Multi-Collateral Dai & What It Means

VeradiVerdict - Issue #60

  • On November 18, MakerDAO is migrating its stablecoin Dai from a single-collateral model to a multi-collateral model. 

  • Prior to the migration, single-collateral Dai (now called Sai) required users to open a collateralized-debt position (CDP) with solely Ethereum to receive Dai. The migration enables users to open CDPs with Ethereum, BAT, and more tokens (as MKR holders vote on them) to receive Dai.

  • The migration also launches the Dai Savings Rate (DSR), which is an account where users can deposit Dai they hold in return for returns over time through appreciation of the account’s value. 

  • Given the interdependencies of DeFi platforms on each other and MakerDAO, migration is an incredibly important and complex problem. Migration broadly entails returning any outstanding Sai to a platform and exchanging it 1-to-1 for multi-collateral Dai. Three of the most important migratory processes occur in:

    • Coinbase, which will automatically convert users’ Sai to Dai on 12/9. 

    • dYdX, which will set up a global smart contract that can convert individual open accounts’ balance of Sai to Dai in early December.

    • InstaDapp, which will set up an InstaDapp migration bridge to convert Sai from Compound borrows and Whale CDPs to multi-collateral Dai in a fractional, one-click process.

  • The migration has major implications for the cryptocurrency ecosystem, mainly signaling confidence and resilience in the MakerDAO platform and diversifying DeFi applications with the future breadth of cryptocurrencies used to collateralize Dai.

What’s everyone talking about in the Dai ecosystem?

The MakerDAO governance community recently voted to transition Dai, MakerDAO’s stablecoin, from a single-collateral form (now called Sai, or Single-collateral Dai) to a multi-collateral from (now considered the norm, called Dai). Multi-collateral Dai launches on November 18, and represents an important step in hopefully improving the governance and flexibility of the MakerDAO ecosystem across a variety of decentralized finance (DeFi) protocols. 

What is MakerDAO and Sai?

MakerDAO is a cryptocurrency organization that works to enable businesses and individuals to capitalize off of the decentralized & digital finance ecosystem by providing a stablecoin, called Dai. Dai is pegged to the US dollar (1 Dai = 1 USD, at any given time) and is entirely backed by cryptocurrency assets on the blockchain. 

When a user wishes to obtain Dai, they must open up a collateralized debt position (CDP) on the MakerDAO platform. A CDP offers users Dai stablecoins in exchange for locking other electronic assets into a smart contract on the MakerDAO platform as collateral. This CDP is what critically differentiates Dai from other stablecoins; most stablecoins are backed by real-world, fiat currency but Dai’s overcollateralization by other electronic assets makes Dai usable like a digital, dollar-based loan, which can be used to buy goods or even pay off a mortgage. Dai’s use cases have evolved to a variety of functions––including lending (both in the real-world and in electronic markets), hedging (given the stability of Dai compared to other cryptocurrencies), prediction markets, online and retail payments, compensation for labor, etc. Currently, Dai has a market cap of $101.9 million and a gross circulating supply of 100.4 million Dai. This makes Dai the 52nd largest cryptocurrency by market cap. Other stablecoins like Tether, Gemini, and USDCoin pose larger market caps (on the scale of billions of USD), but Dai’s diverse use cases across real-world and decentralized finance applications makes it uniquely powerful and important for the crypto ecosystem.

This original form of Dai only enabled users to collateralize their borrowed Dai with a single type of cryptocurrency asset––Ethereum. With the new transition, this old form has been nicknamed Sai.

On top of the Dai token, MakerDAO also provides the MKR token. MKR enables holders to vote on the governance of the Dai ecosystem––essentially, MKR holders vote on various concepts within risk management and the business logic of the Maker system. One of the most critical votes made by the MKR governance community was to transition Dai from its single-collateral form (Sai) to a newer, multi-collateral form (now called Dai).

What is multi-collateral Dai?

Multi-collateral Dai, which launches November 18, is essentially the same Dai stablecoin that MakerDAO offered users earlier––except, instead of only being able to lock up one variant of a cryptocurrency asset as collateral in their CDP, users can now lock up multiple kinds of assets as collateral. 

At launch, MakerDAO will support Ethereum (as it did before) and Basic-Attention Token (BAT) as its main forms of collateral; once early versions of multi-collateral Dai gain traction and are industry-tested, the community intends to expands its collateral offerings to integrate with the variety of decentralized finance platforms out there. Other cryptocurrencies that MKR holders voted on (and thus, considered) include Augur, Golem, OmiseGo, and 0x. The ultimate goal of the multi-collateral stablecoin is to enable a variety of blockchain users with a diversity of cryptocurrency assets to take out Dai to fulfill any function they choose––democratizing decentralized financial access and enabling new functionality within the blockchain ecosystem.

