How MakerDAO is Informed by Too Big To Fail

tl;dr: Once it was the most difficult project (for me) in crypto to understand. Now, it may just be the most elegantly designed crypto-economic system around.

Disclosure: I now hold some MKR and DAI, but nothing huge.

One of the projects that has both fascinated and befuddled me for a while now is MakerDAO.

Dai supply over $77M, slowly turning bitcoin maximalists to cryptocurrency realists— Nick Tomaino (@NTmoney) February 9, 2019

It offers a stablecoin (which I’ve covered many times before-here’s a primer from VentureBeat) that is algorithmically pegged to the US dollar.

Top 10 Blockchain Courses – Data Driven Investor

Stablecoins 101

The idea of a crypto asset that is consistently equal to one US dollar is very appealing, given how volatile crypto assets are. More important than that, however, is that it provides a convenient mental “on ramp” to the world of crypto.

Once you have DAI (the name of the stable coin), you can use it to buy pretty much any type of crypto asset that is out there. In your head, however, you know that the DAI is worth $1.

That’s an important mental benchmark since the dollar is the world’s unit of account, for better or for worse (for now).

The Challenge of “Getting” MakerDAO

One of the reasons why MakerDAO/DAI has confused me for so long is that the process of ensuring that a stablecoin is actually stable and consistently worth $1 is, well, REALLY difficult to understand. Plus, I just had an inherent bias against anything that is pegged because I think it invites black swans.

I remember reading their original whitepaper 3 years ago (and I read it something like 8 times) and I just could not get my head around all of the mechanics of it.

I’ve invested a ton of time since then in trying to understand it for a few reasons. They include:

  • It is rapidly becoming the stablecoin of choice in the crypto ecosystem (admittedly, it’s early)
  • People I really respect like Joel Monegro and Nick Tomaino are big believers-and investors
  • MakerDAO itself is becoming better at explaining how it all works (maybe they have a great marketer?)

The MakerDAO A-Ha Moment

Perhaps it is like erosion and you just need to spend enough time with it, but the thing that gave me the “oh shit” moment was listening to the project lead on Rune Christensen on the Laura Shin podcast.

He thoroughly answered all of her questions and explained how various scenarios were accounted for that would prevent a run on the currency and a breakdown of the system.

I kept thinking to myself, “there’s got to be a hole in here somewhere,” but as Rune kept talking, I kept saying, “yep, that makes sense.”

There was a meta-message though.

That was, “this is a guy who studied ‘Too Big To Fail‘ and said, ‘ok, this isn’t going to happen to this system.’

It was as if the team had deconstructed the 2008 financial crisis, found all of the ‘bugs’ and replaced them with crypto-economic elegance to make it antifragile.

Of particular interest were the critical role of oracles who help report prices from around the world and keepers who make sure that the collateral levels stay balanced.

It was like listening to a description of crypto-economic art, which is why the podcast is worth the listen…but don’t do it at 1.7x speed like I normally do. You may need real-time for this one.

Placeholder’s investment thesis is a good and important read because it gives you an economic rationale for why it will work.

In the VERY long run, a USD-stablecoin won’t be necessary, but for the medium term, it’s essential and MakerDAO has really thought about it at a level that few others have.

Bottom line: Though I was never a skeptic, I was undecided. Now, I am much more intrigued by it and will continue to explore it.

How MakerDAO is Informed by Too Big To Fail was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.