This is a very unsound addition to the supply dynamics which work 100% under the current model. Why would we want to make a currency that does nothing, it isn't in anyone else's hands doing anything productive, that would yield an interest?
There are already other ways of making money from MakerDAO.
No, I believe that some of the Dai paid to the stability fee, instead of being used to buy and burn MKR will be designated for Dai Rewards. All Dai issued comes from the debt of each CDP, when you pay back your debt the full amount of Dai is wiped from circulation, but that extra bit that is used to pay the fee is Dai from some other CDP that's freely being traded around.
at the moment it is, but in Multi Collateral Dai the stability fee is paid in Dai, then there will be a contract that takes this Dai and
1. auctions a portion of it for MKR then sends the MKR to the burner
2. takes a portion of the Dai and designates it for Dai Rewards
As someone who profits from the adoption of Tether (by holding Omni), this scares me. It is clear to me that the primary purpose of this change is to increase adoption by exchanges. The #1 use of stablecoins is trading on exchanges. Exchanges will "lock" 95% of the DAI in their systems and collect the interest on those coins while allowing their users to trade DAI at face value.
Very clever. All the exchanges are going to be strongly incentivized to use DAI instead of, or in addition to, USDT.
It will also incentivize exchanges to have high withdrawal fees on DAI to keep it in the exchange wallet. If dai is replacing credit card payment systems on commerce websites you need it to flowing without fees
The additional stability fee charged on CDP holders to fund that payout is what decreases supply. The good news is that the additional stability fee doesn't have to be as high because the reward rate payout also has an effect of increasing demand.
So lets say the stability fee, per the example is 3%, and the reward rate is 2% on those DAI that are locked up. Only a subset of DAI is being locked up and receiving reward, while all CDP's pay the stability fee, regardless of locking. Is it right to say that it might look like MKR holders are losing 66% of the fee, but actually it's only 66% of the subset of the rewarDAI that MKR holders lose, so we can expect it to be less than 66%, unless absolutely all DAI was locked as RewarDAI.
One thing I want the team to be aware of is not to slowly cut mkr holders out of the picture. I am in support of the mechanism, but the system is set up so that the risk/reward proposition of mkr holders is beneficial enough so as to 1. Make mkr valuable enough to cover bad debt 2. Essentially purchase the collective wisdom of whoever mkr holders self-select to be.
By having governance go the way it is with mkr holders not being able to have direct (but small) individual influence on the system, and now giving mkr holders a smaller cut of the pie (even for good reason), you are losing the value of having mkr in the system at all. If you rationalize everything into ‘well this decision drives adoption/stability and so is worth giving mkr holders a little less’ – then why not take mkr holders completely out of the picture? The foundation could further build out their already really great risk team and have part of the stability fee go into a fund that goes towards purchasing bad debt (it could even be transparently held in dai). It’s the same thing, and much simpler because I think distributed governance is going to be VERY hard and arduous process. You’ve got to make it worth it to have mkr holders in the system by giving them influence because including them in the system is going to suck a lot of the Foundation’s resources.
As a mkr holder, I would hate to see this happen because I think mkr is a great investment still, but I honestly think the system would work better this way with the way the Foundation’s decisions are trending anyways.
The governance process needs to make sure that we use the reward rate to find the sweet spot where adoption and stability fees results in the highest possible total net income to the system. If it is used correctly, it will be a huge benefit to MKR holders. It's an advantage, a tool given to them, rather than a way of cutting them out.
And keep in mind MKR holders always have the choice to not utilize the reward rate at all, and purely balance Dai supply and demand with stability fees, if they want to... It would just result in lower total income, so it would also make MKR less valuable.
The perspective that this is another tool to give mkr holder influence to increase total fees (and that if the tool isn't optimizing fees they can stop using it) makes sense. Thanks Rune! I do think it is important overall to make sure mkr is a better fallback mechanism than just holding that amount of dai/usd to buy bad debt.
> I do think it is important overall to make sure mkr is a better fallback mechanism than just holding that amount of dai/usd to buy bad debt.
We are also going to eventually have a mechanism similar to this (guardians and reserves - only difference is they hold very diversified portfolios of reserves and try to specifically hedge against the risk of the collateral portfolio with options). But it will be in addition to MKR, so it just creates an even better effect combined.
I’m not sure it is. Yes it will increase adoption rate, but does so by creating an incentive for people to hold their DAI instead of use it. This could also cause the peg to break when DAI holders refuse to sell it back to the CDP makers at 1-$1
"creating an incentive for people to hold their DAI instead of use it. This could also cause the peg to break when DAI holders refuse to sell it back to the CDP makers at 1-$1"
^ This seems like a legitimate concern. Has anyone addressed this yet?
The important characteristic of the savings rate is that it is variable, meaning it will change continuously to balance supply and demand. So if Dai holders refuse to sell, causing the market price to exceed the the target price, the savings rate will be lowered until supply and demand is again in balance.
