Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Rune Christensen: Maker DAO – The Central Bank of Web 3.0

Episode Date: July 30, 2019

We're joined by Rune Christensen, CEO and Co-Founder of MakerDAO. We discuss the rise of Maker DAI as an algorithmically backed stable token and get into the weeds of the new version featuring multi collateral DAI as well as the ability to natively generate interest on DAI. We also cover the current governance model and how this can be attacked. The governance will undergo an overhall for the new version of Maker, introducing an Emergency Shutdown that can be triggered through MKR holders and promises to make the system more resilient. Lastly, we venture into what Rune hopes the future will bring for MakerDAO. Topics covered in this episode: Recap of how single collateral DAI is kept at peg of 1 USD Why was DAI intermittently trading at < 1USD Governance functions exercised by MKR holders Sale of MKR tokens and MKR distribution Is the current governance model satisfactory? New governance mechanisms to be rolled out soon Introduction of multi collateral DAI Interest generating DAI: Implementation and rationale Future of Maker DAO: What will be able to serve as collateral? Episode links: MakerDAO white paper MakerDAO CDP portal MakerDAO Blog Roadmap Multi Collateral DAI DAI in numbers DAI in DeFi Sponsors: Cosmos: Join the most interoperable ecosystem of connected blockchains - http://cosmos.network/epicenter Azure: Deploy enterprise-ready consortium blockchain networks that scale in just a few clicks - http://aka.ms/epicenter This episode is hosted by Sunny Aggarwal & Friederike Ernst. Show notes and listening options: epicenter.tv/298

This episode of Epicenter is brought you by Cosmos. Cosmos is building the internet of blockchains, an ecosystem where thousands of blockchains can interoperate, creating the foundation for a new token economy. If you have an idea for a DAP, visit cosmos.network slash epicenter to learn more and to get in touch with the Cosmos team. And by Microsoft Azure. Do you have an idea for a blockchain app but are worried about the time and cost it will take to develop? The new Azure blockchain DevKit is a free download that brings together the tools you need to get your first app running in less than 30 minutes. Learn more at aka.ms slash Epicenter.

Welcome to Epicenter. I'm Sunny Agarwal. And I am Friedricha Ernst. And today we are talking with Roon Christensen of MakerDAO and talking about many of the exciting developments and things that have been going on with Dai in the Ethereum. ecosystem and, you know, about stable coins and the governance of the MakerDAO itself. So it's a really exciting episode. Before that, though, we have a couple of announcements, many of them to do with the Berlin Blockchain Week.

The first one has to do with DAPCON. So, Frederica, given that NOSIS is one of the co-organizers of it, would you like to talk a little bit about that? Debcon is one of the conferences at Berlin Blockchain Week. It starts August 21st and is until August. 23rd, and we have a 20% discount code for Epicenter listeners. So the discount code is Epicenter DepCon 2019, no spaces. We will also record a second edition of Epicenter Live with myself, Sunny and Sebastian,

at the DebCon conference. The last one that we had at the Interchain Conversations was really nice. Yeah, and then a lot of us will be attending at, you know, many different events throughout the week at Berlin blockchain week. I'll be there at the Better Cartel demo day as well as the Web3 Summit and Heath Berlin. So, you know, I think it should be a really exciting week. So I urge many people to show up. And we'll actually be having our own epicenter event during that week as well, where we'll

be having a small meetup, similar to the one that we've had a couple of times at, you know, DevCon4 and at ECCC. It'll be a drinks meetup with the hosts. and other listeners. It will be on Thursday, August 22nd. The location is still to be determined, but it will be pretty close to the location where DAPCon is. So it will just be a quick walkover from the venue

over to the meetup location that day. Finally, the last announcement I have is not for Berlin Blockchain Week, but for SF Blockchain Week, which is quite a bit further out near the end of October. But the CESC conference, Crypto Economics and Security Conference. It's the UC Berkeley academic blockchain conference, the one with Blockchain at Berkeley throws annually.

