 150 dollars’ worth of collateral, and once the system knows that, so once someone is willing to pay 100 dollars, then the system has achieved its primary objective, which is to ensure that it can take in 100 Dai to contract the supply, right, so then the next step is to be like, okay, so actually, I know I can sell this collateral for 100 Dai, then actually, my goal is to just sell as little collateral as possible for 100 Dai, so I can see if there’s something left that way I can give back to the owner.
So, the next phase of the auction, if it indeed gets this far, because it doesn’t always get this far because sometimes the value of the collateral has just crashed below 100 Dai already, you know while the auction is in process, but if that doesn’t happen, then the next phase of the auction is the system then says, I need 100 Dai, how much collateral do you want from me to give me 100 Dai, so then one guy would bid maybe, I’ll give you 100 Dai if you give me 140 dollars’ worth of collateral, and then someone else would be like, well, just give me 120 dollars’ worth of collateral, right, I’ll give you 100 Dai for that because it’s still a great deal, right, and eventually, they should equilibrate towards just the actual, you know like the value of debt, so someone is going to like, basically, bid 100 Dai and want about 100 dollars’ worth of collateral, like maybe 102 dollars’ worth of collateral or something, right, so there will actually be still a decent surplus, like 48 dollars, if the CDP holder’s really lucky, that is then leftover in the system, and then is given back to the CDP holder.
Laura Shin:
Okay. So, now, I think we’ve walked through most of the nuts and bolts of MakerDAO. We are going to discuss how all the different partnerships that MakerDAO has, we’re going to discuss regulatory issues, but first, a quick word from our fabulous sponsors.
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Laura Shin:
Back to my conversation with Rune Christensen of MakerDAO. When do you expect to launch multi-collateral Dai and with which assets?
Rune Christensen:
So, we’ve, basically, you can say learned the lesson that we don’t make any estimations on when it’s actually going to be done because like, at this stage, right, it’s so close, right, I mean, we actually released the code almost half a year ago, at this point, and we’ve formally verified almost the entire code base, and there’s only these very small pieces left that needs to be engineered, and most of it is just in testing, at this point, and of course, there’s going to be a very rigorous testing process, but ultimately, yeah, it basically is really close, and it is also really close to the point where we don’t have to make an estimate of when it’s going to launch, we can actually commit to a hot launch date.
Once we reach that point, then we’ll announce it everywhere, but until then, basically, all we can say is it’s very close and also very soon, we will actually give the community some very deep insight into the whole…like so the project management of the launch cycle, right, and like the milestones, and basically, you know the entire scope of what’s still left to do.
Laura Shin:
And have you decided on at least what your next asset is that you’ll use as collateral?
Rune Christensen:
Yeah, so that’s the other really interesting thing that’s happening in parallel, right, is that the preparation for actually launching with some new collateral types, and so right now, we haven’t published anything, but basically, we’ll just launch with whatever is available at launch, right, so right now, we’re looking at, basically, most of the top, like the top ERC20 tokens and also the top Stablecoins, like ERC20 Stablecoins, and at some point, the foundation risk team, and actually it will be relatively soon, will then like first release a set of models and then also kind of like propose some potential data sources that these models can then be applied to in order to synthesize the risk parameters for these different collateral types that we can available launch, but in general, like our approach, is that you know it’s not really a question of what is going to be collateral, it’s a question of what are the risk parameters going to be because from a technical standpoint, the system can really support like anything as collateral, right, like sometimes if you have a weird token, like there needs to be built, what we call an adapter to make it actually fit into the system, but unless a token is literally a scam or just like a terrible project with no redeeming qualities, it’s actually always going to be included as collateral eventually because it’s only a question of technical bandwidth, so from the risk assessment or like the governance point of view, the risk process and the risk models are always able to just take into account whatever risk is inherent in that asset, so it’s actually possible to be very diverse, right, and be very inclusive of all the different tokens in Ethereum in the long run.
Laura Shin:
Okay. So, this is something that I thought I had a misconception about, so once you get the models, then it sounds like you’re just going to allow people to use many, many different assets as collateral, and you’re not going to add them individually?
Rune Christensen:
Oh, no.
