Maker Price Analysis – Dai may be poised to become the stablecoin of choice for ETH users

Maker (MKR) is a utility token, governance token, and a recapitalization resource for the Maker platform, which operates as a Decentralized Autonomous Organization (DAO). Using Ethereum (ETH) as collateral, the MKR platform has been predominantly used to create Dai, a stablecoin with a soft peg to the U.S. Dollar. The MKR market cap currently stands at US$776 million with US$2.67 million traded in the past 24 hours. Dai currently has a free float supply of US$86.47 million with US$2.6 million traded in the past 24 hours.

Rune Christensen, the MKR project lead, CEO, and native of Denmark, first began work on the project in 2015. Dai was launched 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 now MKR market." Notable MKR investors include Polychain Capital, Andreessen Horowitz, FBG Capital, and Wyre Capital, who also provides a compliant fiat on/off ramp for Dai.

The Maker DAO, which currently holds just over 2% of all ETH in circulation (chart below), uses a smart contract that backs and stabilizes the value of Dai through a dynamic system of Collateralized Debt Positions (CDPs), autonomous feedback mechanisms, and incentivized external actors. These external actors include keepers, price oracles, and emergency oracles. Although ETH is the only collateral currently accepted for backing Dai, a multi-collateral feature is set to launch sometime later this year. Additional collateral options will be voted on by MKR holders.

Source: https://mkr.tools/system

In order to participate in the system, a user must first connect an ETH wallet, such as MetaMask, to the MKR platform, then ETH can be sent to MKR to create a CDP. Because ETH is not ERC-20 compliant, the ETH must be sent to escrow and "wrapped," creating an 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 amount from the CDP, equivalent to the debt, which locks access to the collateral. A user can retrieve the collateral and pay down the debt plus a continuously accruing stability fee, currently at 7.5% per year. When the debt and stability fee are paid, the user can retrieve the collateral. A further explanation of the process can be found here.

Source: https://cdp.makerdao.com/

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 on July 8th, 2018, after the first debt ceiling was reached. The variable liquidation ratio reflects how volatile MKR voters expect the collateral price to be. The stability fee is an annual percentage yield which can only be paid in MKR and is burned, decreasing the MKR supply. The penalty ratio determines the maximum amount of Dai raised from a liquidation and is used to cover the inefficiency of the liquidation mechanism.

Most of the larger CDPs, with greater than one million Dai in debt (chart below), are currently under an ETH price of US$120. These CDPs can also increase or decrease collateral at any time to increase or decrease the liquidation price. The largest CDP, 5199, currently holds 11,523,400 in debt at a collateralization ratio of 316% and a liquidation price of US$76.42.

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

In recent months, the Dai stability fee has increased dramatically (shown below). Each stability fee adjustment is voted on by the MKR holders through a voting smart contract. From May to October 2018, Dai remained relatively stable, near US$1. The first stability fee increase occurred on August 6th, 2018, raising from 0.5% to 2.5%. The Dai supply contracted slightly before the increase, but the supply quickly increased in late October. The stability fee was decreased back to 0.5% in late December and the Dai supply increased dramatically. In February this year, MKR holders continually approved increases in stability fees, leading to the current 7.5% level, because of a Dai exchange rate persisting below US$1. Despite these increases, the Dai exchange rate currently remains below US$1, having ranged between US$0.98 and US$0.99 for the past few days.

Source: https://mkr.tools/governance/stabilityfee

Despite the fluctuating stability fees, monthly active Dai users (red, chart below) have continued to increase. In January this year, more than 7,300 active addresses were sending or receiving Dai. The strong rising trend for active users suggests incremental on-ramping and trust in the Maker ecosystem.

Source: https://plot.ly/~beneath/16.embed?link=false&modebar=false

Other stablecoins, such as Tether (USDT), are typically backed by Fiat currencies, also making them non-mineable collateral-backed assets. USDT (dark green, chart below) has firmly maintained its stablecoin dominance since stablecoin competition ramped up in 2018. Dai (red, chart below) has significantly gained in popularity since its inception, but has taken a back seat to other stablecoins in terms of total circulating supply, such as USD-Coin (USDC) (blue, chart below), TUSD (neon green, chart below), and Paxos-Standard (PAX) (pink, chart below).

Source: coinmetrics.io

Turning to developer activity, the MakerDao project has 135 repos on GitHub, with the Dai repo being one of the most active over the past year (shown below). 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.

Source: https://github.com/makerdao/dai.js/graphs/contributors

In the markets, over the past 24 hours, MKR (top) exchange-traded volume has been dominated by ETH and BTC pairs, while Dai (bottom) exchange-traded volume has been dominated by USD and ETH pairs. Most of the MKR trading volume occurs on Bitfinex, while Dai is the base currency of choice for most decentralized exchanges. Binance, Bittrex, and Poloniex do not currently have MKR pairs. Coinbase will likely add MKR to their mobile wallet but plans to add a fiat pair have not been announced.

Technical analysis

MKR has increased over 100% since the recent low in late-January but has limited chart history due to both a lack of exchange data and trading interest. Consistent daily volume across multiple exchanges will be one sign of increased speculative interest. All market pairs in the following analysis will be assessed using the weekly and monthly exponential moving averages (EMAs), as well as volume.

On the daily MKR/USD pair, volume has increased slightly since February, suggesting some correlation between trading volume and an increase in MKR voting proposals. The 7 day EMA and 30 day EMA have been bullishly crossed since mid-February. Price has also risen above all volume congestion zones and is effectively nearing a new local high. Any price beyond US$1,500 would enter price discovery.

On the daily MKR/BTC pair, the 7 EMA and 30 EMA had been bullishly crossed since mid-February. Recently, these EMAs have crossed bearishly, with a significant drop in price at a volume congestion zone. The relative value measure of this pair shows that MKR will likely lose value to BTC in the near-term. Volume supports stand at the psychological zones of 0.15 BTC and 0.13 BTC. Should price move North, a 1.618 extension of the current high to local low sits at 0.244 BTC.

Lastly, on the daily MKR/ETH pair, price looks similar to the MKR/BTC pair. One MKR token is currently worth 5x the price of ETH itself, largely due to the differences in circulating supply of MKR and ETH tokens. Price recently recorded a high and is currently sitting below a volume congestion zone. Unlike the USD or BTC pairs, the ETH pair has shown consistent daily volume since late-January. The 7 EMA and 30 EMA had been bullishly crossed since early-February, but will likely cross bearishly within the next few days, indicating a long exit.

Conclusion

MKR and its Dai comprise a complex stable coin system which brings transparency, auditability, stability mechanisms, fallback procedures, and scalability to the stable coin universe. Despite several sharp drops in ETH since January, Dai remained stable throughout the tumultuous volatility. Since then, Dai stability has drifted below US$1.00 and remained below US$1.00 despite several stability fee increases.

Dai may also be poised to become the stablecoin of choice for ETH users, for a variety of reasons. An 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 is that, as with all ERC20 tokens, the MKR/Dai system is at the mercy of the ETH blockchain and potential ETH scalability issues as well as the eventual migration to ETH 2.0.

Technicals are limited due to the nascent exchange listings or complete lack thereof. Over the past two months, MKR has made significant gains on the USD, BTC, and ETH pairs. Consistent daily trade volumes and an increase in daily active addresses should be considered strongly bullish for an asset that is currently held by very few. Multi-collateral Dai and further voting proposals will likely lead to increased use and velocity of the MKR token, which will also likely lead to bullish price action.