We're currently accepting papers for submission. And so if you just go to c.esc.io from that site, you'll be able to find the link for how to submit papers. And so, you know, we're open to papers on, you know, any topic in the field of crypto economics or systems designed game theory. and so I encourage as many people to participate as possible. I'm on the program committee, so I look forward to reading all of y'all's papers.

So without further ado, we'll go to the interview with Rune. Welcome back to Epicenter, and today we have on with us a guest, Rune Christensen, who is the CEO of the Maker Foundation and the founder of the Maker Dow Protocol. And so many people are, you know, probably pretty familiar with MakerDAO, especially, you know, it's probably one of the most popular products on the Ethereum ecosystem with the Dai Stablecoin. And so Rune has been on the episode once before, all the way back in 2016, before Dai had even launched. And, you know, since then, Dai has, you know, grown to become this massive project that has become, you know, very, you know, very, you know,

successful and so you know we thought it was time to bring uh ruin back on the shore to talk a little bit about how their project has changed and uh what's what's new and how this uh massive surge adoption has gone so uh welcome back on to the show run uh can you give yourself can give uh the listeners a little bit of an intro about yourself in case uh you know some of them may have not seen the last episode given that it was all the way back in 2016 yeah absolutely and uh yeah thanks for having me back here, it's pretty wild to sort of look back three years in time in the crypto space. So this is a very interesting opportunity, I think. And just quickly about myself.

So basically, I did a lot of attempts at startups when I was younger and worked a lot of, like worked a long time in Asia. When I then discovered blockchain technology and first got into Bitcoin, got really into Bitcoin, you know, became like a real. Bitcoin type back in 2011, 2012. But then over time, I discovered, like, I got somewhat disillusioned by Bitcoin's volatility, really, and sort of the fact that it wasn't seeing less kind of the mainstream adoption that people predicted initially. And I think to a large extent that was because of the volatility, right? And because it's more useful as gold rather than regular currency.

So I got into stable coins and I discovered Bitcoin. shares, which was the first decentralized stablegoing project. But unfortunately, due to many reasons, BitShares never really gained the kind of traction that we hoped for. And instead, me and a couple of other people from the BitShares community eventually pretty much switched over to Ethereum and kind of took the stablecoin component from Bitchairs and tried to implement it on Ethereum. So were you actively involved with like the development of BitShares?

No, you could say I was a very active community member. And it was, I mean, many of these like fundamental ideas around MakerDA all come straight from the bitch, like from the idea of bitchairs. In particular, right, how like you have regular community members ultimately being, like despite not being sort of an official developer of the project, right, I still was very deeply involved in sort of the core of the governance of it, which is exactly what was so powerful about blockchain technologies, right? blockchain entities. So the Bitshare system, you know, they used their contract for difference system. You know, can you tell us a little bit about some of the things that why BitShairs, you know, maybe didn't work and how that kind of contributed to your design of the maker system with the CDPs? Yeah.

So there's really a couple of reasons. I would say there's really three major reasons. why, I mean, there's three major things that to some extent got in Bidshare's way, right? So first of all, was that Bidshare's was this, it was not like Ethereum, a smart contract platform, rather it was kind of like a Swiss army knife. So it's like a single platform or like a single project that tried to do many different things, right? So it both, it did sable coins, which was mainly, like was kind of its main product, right?

And really the biggest innovation of the project. But it also did things like privacy and like a very, advanced privacy system and things like account names, which is a time, like, instead of having the long strings, like having actual account names was like very revolutionary. And just like a whole range of other things, like decentralized exchange. There was even like some music related stuff, which is, I think it's funny. It's like, it's kind of related to what ended up happening with our chain many years later. But I mean, there's just, there was a lot of, it tried to do a lot of things. And as a result, it didn't really like miss so well on, on any.

one specific product, at least within the very early big window of opportunity that it had back even before Ethereum launched. And then secondly, there were some fundamental problems with its staple coin design still. Chiefly that the stable coins were based on a single collateral type, right? So they were only collateralized by the bit shares asset itself. So actually similar to the current design of single collateral. And the downside with that approach is that it really limits the level that the system can scale. Because once you get to a certain size, you kind of create this systemic risk where the stable coin failing could take down the entire platform. And that's, of course, like, that's the really big innovation that we brought to the table in that we actually figured out how do you take this basic approach with a single collateral type.

