1.5% of the current circulating supply of ETH is locked up in the MakerDAO smart contract platform. This currently represents $135 million worth of Ethereum to collateralise $55 million of USD pegged loans supporting the Dai stablecoin.
At present, the collateralisation ratio for the ETH locked into the MakerDAO smart contract stands at more than 257%. This is a pretty healthy level, with the safety net of the collateralisation able to withstand close to a three-fold drop in Ethereum price (from current levels).
The way the MakerDAO system works is that users pool Ether together (referred to as PETH, or Pooled ETH), and after this pooling, the issued Dai tokens are collateralised against this asset-locked asset reserve.
If required to do so, the contract can auto-liquidate PETH reserves to stabilise the Dai token at $1. This auto-liquidation is governed through ownership of MKR tokens, which currently have a market cap of over $240 million.
The market cap of the Dai stablecoin has seen a massive 20x jump since the start of 2018, when it was trading with just a $3 million market cap.
According to data from stablecoinstats.com, we can see that they are still behind the other major players in the stablecoin space, such as Tether, TrueUSD, USDC, and Paxos.
Comparing Dai and Tether
It’s interesting to compare the styles and relationships between the two entities on each side of the Dai and Tether projects.
For Dai, you have the MakerDOA token and an organisation that hosts the collateralised loans that support the Dai stablecoin. MKR does also have some serious backing. A few months ago, Coin Rivet brought you the story of how Andreessen Horowitz was buying a 6% stake in the project.
The acquisition gave Andreessen Horowitz a significant influence in the first functional decentralised stablecoin built on verified Ethereum smart contracts. As part of the deal, the venture capital firm will also get involved in MakerDAO’s governance and Dai’s credit rating system.
For Tether, you have the relationship between Tether and Bitfinex, who run one of the biggest USD funding books (incorporating Tether) to back the margin trading volumes for the exchange. Current Bitfinex open interest in the funding markets stands at 30,000 BTC in longs and 37,000 for shorts. This equates to over $200 million in open margin interest.
Coin Rivet recently brought you the story of how wrapped Bitcoin was being created by Bitgo for use within the Ethereum ERC-20 ecosystem.
Why use it?
There are long-term crypto hodlers out there who don’t always want to sell reserves. Other reasons could be to avoid a local taxable event.
Coin Rivet also recently covered another possible utility for Dai. Via the Compound platform, users could use an altcoin to collateralise against a 20% a year appreciating stack of locked Dai tokens.
Finally, imagine you wanted to borrow some money but the bank won’t recognise your cryptocurrency holdings as a tangible asset. For these cases, users can generate a Dai stablecoin (that is, yours) to hedge into fiat during market dips.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.