With all due respect, I don’t think that will be responsive enough. When a liquidation event occurs and CDP holders need DAI to deleverage, they need it NOW, not after the effects of fiscal policy are felt months later.
It's a technical constraint on how the reward rate is calculated in the smart contracts - so it's something interfaces can completely abstract away.
E.g. you could have a wallet that instantly and automatically locks all dai it receives, and automatically unlocks dai as you want to send it out, without complicating things by showing you two separate balances or giving you too many options.
So the user would just have a Dai balance in their wallet, and they'll see that Dai balance continuously increasing.
Thanks Rune. One follow-up - the Dai that is locked up, I was curious if there is a purpose beyond interest for the holder? I am thinking the supply of Dai locked up could provide an interesting use case for utilizing a line of credit for short-term lending - like how Banks lend via Certificate's of Deposit? Thoughts?
Deploying the locked capital is achieved by lending through CDPs.
However in terms of the user experience you're describing, it's possible for people to lend out Dai in custom made lines of credit that use second layer systems, like dharma or lendroid, there are no active markets yet though, but I'm sure it will eventually grow out.
Not necessarily. They have to make sure it resembles a standard bank CD as much as possible. A brokerage CD can be a security and it's when a bank provides CD to investment companies (as middlemen). In the case of Maker, every customer with Dai can directly invest in the Maker itself (and gain the higher interest) so the incentive is not there to use a brokerage. Therefore it's safe to say it's just standard bank CD.
Wrong and its a security. They are not a bank and have no license of a bank or anything similar. No money transmitter license either. It's not a CD its a security with a highly variable dividend. CD from banks are fixed. Please provide correct info rather than mislead the public. It's an unregistered security now
Specifically for the U.S. we are confident this will not change the legal status of offering Dai to consumers, because the 4th prong of the Howey test won't be fulfilled (Or as the SEC puts it, there is a sufficient level of decentralization).
There is also other relevant case law that backs the idea that offering a simple low yield return on money doesn't count as a security, and I personally believe that a return which is similar in concept to the risk free interest rate doesn't satisfy the third prong of the Howey test, because if on average you only end up beating inflation, you don't have an expectation of profits.
Should there be jurisdictions that decide selling Dai to consumers and giving them access to the Reward Rate functionality is a regulated activity, then it still doesn't mean consumers in that jurisdiction are completely cut off from the Dai Reward and can only use regular Dai, it just means they need to go through KYC procedures and access the Reward Rate feature through an interface operated by a regulated entity.
You really think you are "sufficiently decentralized" please explain how? Prove it. You are relying on a vague and undefined phrase from a speech not case law. You are centralized. You are a company and an issuer. You provide the tech. It's laughable that you equate yourself to bitcoin or ethereum. You are under obligation as a clear issuer you must do KYC, not rely on someone else. You are malpractice
>You really think you are "sufficiently decentralized" please explain how?
If the Foundation was shut down, or all Foundation team members hit by a bus, the Maker smart contracts would continue to operate normally.
Wrong and you know it. It's more than smart contracts ability to be immutable. That's such a narrow example. Who implemented this reward system? You and your centralized control issuer entity. You are an issuer. The cute arguments don't work. Foundations are corporate veils
Having a foundation means decentralized? Fire whoever told you that. Also your code has exploitable bugs and you have a kill switch. And you are constantly making changes to increase value. They don't just live on. You totally conflate immutability with decentralization. That's fake law
>Who implemented this reward system?
MKR holders decide if the reward rate gets implemented. The foundation has no special authority to control what gets added to the live smart contracts.
And it's important to keep in mind that the reward rate is a second layer mechanic - it's something anyone can create and add to the system, if there is an MKR holder majority. It's not a change to the core design of the system.
We have worked incredibly hard to ensure the system is decentralized from end to end, and continue to push the limits of how far we enable creative decentralized governance of the actual risk parameters and business logic of the system - the day to day operations that will directly impact value created for users, such as the reward rate and MKR buy and burn. These operations will be directly commanded by the entire community over time.
The Foundation is a participant in the ecosystem and exists to grow it, but by no means is the ecosystem dependent on the Foundation. By the time multi-collateral Dai is out, if the foundation disappeared at worst it means a few second layer features won't be developed.
There is simply no way around the undeniable fact that the system has already reached a fully self sustainable and autonomous state. There are a few technical compromises in the current beta, but by Multi Collateral Dai launch (when the reward rate will also be available for MKR vote) the Maker smart contracts will be a finished product which will need little, if any, further maintenance or upgrades over the coming decades, and the only challenge is how the community manages decentralized risk governance.
Also, I should probably add that we have been in dialogue for years with the major lawfirms and regulators across the globe on how to approach the difficult problem of crypto regulation, and what the advantages of fully decentralized systems are. Fortunately, it's more of a competition between jurisdictions to see who can provide the most business-friendly regulation.