Laura Shin:
Because I thought you would sort of suss out the risk for like maybe 5 or 10 at the most, but it sounds like you’re just going to allow people to use whatever for collateral at a certain point?
Rune Christensen:
Yeah. Well, I mean, so in practice, they do have to be added individually, and there is like some level of technical overhead to adding a new collateral type, especially in the beginning, as we’re still kind of getting started and getting the processes up and running, so initially, like it will be based on one of the most, like again, right, one of the top ERC20 tokens and Ethereum and one of the top Stablecoins so we can get ready for launch.
Laura Shin:
But when you do launch, do you expect that you’ll launch, do you expect that you’ll launch with like 10 assets that people could use or do you expect it will only be like two or how many at launch do you expect to have available?
Rune Christensen:
Yeah, I hope it’s going to be closer to 10 than 2, and maybe even more than that. I mean, that would definitely be ideal, I think, and also very much possible.
Laura Shin:
All right. All right. So, it sounds like it’s undecided. So, TBD, check back here. I’m sure I will have updates when that happens. So, something that’s really, really, really interesting and I was totally fascinated by was so if we think of liquidations on these CDPs as similar to kind of like defaults on loans, Digital Asset Research had this pretty interesting report that showed that across a lot of months defaults were at about 1 to 2 percent, but then there were a few months when they reached as high as…well, in one month, although the system was really small, at this point, it was 28 percent, and the report actually only went up to September, and I know that there were a large number of defaults in November and December, so of course, you know making a light caveat about how the system is still small and it’s still kind of early, do you feel like you have any conclusions you can draw about how people behave when they have this much responsibility over their own loan versus you know if they had taken the loan out in a more traditional way?
Rune Christensen:
Yeah, I mean, I’ve been incredibly fascinated by being able to see how like people interacted with the system in this first year. I mean, especially considering the crazy circumstances of just like this persistent Ethereum crash, right, that just kept getting worse and worse and worse, and I think the main interesting takeaway that we’ve observed is, yeah, it’s just like this how good people have been at adding more collateral to their positions, and in general, how people seemed to have preferred adding more collateral rather than deleveraging, which I actually think is a little bit counterintuitive, but I mean, that’s apparently just a preference, right, of users, and then like there have been those situations where a lot of people have been liquidated at once, and typically, those have always been times where there’s been a sustained crash, it’s kind of been crashing and crashing and crashing and crashing, and then, at the end of like a long sustained period, then suddenly, there’s like a really steep crash. That seems to like catch a lot of people off-guard because I guess many people, they expect after there’s been a long period of crashing, then it will turnaround, right, and then they’re actually willing to go to a pretty risky point in their CDPs there, and then can be caught off-guard if there then is suddenly a steep crash.
Laura Shin:
Yeah, so let’s talk a little bit more about what you mentioned about how…and this is partially why I was so impressed when I was researching this, Dai has basically maintained its value at around 1 dollar. During this time when the price of Ether at its high was 14 hundred, and then also hit a low below 100, so how did the system keep that peg?
Rune Christensen:
Yeah, it’s quite amazing, and actually, the answer is pretty simple, is that the system ended up absolving almost 2 percent of the entire Ethereum supply, so basically, as the price of Ethereum crashed, more and more of the entire Ethereum ecosystem like entered the system, basically, to make sure that despite the price of Ethereum crashing, the supply of Dai actually kept growing the whole time because there was just a flood of Ethereum tokens entering the system, so even though from the beginning the value of Ethereum had fallen 10 times or even more, there were a hundred times as much Ethereum in the system, at that point, so even a 10x fall in price didn’t matter because there was just so much Ethereum put into the system.
Laura Shin:
Let’s switch to regulatory issues. I noticed that Coinbase has listed Dai, and it’s also listed MKR, but MKR is actually only listed in jurisdictions outside the US, which is, I’m assuming, for regulatory reasons, so how do the Collateralized Debt Positions and Maker comply with CFTC regulation of derivatives and margin trading?