The launch of multi-collateral Dai also opens a new feature in the MakerDAO ecosystem––the Dai Savings Rate (DSR). The DSR allows users to deposit Dai they hold into the DSR smart contract, where the value of the deposit appreciates over time and users can earn additional Dai. The DSR functions quite literally as a savings account for Dai tokens. The returns from the DSR are produced by adjustments to stability fees of Dai CDPs and from MKR token holders. MKR token holders will also be able to vote to determine various risk and business parameters that govern the appreciation of assets in the DSR. 

What does migration actually entail?

Migration is the process of converting an individual user’s assets from Sai to multi-collateral Dai. The idea is to transition the entire Dai ecosystem towards a multi-collateralized model to enable a diversity of decentralized finance applications and to ensure symmetry across the use and treatment of Dai in the blockchain space. Dai is very popularly used in a variety of DeFi protocols by a huge cohort of users––which naturally makes converting their Dai from Sai to multi-collateral Dai an ambitious problem.

Broadly speaking, the transition from Sai to multi-collateral Dai entails users returning any outstanding Sai to the MakerDAO platform and then exchanging that for an equivalent amount in multi-collateral Dai. Given the dependencies of a variety of DeFi platforms on MakerDAO, many of these platforms have announced their specific mechanisms to automatically manage this migration for their users. We discuss three of the largest DeFi platforms with Dai functionality here:

  1. Coinbase: On December 2nd at 9 AM PST, both Coinbase and Coinbase Pro will automatically convert any Sai held by users into multi-collateral Dai. The Coinbase Wallet app also will have functionality to enable users to upgrade from Sai to Dai on their own terms, even prior to the December 2nd date. Coinbase will also support migrating Dai on other DeFi platforms by having users send their Sai to Coinbase, which it will exchange for mutli-collateral Dai and then return to the user.

  2. dYdX: Within 2-3 weeks of the launch of multi-collateral Dai (early December), dYdX will kick off its migration of user assets from Sai to Dai. The process will be entirely automatic, and entails setting up a globally-approved smart contract that can convert Sai to Dai for each individual open account within dYdX through trustless, community-approved smart contracts. The same goes for open positions––Sai open positions will now become Dai open positions. During this migratory process, spot trading in the Sai and Dai markets will be disabled to ensure the free flow of these crypto assets for proper, full migration.

  3. InstaDapp: This platform is a bit more nuanced than the other two, because it acts as a meta- and managerial-platform for other DeFi tools. Two of the most important uses of InstaDapp and Dai are Compound and WhaleCDPs, both of which are discussed below.

    1. Compound: Compound is currently the biggest holder of Sai, which makes migration a really critical advancement in the platform. To facitilate this migration, InstaDapp is launching an InstaDapp migration bridge that sets up a series of smart contracts that allow users to migrate their Sai to Dai within just one-click. This changes all debt and lending positions from Sai to Dai, ensuring symmetry across the platform.

    2. Whale CDP: Whale CDP provides the greatest supply of Sai on the market currently. Because Whale CDP essentially involves migrating lenders, it’s critical to maintain sufficient liquidity throughout the migration process. To that end, the InstaDapp migration bridge will enable users to migrate a fraction of their Sai to Dai in mutli-collateral Dai vaults with just 1 click. This enables users to migrate at any time, unblocked by the supply of Sai in the market. 

What does this mean for the MakerDAO and broader DeFi ecosystem?

The migration from Sai to multi-collateral Dai is one of the most important transitions in the cryptocurrency space of 2019. As a result, it has a variety of implications for various DeFi applications, but broadly speaking, two key ones are:

First, a successful transition will be a huge vote of confidence for the cryptocurrency space. The transition reflects the nascent and ever-evolving nature of the blockchain ecosystem; a successful transition demonstrates that users and platforms are very adaptable to these changes, and that the community as a whole is committed to the ongoing resilience and success of these DeFi platforms. Migration is an incredibly challenging and complex task––and successful migration signals that the community is prepared for further challenges and shifts.

Second, it diversifies the applications of Dai. As Dai can now be collateralized in BAT and in the future, other cryptocurrencies, various DeFi platforms can now plug in and leverage the MakerDAO platform to execute their applications with currencies outside of strictly ETH and Dai. Given the importance of the Dai stablecoin to the current cryptocurrency ecosystem, this will enable a whole slew of new applications in DeFi.

The successful migration ultimately signals huge promise for the resilience and diversity of applications in DeFi.


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ADDITIONAL INFO

Hi, I’m Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing in blockchain companies and cryptocurrencies. The firm invests in equity, pre-sales/IEO rounds, and cryptocurrencies on the secondary markets. I focus on early-stage investments and share my thoughts on what’s going on in the industry in this weekly newsletter.

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