MakerDAO shuts down Single Collateral DAI

The Maker Protocol allows users to generate Dai (DAI), which is designed to be a stable store of value that lives entirely on the blockchain. Dai is a decentralized stablecoin that is not issued or administered by any centralized actor or trusted intermediary or counterparty.

The original white paper described how anyone could generate Dai by leveraging Ethereum (ETH) as collateral through unique smart contracts known as Collateralized Debt Positions. Given that ETH was the only collateral asset accepted by the system, Dai was called Single-Collateral Dai, or Sai. The white paper also included a plan to upgrade the system to support multiple collateral asset types in addition to ETH.

The Dai Stablecoin System, today called the Maker Protocol, now accepts any Ethereum-based asset as collateral, as long as it has been approved by MKR holders, who also vote on corresponding Risk Parameters for each collateral asset.

Through a system of governance involving Executive Voting and Governance Polling, MKR holders manage the Maker Protocol. MKR voting weight is proportional to the amount of MKR a voter stakes in the voting contract. The more MKR tokens locked in the contract, the greater the voter’s decision-making power.

The recent decision to switch to MCD was recently finalized after a community discussion and voting period had been completed. While the soft transition to multi-collateral DAI began on November 15th, 2019, a Governance Poll for the final closure of SAI was run between March 30th and April 6th 202. The community signaled its support to initiate the Shutdown of the SCD system through an executive vote on April 24, 2020.

The post announcing the closure of Single-Collateral Dai (SCD) describes it as an Emergency Shutdown (ES). BNC Pro users were made aware of the announcement at the time. The MakerDAO team states that ”Technical documentation, which will provide a much deeper dive into ES for SCD, as well as detailed explanations of the process as it relates to different stakeholders, will be published within the next few days.”

Following the implementation of Multicollateral DAI, Ethereum users have more flexibility when generating DAI through loans. They can use stablecoins like USD Coin (USDC) that offer price stability or tokens that secure long term reward options like Binance Coin (BNB). All Dai is backed by a surplus of collateral that has been escrowed into publicly viewable Ethereum smart contracts.

Since the release of Single-Collateral Dai in 2017, user adoption of the stablecoin has risen dramatically. The stablecoin currently has a listed market capitalization of ~US$10.3 million. Stablecoins have become a building block for decentralized applications that help expand the decentralized finance movement, or DeFi.

Defi is the community coined term for a suite of blockchain-based applications that provide internet users anywhere on the globe with access to basic financial services, such as borrowing and lending. Defi has been described as the “fintech revolution we’ve been waiting for.” In February 2020, the Defi space had locked in a billion US dollars worth of digital assets.

Ethereum is the primary public platform the Defi products are built on. Defi market data aggregator. Defipulse currently lists Maker as the largest protocol in Defi, having over US$424 million locked into it.

The Defi space utilizes many of the inherent advantages of distributed ledger technology such as instantly verifiable transactions, transparency between counterparties, and cheapness. However, protocols within Defi have sometimes misrepresented potential security and the financial risk in their audit reports or whitepapers. This has also created issues for Defi with regulators, users, and prospective developers.

Paul Salisbury, Chief Blockchain Officer of Techemy Ltd., suggests that a smooth community governance based transition away from the Single Collateral DAI sets a good example for the Defi industry.

“This goes a long way towards building trust in DeFi. The MakerDAO team has set a high bar for good governance and demonstrated that they can not only test and launch new products, but also gracefully deprecate old ones, which is important for growing users confidence in DeFi systems.”

Three days after the Multicollateral DAI release, the MakerDAO team introduced the DAI Savings Rate (DSR). The DSR lets any DAI holder earn interest. Prior to the implementation of the DSR, users only had access to loans from MakerDAO.

The DSR determines the amount Dai holders earn on their savings over time. When the market price of Dai deviates from the a target price due to changing market dynamics, MKR holders can mitigate the price instability by voting to modify the DSR accordingly:

If the market price of Dai is above 1 USD, MKR holders can choose to gradually decrease the DSR, which will reduce demand and should reduce the market price of Dai toward the 1 USD Target Price. If the market price of Dai is below 1 USD, MKR holders can choose to gradually increase the DSR, which will stimulate demand and should increase the market price of Dai toward the 1 USD Target Price.

Initially, adjustment of the DSR will depend on a weekly process, whereby MKR holders first evaluate and discuss public market data and proprietary data provided by market participants, and then vote on whether an adjustment is necessary or not.