Rune Christensen:
Yeah, so the question of regulation in crypto is actually, you know it’s a lot more complex than you would think because the fact is there just isn’t really legal clarity at all on these things, right, even when you know the CFTC and the ACC they go out and they make statements, they don’t really make very like precise statements, and this is typically also the case for most of the regulators around the world except like there’s a few notable exceptions such as Japan and Singapore that have been like here are the guidelines, this is exactly how it works, you know go ahead and innovate, basically, within this framework, but in most countries, the approach, at this stage, is still kind of wait and see because on one hand, you know they don’t want to stifle innovation, they don’t want to be like you can’t do this, and then suddenly, a bunch of startups move to another country, right, but on the other hand, they also are still a little bit scared, you know it’s still a bit unknown, they’re not really sure what actually needs to be done, so right now, I mean, something like CDP, like it is way too kind of like there are multiple issues that are kind of like much closer on the horizon for the regulators to deal with globally, but in general, I mean, we’ve done a lot of research, right, and we retain, basically, all the top lawyers both in the US but also all across the world, right, because of course, there’s a ton of work that goes into dealing with all the legal and regulatory and even political challenges of trying to build a decentralized financial infrastructure.
I mean, so in general, it seems like as long as you have something that is fully decentralized, that in a lot of jurisdictions including the US, that seems to be one of the big sort of factors that decides whether a regulator feels like they’re compelled to step in to protect people because you know traditionally, like the spirit of the law and really what regulate is all about, is kind of like protecting honest people and maybe slightly naive people from smart and dishonest people, right, so like you know confident schemes or whatever, like scams or pump and dumps and that kind of stuff, right, where there’s a guy who’s saying, buy this because I’m totally going to make you rich, and then, after you buy it, he’s like, nah, not going to make you rich after all, right. You can’t do that because when you told them they should buy it and they were going to make it rich or whatever, right, that actually created like effectively a legal claim, in a sense, right, so that’s the basis of the whole thing about ICO as being securities, right, that if you sell a token and you go out and say buy this token, it’s going to make you rich, you actually suddenly fall under like a part of the law, and…
Laura Shin:
Right, but in this case, where it’s more about derivatives that involves the CFTC not the ACCOMPLISH.
Rune Christensen:
Yeah, and then the question really is like in a legal sense under the common law precedence of the US is like does a CDP fall into the bucket of being a derivative, and the thing that’s really critical to think about in this context is like it’s very much about the transaction, so like the concept of like a smart contract, so like a piece of code on the blockchain that holds the money and holds some assets and has some debt, like that fundamentally doesn’t really make sense in a regulatory sense because there’s no such thing in like the real world, right, because the way derivatives work in the real world is you know it’s a trajection where you sign a contract that says like I’m going to…or rather, we’re going to post some collateral, and then, at some point, we’ll sort of share it according to what we put in this contract, and then, when you enter into that legal relationship, that is when you, again, like you get into that situation where like with derivatives, for instance, right, you don’t want to just have random people do that kind of stuff because you don’t know like what are the full implications of what you’re actually doing there, right, and again, a smart contract just isn’t the same thing, right, I mean, you’re not actually doing any sort of legal transaction, you’re not even dealing with a counterparty at all, right, you’re actually like dealing with yourself in a way, right, you’re like sort of making a deal with your own assets, and ultimately, like I said, right, there’s no clarity on this yet, and we’re in touch with like most of the regulators.
Like, what I think could happen, right, is that I think there are some places that are going to just say, for instance, I mean, it could be a CDP as a derivative, it could be CDP as a loan, it’s whatever, it could be all sorts of stuff, right, but the important thing is like it wouldn’t impact Maker itself, it would impact those that actually enable those transactions, right, so it would be a question of what kind of frontends, what does a frontend into the system look like, so it could, for instance, mean that some frontends…like, let’s say, if the US, for instance, decided it falls under some sort of regulation, right, then you would see kind of like you’re seeing with a lot of decentralized exchanges, the US would get blocked from like interfaces that just expose directly to the underlying system, and then you’d only have these more fully compliant interfaces that maybe even had a license or something that would actually enable users to use the system, and then, at the same time, of course, you would have like proper sophisticated investors, right, and institutions, and so on, be able to completely freely use the system, right, because this kind of regulation really only applies to like end consumers and their access to financial services.