And you actually design a system that has many different collateral types, which can then, diversify and really mitigate the risk that's inherent in having just a single level type and even branch out the use case way beyond what was originally envisioned in terms of even accessing real-world assets and all sorts of even more sort of futuristic stuff. And then I think the final point that I think has been really critical for our development and really a big part of how Maker has evolved is that the bit-shareers community and sort of the bit-shareers philosophy

was quite extreme in that it was really like hardcore anarchism in many ways and really to some extent totally detached from reality which then ended up just like, you know, turning off a lot of people who would otherwise have been interested in it, but who simply were like turned off by like the idea that if you want to use this super awesome technology,

you also have to like subscribe, to all this ideology, right? Which is not always, in fact, it's a pretty bad strategy for trying to get business adoption. So Maker did start off, like very much derived from that anarchist philosophy for sure. But it was with a mindset that in the end, the goal is to make change in the real world. And that perspective then led us on this ability to essentially grow up alongside the rest of the ecosystem, right? because really today the blockchain space is just very different from what it was, even let's say, back in 2016.

Yeah, absolutely. And we'll deep dive into how exactly the stability mechanism works in a second. But just as a catch-up, can you give us the 90-second version of what happened since we last had you on the show? Yes. I mean, I think it is really mind-blowing. if you could go back to 2016 and then tell people what the landscape looks like today with like Maker out in the wild and things like compound and other D5 projects all working together. But just the very basic milestones, right, is obviously the launch of single collateral die, which was really to some extent the first launch of like the first successful launch of a major debt. And then followed immediately by the trial by fire as it had to survive a 95% crash in its course.

lateral right just starting immediately from its launch and actually single collateral die was able to you know totally like brush us off right so there was that complete crash in 2018 and at no point in time did it in any way sort of come close to threaten the stability of dye or threaten the integrity of the pig so that really created this critical proof point that the technology did in fact work work in the way it was was supposed to work which then led to just this great greater sense of trust in the system and ultimately adoption of follow with that. Right. So in summer 2018, the system hit its initial dead ceiling of 50 million and the governance had to actually raise it beyond that. And then it went all the way to about 80 million dying circulation, which is where it sits today, as well as something like I think it's more than $300 million worth of Ethereum blocked as collateral in the system right now. And then what came next was the proliferation of the defy ecosystem right so this sprawling ecosystem of startups that could really be made by anyone right like and that can fit together seamlessly and because they have dais their

source of decentralized ability they can actually provide very useful uh products and very useful services without giving up or sort of compromising on the decentralization which is otherwise often what you see is the the trade-off with for instance something i mean just with Bitcoin, for instance, right? A lot of the very interesting stuff you do with that, or just other systems that aren't based around smart contracts, you very often have to give up decentralization to get more advanced functionality.

And I think this might be the first time where we've seen this, like, where we've seen the opposite, where we've actually seen that decentralization, in fact, adds to the functionality and adds to the convenience of using these apps because they all fit together seamlessly right, which is, I mean, it is really mind-blowing, I think.

And it's not many people think about that. Also because maybe many people didn't really, weren't around in, let's say, 2015, 2016 when Ethereum started. But it is pretty crazy that the ecosystem has actually been able to deliver on that promise of like this seamless interconnection between, you know, trustless and permissionless financial services. And then finally, I think this has been a little bit more than 90 seconds now. But the final and perhaps, well, in my opinion, the most critical milestone is that the community was able to bootstrap the decentralized governance of the single flat-all-die protocol and actually begin controlling the system directly through the MKR tokens in a very active and very, well, somewhat efficient manner, although with a few pitfalls here and there. But that has really been, I mean, that is the most incredible thing of all because of all the things, it is really the decentralized governance that kind of like defines the mega project the most. And it is the critical value proposition and the critical feature of the system that really makes it interesting. Because it promises to deliver something that's completely different from existing financial systems, right, that are all like incredibly locked down.