However, like I mentioned, should any jurisdiction interpret that a certain part of the system falls under their existing regulation, then it is quite simple to only provide access to users from that jurisdiction through compliant frontends, so e.g. if a jurisdiction determines that offering Dai Reward to users counts as a securities offering, then only companies with a broker-dealer license will be able to enable that feature for users that undergo full KYC.
The responsibility is on you to do all KYC NOW since you are centralized NOW yet have sold unregistered securities and derivatives to thousands. Your lawyers committed malpractice and probably just wrote informal memos guessing and you know lawyers just want to get paid and will tell you what you want to hear. You just admitted as of today you are centralized. You keep conflating immutability with decentralization. That is your fatal mistake in your faux legal theory. It's laughable that you supposedly are talking to lawyers but are not doing kyc. You are an issuer. No reputable attorney would admit otherwise
I appreciate you are really passionate about this, but nothing changes the fact that the system is already at a state where it can operate, develop and be governed without the Foundation. Please continue to repeat yourself as much as you want, it won't change reality.
Immutability is not decentralization. Then why not dissolve the foundation? Everyone knows you are still profiting and the system still needs you. Shame on you. False statements and obfuscation are a bad strategy
Which transactions do you expect to apply the Howey test to in order to determine whether they constitute an investment contract?
(If the answer is "all transactions" then I would think that this is the same situation as ETH, which people expect to stake.)
However, I am very much not a lawyer.
That was my initial thought too, but you don't automatically get the interest just for holding it like you would expect with a security. You are effectively utilising the token by locking it up for the network to use for stability.
So this means some fraction of CDP fee would go to Dai holders and some part to MKR holders - what is the expected ratio 50/50? I like it but it potentially means less money for MKR holders unless it stimulates a proportional increase in Dai creation.
This mechanism makes very little sense imho, why not just make the DAI and let people use it as needed. People could very well loan it out and have it do real productive work and earn real interest. This mechanism seems superfluous and only of (very mild) benefit to the Ethereum miners via fees. Other than that it just shuffles money around.
Feel free to disagree, but please offer something a bit more substantial than "this is like another thing".
The concept of interest on a savings account was originally based on the idea that the bank would loan the money out to someone, charge interest, and give you a cut for placing your deposits at risk. The money would actually be somewhere else, doing something productive at low risk, **earning**, the interest.
The idea later became the artificial interest scenario that central banks would run where they **print more money** which they hand out as "interest" to incentivise people to hodl their inflated money. This obviously didn't work, the South African apartheid government did this for a while to keep themselves afloat.
What productive use will this mechanism incur? It will not actually increase the collateralize supply of DAI or the distribution of DAI.
"if average Stability Fees collected on CDPs is 3%, it could be used to fund a reward rate of 2%. "
Are the Stability fees the only source of income for holding MKR and risk and tasks that come with it? Seem a bit worrisome for MKR holders that most of that would go to people holding Dai instead, a product that really sells itself already.
Personally I would had looked into this change only after seeing how multi-collateral Dai starts gaining adoption, I think Dai is such a great product already that it really sells itself. The only problem being that it's hard to get...
Overall, I think this is the best move to make in a race to gain the #1 spot for a stable cryptocoin, short term it might cut into MKR holders rewards but in long term, if Dai becomes huge, we'll all be smiling in the end.
Keep up the good work team, especially happy with the progress you guys are making and can't wait to see multi-collateral at work!
Q: What is the implications for the user when putting their Dai in "reward mode"? Will the Dai be locked up, so it can't be transferred to others or used for buying stuff etc? Like in the bank, if I lock up money in a high-interest bank account, I only have a few withdrawals a year.
Why would anyone store their Dai outside of this contract, then? Seems like every transfer will end up just being withdraw -> transfer -> deposit.
Edit: In fact, doesn't this incentivise someone to create a wrapper token for Dai? The underlying Dai can remain deposited while the wrapper token is freely exchanged while accruing interest.
Most people, in the long run, will probably use wallets that automate the Dai reward locking and unlocking seamlessly as it is needed.
However if you are obtaining a small amount of Dai that you only plan to hold for a short amount of time, it may not be worth it to pay the gas fees to lock and unlock.
There could also be accounting standards that will cause some companies to only use regular Dai in their internal work processes.
Got it, but back to the wrapper token question: do you see this as a concern?
There may be some that require pure Dai for accounting, but certainly many others might prefer a wrapper dai that generates interest.
It's already set up as a wrapper, basically. However we don't want to encourage developers to use that functionality yet, it is a little more difficult to integrate because of how you have to handle the reward rate continuously.
This would effectively be a negative interest rate loans (you can make money by taking out loans). Central banks will sometimes do this to stimulate the economy in times of financial stress (see Bank of Japan). Theoretically there could be a scenario where there is so little demand for Dai that MKR holders are willing to subsidize interest in order to promote short term stability.
I like it. Still trying to wrap my head around the implications. My initial thought is to view it as a lever to increase DAI demand at the expense of short term MKR returns. Also, it is not mentioned in the article - how often does the reward compound? Same as stability fees?