Laura Shin:
Yeah. So, I think you’re right that it’s not entirely clear what the regulation is, but I did see that the FCC has a document and it appears to, I guess, be put out by some lab at the CFTC, but it says, here are examples of prohibited activities, and it says derivatives, contracts, including those that are smart contracts deployed on a decentralized blockchain must not be traded or…and there’s like a list of them, but the one bullet point that stuck out at me, must not be traded or executed by any officials or firms that are required to be registered with the CFTC but are not, meaning are not registered, and also do not have an exemption or exception from registration, so yeah, it’s not clear.
You’re right, that in a way they’re using the system to take out a loan from themselves, but presumably, you’re right, these people would not be registered or would it be interpreted as you know they are using the Maker System to do it and the Maker Foundation or whatever entity is not registered with the CFTC. It’s not clear, so I guess we will someday find out, you probably before me. So, tell me how people have been using Dai?
Rune Christensen:
Yeah. So, I mean, that’s a really sort of broad…like it’s very interesting because actually adoption of Dai so far is not really that great, right, compared to if you look at something like UACC, which is a much newer Stablecoin, but it actually already now has a much bigger supply, and I think it’s because the way the Dai really is positioned, it’s kind of as you know it’s more like a platform, it’s more like a tool for others to build something on top of rather than being you know like a product in of itself, so like basically, what we’re seeing is like Dai has really been used in a lot of different ways, but still, at a relatively small scale, and at the same time, there are a ton of different projects that are building on top of it, right, so there’s a lot of different projects out there that are right now in the process building some sort of system that uses Dai as this decentralized store value, and I think probably the best example to mention of kind of like a very useful and very interesting use case is that there are a lot of startups around the world that use Dai for their payroll to international employees, right, because actually doing payroll as a startup is very difficult, actually, and it’s been done, like it was done a lot with Bitcoin in the past, and now it seems like a lot of the companies that have been doing that, they have actually started to use Dai for it because it just allows them to even avoid the volatility of doing it, right, but still getting that incredible convenience of being able to just pay salary directly regardless of where the person is, and then, in addition to that, there’s also just a lot of trading on decentralized exchanges, right. In fact, I think pretty much all the volume on the decentralized exchanges on Ethereum is mostly with Dai.
Laura Shin:
Oh, meaning that’s used for trading pairs?
Rune Christensen:
Yeah, so like you know if people, for instance, if they just want to speculate on the price of Ethereum with the 0x protocol, then they might go on Radar Relay and trade DAIagainst ETH, right, so they’ll go into DAIwhen they want to hitch their exposure, and then they’ll take the DAI, and they’ll purchase ETHwhen they want to speculate on the price, and that actually generates some demand for DAI, right, because there is a whole ecosystem or like a whole economy around trading ETHagainstDAIacross these various decentralized exchanges.
Laura Shin:
Yeah. I was looking at the Maker tools website, which is amazing, for people who haven’t seen that, I’ll link to it in the show notes, but one thing that stuck out at me is that Dai has a pretty high velocity, which I think indicates that it is being used as a medium of exchange. Sometimes, it’s as high as 3 to 6, which I tried to find this out for Bitcoin, and I did find a chart, and it showed that at least, especially more recently, Bitcoin’s velocity is in the 1 to 2 range or even sometimes below 1, so I think you’re right that it is…I mean I guess as a Stablecoin, it probably makes sense.
So, something else I wanted to ask about was you know you kind of described how everyday people are using it, but I know that MakerDAO has also entered into some business partnerships such as with Wire, which is a blockchain money transfer company, can you describe some of those different business partnerships and how Dai can be used by businesses?
