Maker Price Analysis – A complex stablecoin system

Maker (MKR) is a smart contract platform leveraging Ethereum (ETH) to back and stabilize the value of a stablecoin called Dai (DAI). The MKR token circulating supply is currently 728,228, generating a market cap of US$285 million, with US$591,000 traded in the past 24 hours.

Rune Christensen first began work on the project in 2015, and launched the Maker Platform on December 17th, 2017. According to Christensen, the funds for MKR were not raised by an ICO, but instead "MKR was sold off over time at a steady pace, initially through our forum and in private deals, and later through sell orders on openledger and the MKR market." Notable MKR investors include Polychain Capital, Andreessen Horowitz, FBG Capital, and Wyre Capital. Wyre Capital also provides a KYC/AML compliant fiat on/off ramp for Dai.

DAI is generated through a dynamic system of Collateralized Debt Positions (CDPs), which work through autonomous feedback mechanisms and "appropriately incentivized external actors." The entire system is run through smart contracts, where ETH is used as collateral. DAI currently has a free float supply of US$74.5 million with US$11.6 million traded in the past 24 hours. There are currently 13,870 DAI holders according to the Maker Platform.

In the first year of operation the MKR platform; generated 77 million DAI, locked 1.5% of the total Ethereum supply in CDPs, opened 5000+ CDPs, maintained a US$1 peg despite 90% drop in the price of ETH, and attracted over 200 integrations & partnerships.

Anyone who has ETH can leverage them to generate DAI through the Maker Platform CDPs, which accrues debt. This debt effectively locks the deposited collateral assets inside the CDP until it is later covered by paying back an equivalent amount of DAI, at which point the owner can again withdraw their collateral.

Risk parameters of the CDPs include a debt ceiling, liquidation ratio, stability fee, and penalty ratio. DAI started with a debt ceiling of 50 million DAI, which was raised to 100 million in July 2018, after the first debt ceiling was reached. The variable liquidation ratio reflects price volatility as predicted by the expectation of the MKR voters. The stability fee is an annual percentage yield which can only be paid in MKR. This is burned and decreases MKR supply. The penalty ratio determines the maximum amount of DAI raised from liquidation and is used to cover the inefficiency of the liquidation mechanism.

Currently, only ETH is accepted for collateral in the MKR/DAI system, with a multi-collateral DAI set to launch in the near future. In order to participate in the system, a user must first send ETH to MKR and create the CDP. Because ETH is not ERC-20 compliant, the ETH must be sent to escrow and "wrapped," creating and ERC-20 compliant crypto asset known as Wrapped Ethereum (WETH). A second crypto asset, Pooled Ethereum (PETH), is automatically inflated to pay off debt, or burned to pay for fees when necessary.

After PETH is created, the user retrieves the DAI, which is equivalent to the debt amount, from the CDP, and locks access to the collateral. A user can retrieve the collateral by paying down the debt plus a continuously accruing stability fee, currently 0.5%. When the debt and stability fees are paid, the user can retrieve the collateral.

Source: https://dai.makerdao.com/

DAI joins a litany of other stablecoins, including but not limited to; Tether (USDT), USD Coin (USDC), TrueUSD (TUSD), Paxos Standard Token (PAX), and Gemini Dollar (GUSD). Proportionally, DAI is one of the smallest stablecoins based on market cap. Other stablecoins, such as Tether, are typically backed by Fiat currencies, or are collateral-backed assets, and are not mineable. As opposed to Tether, which is a centralized stable coin built on the Omni Layer, the Maker Platform operates as a Decentralized Autonomous Organization (DAO). There is no KYC process for generating DAI. As such, the MKR/DAI system has given rise to the "decentralized finance" (DeFi) movement.

However, DAI may be poised to become the stablecoin of choice, for a variety of reasons. A potential upcoming Coinbase listing, the potential for ICOs denominated in DAI, payroll sent in DAI, and dApps like Augur using DAI, all point to the need for DAI or something similar in the future. If the prevalence and use of USDT is any indication, DAI has a large potential market. The downside risk being that, as with all ERC20 tokens, the MKR/DAI system is currently at the mercy of the ETH blockchain and potential ETH scalability issues.

Source: stablecoinswar.com

The true test of the stability of a stable coin comes with fluctuations in market volatility. DAI shields itself from volatility and supply/demand fluctuations by implementing a Target Rate Feedback Mechanism (TRFM), which constantly compares the DAI market price to the DAI target price. The TRFM incentivizes holding DAI with a positive Target Rate and incentivizes borrowing DAI with a negative Target Rate. The MKR platform uses Keepers, Oracles, and global settlers to help mitigate the risk of this mechanism decoupling.

