Editorial Note: The start of the Sai to Dai migration in late 2019 sparked tremendous interest in the DeFi and Stablecoin industry. Stable Report created a series that will follow the progress of Dai and the Maker Foundation along the way.
This article is the first of the series, and focuses on explaining the differences between the two tokens.
MakerDAO’s Dai and Multi-collateral Dai:
Maker’s Dai is arguably the best-known decentralized finance project within the Ethereum ecosystem. In a sense, Dai is the necessary base where almost all other decentralized finance innovation can come from. Why? Because Maker is trying to create a decentralized version of the most preeminent financial tool in the history of the markets – money.
How do they achieve this? By creating a smart contract, called a CDP, which stands for collateralized debt position, that mints Dai from a stored cryptocurrency collateral. Until recently, Maker’s Dai used Ethereum as its sole collateral. For every 1 USD worth of Dai minted, a minimum collateral of 1.5 USD worth of Ether is stored in a smart contract. To protect from a smart contract liquidation due to Ether’s price volatility, Dais were often overcollateralized to an average of 450%. Therefore, for every 1 USD worth of Dai minted, 4.5 USD of Ether were stored in the smart contract, and subsequently locked away from the ETH circulation until an equal amount of mint Dai is paid back.
This overcollateralization was necessary to protect the peg, since the underlying collateral was so volatile. This caused some concerns, namely the limited potential market capitalization of Dai, since it would always be a fraction of the total Ether supply, and black swan events could destabilize the peg substantially. Simply put, you cannot build a global monetary system with an unstable unit of account that will only ever account for around one fifth of the total market capitalization of Ethereum, which peaked at only 135bn USD in early 2018.
However, Maker’s long term target was outlined since the start, and it never aimed to limit its collateral to only one cryptocurrency. Maker set out to create a scalable and decentralized stablecoin since the DAO’s founding, and in mid-November of 2019, after years of development and research, Maker launched the long awaited Multi-Collateral Dai.
For convenience, the two coins have changed names. Single collateral Dai is now known as Sai, while multi-collateral Dai is referred to simply as Dai.
Sai vs (MC) Dai:
Sai’s collateral is Ether, the cryptocurrency of the Ethereum blockchain. Since the launch of the first Sai in late 2017, over 100m have been minted. This landmark was achieved only 9 days before the launch of Multi Collateral Dai, and it demonstrated that demand for a crypto-based decentralized stablecoin is very real.
During the first years of Dai’s existence, it’s cryptoeconomic structure was tested significantly. The price peg shifted dramatically twice, in Jan. 11th, 2018, and in Jul. 13, 2019. In both dates, the conversation rate never went lower than .93 USD, or a 7% target price deviation. At the same time, its sole collateral, Ethereum, saw a price collapses of over 90%.
How did Sai successfully maintain stability during such a massive drop in its collateral’s value? Through the economic incentives set in place, and, primarily, by using the dynamic stability fee, which acts like dynamic interest for all issued Dai. By leveraging the stability fee, and by liquidating positions when a CDP collateral’s value went lower than 150% minimum, MakerDAO’s Sai passed through a test of fire.
The launch of Multi-collateral Dai is set to make the platform considerable more accessible and stable. For the first time, collateral other than Ethereum will be used in the CDP smart contracts. The long term vision is to have a combination of real life assets, like tokenized real estate, tokenized fine art, and even digitized fiat, as the CDP collateral. This will allow lower minimum collateral percentages, higher liquidity and democratized access to holders of other cryptoassets than Ethereum.
At this moment, the Maker community is discussing and voting on which new collateral they will add to Dai. You can participate in these conversations in Maker’s weekly Risk and Governance meeting. The Basic Attention Token (BAT) is the only new collateral already functional, and over 19m BAT have been locked away in CDPs valued at nearly 1,5m USD in Dai. Voting on new collateral types is taking place throughout late 2019 and 2020. 0x and Augur are tokens that have already been voted in by the community before the launch, but implementation within CDP contracts has not yet taken place.
Maker also launched the Dai Savings Rate (DSR) alongside multi collateral Dai. The Dai Savings Rate is an interest returned to long term Dai holders. By creating a DSR, the Maker community has a new tool to control the demand for Dai. When demand is low, the DSR will increase; when it’s too high, the DSR will fall. On the other hand, the pre-existing stability fee mirrors in functionality the DST but on the supply side of Dai. Together, these fees increase the cryptoeconomic robustness of the whole platform substantially.
The Maker team may seek to use Multi-collateral Dai as a tool to democratize the use of tokenized collateral. This will open up channels for new asset to “join” the blockchain as tokens, and these tokens can stabilize Dais even further. Risk associated with these contracts will surely decrease over time, and to that end, Maker is leading the way in decentralized stablecoins.
By Xenofon Kontouris - Writing for Stable Report