On-Chain Analysis of the Maker Ecosystem – IntoTheBlock
Decentralized Finance (DeFi) has been one of the most buzzed sectors in the past few months — rightfully so as many of the projects involved are actually creating value rather than sheer speculation. Out of these protocols, perhaps the best-known is MakerDAO, which currently is the largest player in terms of value locked, or stored in its platform. Having just released a major update, I thought it would be interesting to cover the basics of the Maker ecosystem, its services and on-chain analytics.
MakerDAO is a distributed autonomous organization (DAO) offering several decentralized finance services. The Maker ecosystem currently consists of four main elements: Collateralized Debt Positions (CDPs), the DAI stablecoin, the MKR governance token and the DAI Savings Rate (DSR).
DAI — The DAI stablecoin was created by the Maker and is the first decentralized cryptocurrency pegged to the US dollar. Unlike centralized stablecoins like Tether, the collateral backing DAI’s peg to USD is provided by users of Maker’s network rather than stored in a bank. In Maker’s case, users of the collateralized debt positions (CDPs) portal provide the assets backing the DAI stablecoin. Smart contracts in the Ethereum blockchain enable a mechanism that temporarily holds the collateral used to back DAI.
To further explain how the DAI’s peg to the dollar is maintained, it is necessary to first explain its dynamic collateralized debt positions.
Collateralized Debt Positions (now called Vaults) — Maker’s CDPs offer a decentralized alternative to traditional loans. CDPs consist of users providing collateral asset(s) on the blockchain, depositing them in a smart contract and obtaining a DAI loan in return. As opposed to traditional loans, users of a CDP do not require credit checks, KYC (identity verification) or minimum balances, thus allowing the unbanked or underbanked to participate.
Furthermore, CDPs can be created in matters of minutes through Maker’s CDP portal website just by connecting to your cryptocurrency wallet. The steps to obtain a CDP are outlined in the process flow below:
If a user wants to repay their CDP loan, they have to pay back the amount borrowed plus the stability fee. The stability fee is effectively the interest rate charged on the loan. Its name is derived from the fact that its value changes dynamically to create market forces that push the price of DAI back to its target of 1:1 parity with the USD. For example, if the price of DAI is $0.99, the stability fee would be reduced to incentivize more people to create CDPs, therefore increasing the amount of collateral and pushing the price of DAI back to $1.
Previously, ETH was the only type of cryptoasset accepted by the Maker protocol as collateral for a DAI loan. However, as of November 18, users are now also able to deposit other ERC-20 tokens (a type of Ethereum-based token) as collateral. For now, only ETH and Basic Attention Token (BAT) will be accepted for multi-collateral DAI, but the selection of assets accepted is expected to expand in the near future. The tokens that will be accepted for multi-collateral DAI are selected from the results of a vote that takes place among holders of Maker’s native token, MKR.
MKR Token — The MKR token is used for decision-making in the Maker platform, akin to voting shares in public companies. MKR holders vote over several attributes in the network such as the stability fee, ensuring the health and growth of the Maker ecosystem. Notably, a16z Crypto, Andreessen Horowitz’s blockchain-focused subsidiary, holds 6% of MKR tokens after they invested in Maker in late 2018. These tokens are available to the general public in multiple cryptocurrency exchanges and holders can vote in MakerDao’s website.
DAI Savings Rate — Lastly, the DSR, which will be launching along with multi-collateral DAI on November 18, is expected to be another pillar of the Maker ecosystem moving forward. The savings rate allows users to earn interest on the DAI deposited in the Maker platform, similar to interest earned in a savings account. Like CDPs, DAI savings will be available to anyone regardless of their account balance, credit score or country of origin.
Another benefit of the DSR is that it adds another layer of stability to the platform. Through its variable interest rate, the DSR is adjusted through a voting process from MKR holders in order to retain the DAI peg to the US Dollar.
Data stored in the blockchain offers a transparent picture of the adoption of a cryptocurrency amongst other things. On-Chain data of the Maker ecosystem can provide an overview of the health of the MKR and DAI tokens. Here are a few interesting insights displaying the bigger picture for MakerDAO:
Over Half of MKR Holders Are Making Money –
IntoTheBlock’s machine learning algorithm identifies the average cost at which each address purchased a token. The In/Out of The Money chart compares current price of a cryptoasset to the average purchasing costs to determine what percentage of holders are making money, breaking even and losing money on their positions. As can be seen above, 71.3% of holders are either breaking even or making money on their positions, at least on paper.
This is particularly impressive taking into account that Maker launched in November 2017 right before the peak of the 2017 bubble and 2018 bust. In contrast, other ERC-20 tokens had very different outcomes for holders, with tokens like ZRX and OmiseGo(OMG) having only 24.5% and 1.1% in the money, respectively.
MKR is Heavily Concentrated Amongst Whales –
Whales, which IntoTheBlock defines as addresses that hold more than 1% of the circulating supply, account for roughly two thirds of MKR tokens. Addresses considered as investors, which also represent a significant 21.8%, are those that hold between 0.1% and 1% of the circulating supply.
Out of a total of 8 whales holding 66.5% of the total circulating supply, we can identify the Maker Foundation and a16z crypto as key stakeholders in the MKR decision-making process. This is not necessarily a negative sign, but could be seen as something going against the industry’s ethos of decentralization.
Growing Stability for DAI –
As inferred by the name, it is essential for a stablecoin to maintain, well, stable relative to the asset they are pegged to. DAI, which had an all-time high price of $4.77 in February 2018, has improved remarkably on this end. As can be seen in the graph below, DAI’s peg to the dollar has become more robust:
This improved stability can also be reflected in the decrease in volatility DAI has achieved:
DAI has a large amount of active and new users –
A proxy to adoption of a cryptocurrency is the number of addresses utilizing the asset on a given day. In the case of Maker’s stablecoin DAI, the number of active addresses has increased from around 700 a day at the beginning of the year to over 3,000 recently.
What stands out is the percentage of addresses that are new to DAI on a daily basis — 34% of addresses using DAI in the last 24 hours are new addresses, those that were just recently created. This could be seen as a sign of growing interest and attraction of new participants. In comparison, only 17% of addresses using ETH in the last 24 hours are new users.
Overall, the on-chain indicators covered through IntoTheBlock data provide a healthy outlook on the Maker ecosystem. Along with the recent launches of multi-collateral DAI and the DAI Savings Rate (DSR), this is certainly a cryptocurrency protocol to look closely in the coming years as the DeFi space evolves. That being said, the growth of the Maker ecosystem does not necessarily correlate with price action in its native MKR token.
The author of this piece does not hold any MKR or DAI at the time of writing. This piece is not intended to be used as financial advice.