Rune Christensen:
Yeah, so I think one of the things that really sets like the Maker project apart from many other crypto spaces, how we’ve managed to really like penetrate both into the real world in some cases, right, but then also just like create this momentum of many different crypto projects that kind of get tied together by all adopting Dai or adopting CDPs and integrated with Maker in some way, and I mean it’s really a lot, and I think you know we have partnerships with almost all kind of like the major decentralized crypto projects, at least on Ethereum in particular, but yeah, so Wire is a really good example of something. It really makes sense. I mean it’s really useful both in a sense that it’s very good for the Maker ecosystem to get access to this kind of service because not only is Wire an onramp price, so not only is Wire a point that’s going to interface between money and the bank, and sort of the fiat world and then the crypto world through Dai, but also, Dai actually provides a lot of utility to Wire because Wire also powers remittance services, right, like so money transfer, and like that’s one of sort of the top use cases with Dai is to use it as liquidity backbone for remittance, so actually, Wire is just one of many that are doing that, using Dai, and again, like I was saying, like most of the partners and most of the projects that are integrating Dai, they’re still working on it, like a lot of it still is not live yet.
Another really cool example is our major partnership with Tradeshift. So, Tradeshift is one of the biggest supply chain platforms in the world. They actually have more than a million companies on their platform that use Tradeshift kind of as their almost like Facebook for business or something, so it’s like a software, like it’s an internet platform that the companies use to kind of like maintain all their relationships with each other, and especially small businesses, it’s really important for them to have access to these kinds of systems so they don’t have to do so much paperwork, but the other problem that small businesses have is that you know if you’re a small business and you sell some product to a big buyer that buys let’s say a million dollars of products from you, the way it works in the international trade is they’ll buy those goods from you, and you’ll send it to them, but they’re not going to pay you until like three months later or sometimes six months or in some places, like in Asia, it’s even like they’ll pay you whenever they want to, which is kind of crazy, right, so that’s really just like an example of how the global economy is very…it’s kind of like built to disadvantage the little guy in many cases, right, like you’ll see big companies sort of like squeezing out these kind of terms out of small businesses because they just have no other choice, they just have to do it, so when you’re in this kind of situation where you’ve sold your product, but you’re not going to get paid until several months later, what you can do is you can get what’s called trade finance, so you can actually access financing that sort of gives you a bridge loan. Basically, like you can get some credit during this period where you still haven’t got paid, but you still want to do more business, right, you want to buy more materials so you can build more stuff, and you can sell it to even more buyers, and so with Tradeshift, what we’re doing is we’re actually using blockchain technology to build a new kind of marketplace for this kind of service where we’ll actually be able to really put the small business at the center and create something that really has the efficiency and also like transparency and like build with the right values to create something that just improves the conditions for small businesses, and it’s all based around the fact that you can actually tokenize an invoice, right.
So, you can have a small business that is going to get paid a million dollars from its big buyer three months from now, you can actually turn that sort of future million dollars into a token, and then you can have people buy that token at a discount, so the company gets paid upfront, but it gets paid slightly less, but then the good news is they get their money straight up, right, so what we’re doing with Tradeshift is we’re implementing this kind of tokenized system using Dai as a settlement currency, so you can buy these tokenized invoices with Dai, and then when they sort of mature and the big buyer pays out, you’ll get paid out in Dai, and that just makes it very convenient to access and also means that we can actually open up this market, like the market for trade finance for the entire financial world and the entire blockchain economy.
Laura Shin:
Yeah, there are whole companies now in the fintech space that do this, and it is a huge business, but you’re right that some of the companies do take kind of a big cut, like they really are pretty aggressive with the discounts, but you’re right that I think this could potentially be even more liquid than it is now if it were in a blockchain-based cryptocurrency, so we’ll see what happens there, but it is already kind of a big business, and there’s a lot of fintech companies that are already working in that space.
I also wanted you to walk through examples, which you sort of mentioned briefly, that Dai is being used in the decentralized finance system, and listeners will know at least some parts of that system because I’ve interviewed Dharma, dYdX, Compound, 0x, like just a bunch of these decentralized finance protocols, so what are some examples of how Dai is being used in that system?
