The MKR rabbit hole

About a year ago I first heard about Maker (MKR). I listened. I heard, but I failed to truly comprehend the depth of Maker. In summary, I largely dismissed it as just yet another ethereum project.

That was a mistake. Luckily I believe the market has also failed to grasp the depth of the value of the MKR token (thus the buying opportunity still exists).

Why do I like Maker? and what is it?

In summary, Maker is a decentralized central bank (but without calling it a bank); however, many of the operations of the code operate and execute in a similar fashion as a modern central bank. The primary difference however, is that A) there are private owners of that central bank and B) we are so early to the party it is laughable.

After the realization that using ETH as collateral in a dynamic contract to ensure sufficient collateral rations was JUST a proof of concept, I came to fully understand that any ERC-20 token could be used as collateral. Now, for clarity, most associate an ERC-20 (or its successor) as purely related to ICOs. Anyone can create an ERC-20. What is important is not purely the creation of a token, rather it is the laws and legal contracts that associate that ERC-20 token to “stuff” out of the blockchain.

That “stuff” could be membership interests of an LLC or debt securities. It could also be tokens for a local arcade. Note, the construct of tokens is largely similar to Asset Backed Securities (and by derivative mortgage backed securities), where there significant legal agreements that associate a home with a mortgage into a bundled pool before an investor might consider making an investment (purchasing a portion of the pool).

Now, let’s zoom back to Maker. In the coming weeks Maker will be releasing a new version where its counter-part stable-coin (DAI) will be upgrading to a multi-collateral smart contract. In doing so, it will be unclear what portfolio of assets that Maker will allow DAI to be borrowed against it. However, one thing is clear, that list will A) not be static and B) more importantly has a much higher probability to be growing that decreasing.

The most important take away from the previous paragraph is that not only will the quantity of assets that may be used as collateral be increasing, the DEPTH of those assets are staggering compared to the currently locked-up collateral of some $200mm (at the time of authoring).

As the value of Maker as a token, will be supported / improved with BOTH investors who are speculating on the future value of MKR as well as good loans being repaid with the annual fee being used to “burn” MKR tokens. That annual fee (which looks and smells a LOT like interest) could also be construed as an asset management fee for all assets that folks pledge as collateral and use the MKR and DAI toolbox to borrow against. Therefore as the asset base increases there should exist a direct and exponential increase in MKR purchasers (e.g. burns). This would-be stock buy-back to support pricing is in its exceptionally young age.

Once Maker releases its multi-collateral DAI contract migration expected in a few weeks from today, aside from continuing software maintenance, Maker should largely pivot to expanding its Assets it will authorize as possible collateral against DAI. As such, they should be in a perpetual cycle of monitoring the assets, their performance and allocation percentages as a blend to ensure that no one asset class could impact the value of DAI too much. Further, I can imagine that they will allow only certain “margin-ability” on certain assets vs others. Unlike ETH (or an existing ERC-20 token) with a price feed, the further that Maker has to go off the reservation to both secure an asset / asset class and to that end the pricing discovery to the Maker pricing oracles, the more systemic risk that is introduced. For example, there are thousands of publicly traded stocks, it is conceivable that Maker would allow a portfolio of stocks to be used as collateral. However, they would need a “bridge” custodian allowing the contract nature of a margin call but without the human intervention along with pricing data to ensure that a portfolio doest become too volatile or low in value.

Coming full circle, I was wrong to discount the scope of the possible assets that Maker would potentially serve. The more I research the more I am impressed by the elegance of the solution and aware of their challenges. One thing to close, Network Effects are a powerful force, especially in e-commerce. What makes Maker so unique is that its stablecoin (DAI) is soft-pegged to the USD (1:1). Soft pegged meaning market forces push it as close to $1 as possible. Thus far, there are no other stable coins that I am aware that are not backed by dollars in a bank, but rather have collateral that is more than sufficiently covers the value of each DAI. Each month that DAI goes unchallenged, is one more month of network effects.

Facebook Inc. has recently been reported to allegedly been working to used a stable-coin of its own for WhatsApp. While impressive given the depth of users that Facebook commands, I personally view this as an internal research projects. (Very similar to when there were rumors on Facebook wanting to release their own phone instead of an iOS update). While it might actually make progress internally as a research project, one can only only hope that when the legal department hears that they (a publicly traded company) are contemplating releasing a value transfer system without having secured the proper banking licenses (or money transfer business) licenses, they will kill that project exceptionally quick. Moreover, as Facebook has presence in so many countries, I cannot imagine a faster way to ensure that local host countries become “uncooperative” than if Facebook where to use their WhatsApp investment to deploy their own stable-coin. That said, if they build in a web3 ethereum wallet, I can completely see them allowing that functionality.