"Too much volatility to be of any use" is one of the main concerns when it comes to accepting Cryptocurrencies. Those who did accept their salary in any of the major cryptocurrencies had a tough time living through 2018's bear market: "Our salaries were paid in ETH. $500-$800 could be subtracted from a paycheck in the matter of a few hours. Paydays became stressful". That's not the point of having a Payday, is it?
Over the last weeks, we have seen some very good posts covering the DAI stablecoin and MakerDAO ecosystem here on Publish0x.
DAI is completely, and verifiably, backed up by real value. Ethereum is collateralized (or other locked in) for every DAI that is created. This is done through a collateralized debt position, or CDP. Anyone can create DAI, as long as they have the collateral to back it up. The value of DAI is kept at $1 through automated wallets called keepers, which execute algorithms expressed through DAI smartcontracts. Although human users can do what they like to create, trade, or destroy DAI, it is up to these algorithms to keep the true value of DAI at $1.
-> Source: "DAI: The decentralized stablecoin" by JWRandolph
How to create a Stablecoin, the wrong way
It is not hard to create your own stablecoin; fork Bitcoin or create an ERC-20 token and claim it's stable at $1. Maybe shoot a little bit of assets at it to have people believe it's backed - nobody will know, unless a US General Attorney happens to notice you might just have tapped into your backup reserves. On April 28th, Bitfinex publicly answered these claims in An open letter to Bitfinex traders, "In particular, we want to assure you that the allegation that we have “lost” $850 million is categorically false. We have been advised that these amounts – whether in whole or in substantial part – are, in fact, seized and safeguarded in several jurisdictions". This doesn't sound like anything I would entrust my hard-earned cash with, would you? Not even the easy earnings.
(now I should probably call my lawyer to prepare a defense explaining why I publicly distrust a company claiming they've got a 1:1-dollar-backed token where no audit is allowed. Maybe their claim is true and it's just 850 million USDT backed by 850 million USD safeguarded by several democratic governments...)
How to create a Stablecoin, the right way
I've quoted JWRandolph above stating that every DAI created is backed up, "collateralized" by digital assets. Ethan Winter does an excellent job explaining the mechanics of CDPs, in a nutshell: Every DAI created is backed by siginificantly more digital assets than the value it represents. Anyone can tap into the Ethereum blockchain to retrieve the data about assets backing DAI value. An emergency shutdown procedure has been implemented to cover Black Swan events, either by the smart contracts or a number of watchdogs pulling the emergency brake.
For good or bad, anyone can check and validate any claim made against the Ethereum blockchain. When it comes to DAI, you can always head to DAI Stats to fetch the latest statistics. You can always validate the information presented against the Ethereum blockchain and you can always check that the website is actually doing what it claims to do. You can even take the source code, validate it and run it on your own website.
Plain information, and all the information we need - you can either validate the numbers by following these links or do a little math on the validated numbers: At the time of writing, there's 85,085,385 DAI in circulation, backed by 1,601,347 pooled Ethereum out of a total supply of 106,611,831.5 ETH. This means that 1.5% of the total Ethereum supply with a current market value of $492,606,359 is backing 85,085,385 DAI, in other words: each DAI promised to be honored at a value of $1 is backed by digital assets worth $5,79.
WETH is negligible in this post as it simply represents ETH contained in an ERC-20-compliant wrapper - 1 WETH always unwraps into 1 ETH.
It also shows the Stability Fee, an instrument to control CDP creation in general - with a stable overall market, it's okay to have more people creating their own Collateralized Debt Positions. In other times, it might be a good idea to limit the creation of new debt - one of these instruments is the Debt Ceiling, a maximum amount of DAI that may be created [at the time of writing, it's set to 100,000,000 DAI], the other one is the Stability Fee: There are no restrictions on what you can do with the DAI you generate from your CDP - as long as there's enough Collateral to back your debt. This includes taking out a loan on ETH you acquired from taking out a loan. A risky trade, that's why the stability fee which you will need to pay to unlock your collateral has risen from 3% in March to 16.5% in June 2019.
Besides the absolute numbers of 85,085,385 DAI with 1,601,347 Ethereum pooled, there are two indicators pointing towards the general state of the market: Collateral Ratio and Stability Fee.
While DAI is highly collateralized, there is plenty of room for ETH price to take a hit or, with a future Multi-Collateral DAI, the entire crypto-asset market going down as there is plenty of assets to cushion the impact. On the other hand, a high Collateral Ratio may lead to a sudden increase in DAI supply which may be used to fuel further economic operations - at the time of writing, this may enable traders to increase their leverage; in the future it may be businesses taking out a loan on their CDP'd reserves to invest in new machines etc.
Potential High Gains bring along a Potential High Risk. As long as the general market for crypto assets moved sideways for almost all of 2018 and early 2019, while the market is moving sideways there is little risk associated with leveraged trading so there may be more CDPs opened and more DAI created.In a volatile market, leveraged trading leverages the risks associated as well. Thus, MKR stakeholders may decide do disincentivize the creation of new CDPs and fresh DAI minted to manage the risks. On March 7th, a poll has been held if the Stability Fee should be increased from 1.5% to 3.5% - sure enough, both Ethereum and Bitcoin showed a sudden spike upwards about a month later, beginning around the 6th of April. While Bitcoin moved on to new highs, from something around $3,500 in March to $12,500 at the end of June, the Stability Fee sure enough followed.
With the MakerDAO and its Stability Fee being a very young indicator, born in 2015, it may indicate the view of those people holding MKR tokens regarding the general market: A sudden surge in market capitalization may well threaten the MakerDAO should there be more DAI taken out than the combined Collaterals back should the price plummet as fast as it went up. As this has happened before, only those people truely believing in a continued rise of crypto-market capitalization and thus BTC/ETH prices should dare to accept taking out a loan with an interest rate of 16.5%: while the price rally continues it may be a small share of gains to be shared with the MakerDAO for providing liquidity, a crash just as sudden may lead to CDPs liquidated at a penalty. Noone wants to do this so it's a wise move to raise the bars for creating new DAI.
Should you consider yourself an expert of the crypto market, you may well acquire some MKR and claim a share in deciding about future stability fees. I would like to thank fycee for bringing up the MKR token earlier this year.
How to create a Stablecoin, the easy way
So you want to create your own stablecoin? You're plan does not include having your smart contracts interact with The MakerDAO all the time? There's good news, you can combine the best of both ways; raise funds to back your plan and disclose that you've got the funds to back your own stablecoin available. This can be done by putting a BUY order on your own stablecoin on an exchange of your choice, I'd suggest using a decentralized exchange as they've got a better track record of keeping your funds safe - an infiltrated exchange may put your entire operation at risk.
As much as I like the ideas behind UniSwap and Bancor Network, having a liquid pricing mechanism is not what you want to keep your price tag stable. A more traditional, orderbook-based exchange will do the trick: by offering to buy 27,014 BOOTY at 1 DAI a token, the SpankChain team validates that they are able to match their promise of honoring BOOTY at $1 and while the offer is up on RadarRelay, we can put as much trust into this scheme as we're putting into RadarRelay being an indepdendent entity and MakerDAO able to hold the price of DAI at $1. At the time of writing, DAI is priced at $1.001, thus the dollar value shown in RadarRelay's orderbook is slighty off. There is no volume and my wallet is not connected but the DAI to match the offer is locked up in RadarRelay's contracts and with a little safeguarding there is no way any authority can force you to remove ("seize & safeguard") this liquidity on short notice.
If possible, I linked to resources within this post. Resources that have not been linked in the post are listed below.