Rune Christensen:
Yeah, I mean, I think the ones you mentioned are probably some of the best examples of that, right. I think Compound is maybe the first one that blew up a bit. So, what Compound does is actually kind of like a more generalized version or maybe also you could say most simple version of the multi-collateral Dai System actually where there just isn’t a native Stablecoin, but rather there is kind of people who can deposit assets into the platform or kind of like lend out those assets, and then the others can come and deposit other types of collateral to then borrow those assets, and they actually held a poll where they asked like what Stablecoins should we add, and the most people then voted to add Dai, so they added Dai as a Stablecoin on the platform, and that meant that you were now able to, like if you either had bought Dai or even if you’re using a CDP in single-collateral Dai, you were able to lend out that Dai on the Compound platform, and people would then use assets like Augur REP, I think actually primarily was the main asset that was used to then take out sort of like Compound CDPs, basically, and borrow that Dai that people were lending out, and the interest rates, they were really high, so at first, it was really popular, like you could get something like 10 percent per year or something for depositing your Dai into it, so that saw a lot of activity, and it’s an interesting example of how you know like how you had two projects, two platforms, that actually synergize, right, in a completely permissionless manner, right, because basically, what that meant was that the multi-collateral functionality was now built on top of Maker already, right, because now you could actually go and you could put in REP, and you could borrow Dai just like you’ll be able to do in multi-collateral Dai.
Yeah, and 0x is another great example, right, and of course, it’s…well, obviously, that’s the first big example, right, because it’s a pretty old project, it’s been alive for a long time, and I’m actually not sure which 0x relayer is the biggest nowadays, but at least Radar Relay is I think one of the oldest, and I think it’s actually the only…I don’t know what you call them, but kind of like it’s the only kind of like pure 0x relayer that does the 0x protocol kind of like the OG way that it was meant to be done where they directly expose the orders in the blockchain, and since the beginning, they’ve primarily been about trading ETH against DAI, and I think it’s really cool, right, because that meant that blockchain users have been able to go to this platform and speculate on the price of Ethereum just like they would do on any centralized exchange but just without having that centralized exposure, right, so you can do it without any risk of getting gox’d
Laura Shin:
Well, yeah, this whole thing is just so fascinating the more that I learn about the whole thing, and you’ve been such a trooper for powering through this super long interview, but as listeners can tell, there is just so much to unpack, but I do want to circle back to something that was mentioned at the beginning of the first episode that we did on MakerDAO, which is you talked before about how you felt like there was a cultural shift with MakerDAO, and something I had been thinking, when I was learning about this whole system, you know about how people have to put up their own collateral, the management of the smart contract is their own responsibility, they have to manage this risk that their position could be liquidated, etcetera, so I used to cover personal finance, and I know that a lot of people don’t even understand the basics of budgeting and saving let alone something maybe this complex, like I used to be one of those people, there’s no judgement there. I, for a long time, really was terrible with my money, so how much education do you feel like you’ve needed to give people for them to use Maker correctly, and do you feel like that’s some kind of barrier or hurdle to adoption?
Rune Christensen:
Yeah, I mean, that’s an interesting like subject, right, because I think actually that this in fact sort of ties into the whole question about regulation as well as, right. I mean, the thing is in the end, like the view we’ve had in Maker for a long time was actually that we didn’t really want to go out and get random people in because you really got to know what you’re doing when you start playing with something like a governance sort of like MKR that can be inflated to infinity or similarly, you know if you start opening a CDP that can be liquidated and give you a 13 percent penalty, right, so we do a lot of education, and it’s really focused on taking people that already are sort of pretty smart and have been able to learn a lot on their own, and then really getting them into the core of the community and get them in and kind of try to get them prepared to actually participate in the governance and the risk management of the system, but ultimately, our goal has not been to take this beta and then go out and kind of like push it out to the regular people or kind of like push it out to the mainstream. I mean, we built it really still as a technical demonstration of what we’re able to do, right, and for really, like I would say regular people currently, I think only really the Dai functionality is what’s available to them, right, I mean because pretty much anyone would be able to actually obtain Dai in their wallet by…well, actually, it’s not even that easy to buy Dai currently, but…well, okay, I guess you can buy it in Coinbase nowadays, but I mean, you could at least receive it in your wallet from your friend, right, like anyone can do that, and I think that’s really good, right, because I mean Dai, that’s kind of the thing that, I mean, if you don’t know what you’re doing and you’re going to play around with crypto, you should play around with a Stablecoin, right, don’t play around with something crazy volatile. I mean, so I actually think that works pretty well, right, that CDPs are quite difficult to use, and then MKR is incredibly difficult to understand and difficult to even obtain, and in the future, all of this stuff will really be made very easily available to everyone, but it has to be done in a way that’s safe, right, and in many cases, that will be in collaboration with regulators or institutions, and basically, like systems that exist to protect people who don’t know everything about finance or whatever from themselves or from crooked salesmen that pitch them a little bit too much on the advantages and whatever, I don’t know convince some innocent guy to open a crazy CDP or something, and I think also actually tying back to what the regulators again really look for, right, is and again, because there’s this, especially in this current element of there still not being any clarity and still not really being any clear guidelines, right.