Source: https://medium.com/coinmonks/maker-and-dai-the-banana-paper-6c68eb59fc62

A CDP is liquidated once collateralization drops below the minimum threshold of 150%. Liquidation prices, also known as liquidation risk, can be decreased by adding collateral or remove debt. A CDP liquidation triggers a multi-step process to maintain the DAI peg. The defaulted CDP is closed and a penalty fee is applied. The Keeper then sends the CDP to the Liquidity Providing Contract (LPC) which removes enough PETH collateral to satisfy the debt at current Oracle prices. The CDP owner is now able to remove their remaining collateral from the closed position.

The seized PETH is then offered for sale at dai.makerdao.com with an incentivizing discount, called the Boom/Bust Spread, applied to the value. The DAI earned from the sale of PETH is burned to wipe out the CDP debt. If there is excess DAI from the sale, it is sold for PETH which is returned to the pool of ether, inflating its value. If there is insufficient DAI from the sale, then PETH is drawn from the pool and offered for sale to cover the shortfall, which dilutes the total value of the pool.

Current CDP Liquidation prices are shown below. CDP 5199 is currently the largest, with 195,643.49 ETH in collateral. CDP 3228 is the largest at risk of liquidation, with 42,000 ETH in collateral and a current liquidation price of US$99.03.

Source: https://mkr.tools/system/liquidations

Daily active addresses for DAI (line, chart below) have continued to grow at a steady pace since launch. The average transaction value (fill, chart below) plummeted throughout December and remains at a historic low. The drop in transaction value may be due to exchange arbitrage and an increase in dApp usage. Upticks in this data, or a continued rising trend over time, should be a leading indicator for bullish MKR price action.

MKR currently has 121 repos on GitHub. The Python API for MKR contracts (top) and the dai.js repos (bottom) have been two of the most active repos in 2017 and 2018 respectively. Most coins use the developer community of GitHub, where files are saved in folders called "repositories" or "repos," and changes to these files are recorded with "commits." Although commits represent quantity and not necessarily quality, a higher number of commits can signify higher dev activity.

MKR exchange traded volume (top) is dominated by BTC and ETH pairs whereas DAI exchange traded volume (bottom) is dominated by ETH and USD. OKEx, bitINKA. Exmo leads the MKR exchanges by volume while bitINKA, fatbtc, and HitBTC lead the DAI exchanges by volume as DAI is the stable coin of choice for most ETH-related Decentralized Exchanges. Coinbase will likely add MKR to their mobile wallet but plans to add a DAI fiat pair have not been announced. Binance, Bittrex, and Poloniex do not currently have MKR pairs.

Google Trends data for the term "MakerDAO" have fluctuated wildly over the past year, but appear to be in a rising trend, with most search interest coming from New York, California, and Colorado. Terms for "MKR", "DAI", "Decentralized Finance", and "DeFi" did not yield crypto-specific or significant results. A slow rise in most crypto-related searches usually precedes peaks in market pricing, likely signaling interest from new market participants at that time. A 2015 study found a strong correlation between the google trends data and BTC price, while a May 2017 study concluded that when the U.S. Google "Bitcoin" searches increased dramatically, BTC price dropped.

Technical Analysis

MKR has limited chart history due to both a lack of exchange data and trading interest. Consistent daily volume and no spread with a full orderbook will be one sign of increased trader interest. All MKR pairs will be analyzed with the weekly and monthly exponential moving average (EMA).

While the DAI peg on the MKR platform remains at US$1, the exchange rate for the DAI token fluctuates based on market value. Bitfinex listed the token in April and the peg had essentially held at US$1 until mid-October. Since then, There has been a consistent and slight premium above US$1.

Turning to the MKR/USD pair, volume has been extremely inconsistent since release in May 2018. The 7/30EMAs have crossed several times over the past year while the price has remained in a range from US$300-US$700. A bullish 7/30EMA cross with a new high in volume should be seen as a bullish entry signal.

On the MKR/BTC pair, price has made steady gains since the large down wick in September 2018. The relative value measure of this pair shows that MKR has consistently gained value against BTC since May. The 7/30EMA will be crossing bearishly over the next few days, suggesting additional downside in the near future.

On the MKR/ETH pair, the trend has been bullish since July 2018. One MKR token is now worth 3.62x the price of ETH itself, largely due to the differences in available MKR and ETH tokens. Also, while the ETH/USD pair dropped dramatically over the past six months, the MKR/USD pair has essentially remained in the same price range.

Conclusion

MKR and DAI comprise a complex stablecoin system which brings transparency, stability mechanisms, fallback procedures, and scalability to the stable coin universe. Despite several sharp drops in ETH since January 2018, DAI has been remarkably stable throughout the tumultuous volatility.

Technicals are limited due to the nascent exchange listings or complete lack thereof. However, MKR has continued to gain relative value against BTC and ETH over the past year. Consistent daily trade volumes and an increase in daily active addresses should be considered strongly bullish of an asset that is currently held by very few.

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