Maker Price Analysis – The Dai DAO

Maker (MKR) is a utility token, governance token, and a recapitalization resource for the Maker Platform. MKR is used on the Maker Platform to leverage Ethereum and generate a stable coin, pegged to the U.S. Dollar, called Dai (DAI). While MKR is a token that has a variable price because of its unique supply mechanics and role on the Maker platform, Dai is designed to have a stable price, relative to USD, and can be used in the same manner as any other cryptocurrency: it can be freely sent to others, used as payments for goods and services, or held as long term savings. The MKR market cap currently stands at US$264.77 million with US$137,000 traded in the past 24 hours. DAI currently has a free float supply of US$48.4 million with US$58,000 traded in the past 24 hours.

The MKR project lead, CEO, and native of Denmark Rune Christensen, first began work on the project in 2015. DAI was launched on December 17th, 2018. 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 recently announced the first compliant fiat on/off ramp for DAI.

Stablecoins, such as Tether (USDT) are typically backed by Fiat currencies, or are collateral-backed assets, and are not mineable. As opposed to USDT, which is a centralized stable coin built on the Omni Layer, the Maker Platform operates as a Decentralized Autonomous Organization (DAO).

More specifically, Maker is an Ethereum smart contract platform that backs and stabilizes the value of Dai through a dynamic system of Collateralized Debt Positions (CDPs), autonomous feedback mechanisms, and “appropriately incentivized external actors.” MKR will also be used to vote on foundation proposals, the first of which will occur on September 12th.

CDPs hold collateral assets deposited by a user and permit the user to generate Dai, but generating Dai also 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 on July 8th, 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. This is burned and decreases 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.

Currently, only ETH is acceptable for collateral on the MKR/DAI system. A multi-collateral DAI is set to launch at the end of Q3. 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 amount from the CDP, equivalent to the debt, and locks access to the collateral. A user can retrieve the collateral and pay down the debt plus a continuously accruing stability fee. When the debt and stability fees are paid, the user can retrieve the collateral. Further explanation of the process can be found here.

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.

According to Trivial.co, MKR and DAI are held in only 4,422 and 5,213 addresses respectively. The daily active user data for both MKR and DAI is practically zero. Upticks in this data, or a rising trend over time, should be a leading indicator for MKR price action.

The MKR project on GitHub has had a cumulative 826 commits over the past year, most of which occurred before 2018. 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.

Unsurprisingly, both MKR and DAI exchange traded volumes are dominated by ETH pairs, as they are a stable coin of choice for many Decentralized Exchanges. OKEx launched MKR trading in mid-January and MKR was listed on Bitfinex in May. 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. HitBTC leads the pack for DAI volume by exchange.

Technical Analysis

MKR has limited chart history due to both a lack of exchange data and trading interest. Although MKR never had an ICO, the continued downward slide since being listed on Bitfinex suggest the token is still trying to prove it’s worth, and is in price discovery mode. Consistent daily volume will be one sign of increased trader interest. All pairs will be analyzed with the weekly and monthly exponential moving average (EMA).

On the MKR/USD pair, volume has increased over the past month as the pair forms a rounded bottom. The 7/30EMAs have been bearishly crossed since early August. The cross was a leading indicator for the current bearish momentum. 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 lower lows since being listed. The relative value measure of this pair shows that MKR has consistently lost value against BTC since May. A bullish cross of the 7 and 30 EMA would suggest a fresh bull trend and a strong increase in MKR/USD value compared to BTC/USD.

Although both the MKR and ETH pairs have lost value against USD, the MKR/ETH pair has been in a bullish trend since July. One MKR token is now worth 1.562x the price of ETH itself, largely due to the differences in available MKR and ETH tokens.

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 has been remarkably stable throughout the tumultuous volatility.

DAI may be poised to become the stable coin 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.

Technicals are limited due to the nascent exchange listings or complete lack thereof. Over the past three months, MKR has lost value against USD and BTC, but has gained value against ETH. 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.

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 has been remarkably stable throughout the tumultuous volatility.