You know, there is this concept in securities law that’s called the Manner of Sale, right, like so it’s not just what transaction happened, but it’s like what kind of marketing and communication happened before, right, and there’s a very big difference between someone being able to understand finance and learning that they have access to let’s say go and use CDPs, right, and they can actually use that to take a very favorable loan from themselves, and then versus someone going out and being like you know creating some Google ads and being like, hey, buy my coin or something you know or like use my interface and gamble with some CDPs or something, right, that’s a huge difference between that and definitely like the one way of sort of like aggressively going out and getting people who maybe not know exactly what they’re doing to get into some complicated financial contract, like I would call it like aggression, right, that I think is going to be like where the question of the regulation would really apply, right, because it really becomes a question of protecting people who may not be able to protect themselves.
Laura Shin:
Yeah. That makes sense. I think that at least we’ve seen so far what the enforcement actions say if they detect that there was some kind of exploitation, I guess, that was going on in the way that the promoters were trying to get people into the system, and that definitely plays a role, which is why we saw some of these enforcements against celebrities and stuff like that, but we will, you know as we’ve discussed in this episode, there are a lot of question marks that remain about regulation of this kind of thing. However, at least in this short period, I see people always commenting on Twitter and other places. I say interesting a lot, but I really do think that this is an interesting project, and that’s why I use the word interesting because when I say that, I actually mean that, but one other thing that I noticed before we recorded, Placeholder VC noted that Maker issued about 200 million in loans in the first year, and that for perspective, they said that Lending Club took five years to originate 250 million dollars in loans, although they did concede it’s not totally apples-to-apples, so certainly, there is a certain amount of traction that you’re getting in, and yeah, I guess we’ll see how it plays out.
Well, it’s been so great having you on a show. Thank you so much for enduring the crazy soundcheck from the first episode and also for coming back on the show. Where can people learn more about you and MakerDAO?
Rune Christensen:
So, the best place to start is on our website, makerdao.com, where you can find a lot of good resources, you can find white paper, the team page, and just like access to all the information about the whole system, and then, if you want to join the community and really be a part of the discussion, the first place to go is to our subreddit, which is on reddit.com/r/MakerDAO or you can even join our community chatroom, which is open for everyone to come and join on chat.maker.org.com or what you can just find on the website.
Laura Shin:
Thanks so much for coming on Unchained.
Rune Christensen:
Yeah, thanks so much for having me. I mean, anytime, you know. Maybe the next time we have an update, I’ll come back and we can talk for like three hours more.
Laura Shin:
Yeah, and let’s hope that this soundcheck goes more smoothly that time.
Rune Christensen:
Oh yeah, I’m getting like a professional setup, and I’m going to have it like on Monday or something because this is not something, I ever want to go…like my frigen headset just stopped working, what the hell, you know. That’s ridiculous.
Laura Shin:
We paid our dues. Thanks so much for joining us today. To learn more about Rune and MakerDAO, checkout the show notes inside your podcast player. New episodes of Unchained come out every Tuesday. If you haven’t already, rate, review, and subscribe on Apple podcasts. If you liked this episode, share it with your friends on Facebook, Twitter, or LinkedIn, and if you’re not yet subscribed to my other podcast, Unconfirmed, I highly recommend you check it out and subscribe now. Also, be sure to go to unchainedpodcasts.com and signup for my weekly newsletter. Unchained is produced by me, Laura Shin, with help from Raelene Gullapalli, Fractal Recording, Corin Faife, Jennie Josephson, and Daniel Nuss. Thanks for listening.