and with this inherent leg of transparency and very often contradicting incentives built into the system. I mean, it's also just one of the things that many people didn't believe it was even possible, right? Like, I mean, in fact, we didn't even really, I mean, we weren't really sure if it was even going to be possible to do it, right? If you could actually launch a sustainable financial system and then just let it be controlled by random strangers over the internet, as long as they have the right incentives by holding the right token. But it has actually played out, right?

And nowadays we've reached a point where on a weekly basis, the MQI holders actually manage the system actually. This episode of Epicenter is brought to you by Cosmos, the internet of blockchains. Cosmos is live and we couldn't be more excited to see so many projects already building on it. Blockchain technologies are evolving fast, and development shouldn't be one-size-fits-all. As a DAP developer, you need the tools that will allow your DAP to scale, grow and evolve over time. The Cosmos SDK is a user-friendly modular framework which

allows you to customize your DAP to best suit your needs. It's powered by tenement core, an advanced implementation of the BFT proof-of-state protocol. Cosmos takes care of networking and consensus and allows you to focus on building your application in your language of choice. Ethereum smart contracts will be supported soon and the SDK makes it simple for you to connect to other blockchains in the Cosmos network. If you have an idea for ADAP and would like to learn more about the or if you'd like to connect your existing dot the cosmos, visit cosmos.network slash epicenter.

For Epicenter listeners, the Cosmos team will reach out to answer your questions and help you get started. We'd like to thank Cosmos for those supportive Epicenter. Can you explain to us how the system makes sure that one die is always one US dollar? So, I mean, just for the larger picture, there are other stable tokens such as USC and the Gemini daughter and Tether that are supposedly. backed by a dollar in the bank for each one of these coins that are issued. So dye actually works differently and that it's backed by crypto collateral.

So how does that work and how do you keep, how do you peg the value to the dollar? Yeah, very important question. There's kind of two mechanisms to it, right? There's two sides to it. So there's the long-term question of fundamental solvency and, I guess you can say resilience of the system, right? Which is like, can it, like, is it really, is the real value there behind the token? Or is it all just like hot air, right?

And that's where the answer is it comes from the unchain collateralization, right? So the reason why you know that there's real value in your die is because you can go to the blockchain, you know, right now, go to mcaulta tools, for instance, and you can actually, you know, on your own, do a complete audit of every single aspect of the system, in real time even, right? And you can ensure that there's always this level, like there's always this fundamental and inherent solvency in a system as well as a safe level of over collateralization. So that despite the system right now being backed by only eth and the inherent volatility of eth, it's still able to remain stable even in situations such as the 2018 crash because the risk parameters. So the kind of like the safety logic of the system that keeps it safe. from things like crash, from a crash, right? It's set correctly so that you could have a,

you know, you could have a significant fold in the price of ETH, but that's fine because there's about five times as much value of ETH in the system as there is outstanding dye in the market, right? So you could really, the system can handle a very big crash. So that's the, that's kind of like the long, you know, that's the fundamental, like, value in the system. That means that there's a potential here for sort of stability, right? But then the other question is how do you create short-term stability on one hand?

So like pegged price, right? That's like that stays at the same price point. But even more importantly, how do you create liquidity, right? So how do you make it possible to move large amounts of dye into ETH or into another stable or even cash it out for Fiat? And the answer is that it's like you said, it's kind of the system keeps it stable, but perhaps a better way to think of it is that it's the governance that keeps it. keeps a stable and that actually takes care of this because it is managed through

the like adjusting the rates in the system so basically the the cost of generating die primarily is how it works right now in the future it'll also be the savings rates like the gains you get from holding die but it's not going to be available until a future version so right now it's actually purely done on the generating die side, which is really it's similar to changing the cost of borrowing, let's say, US dollars, which is exactly how the, let's say, the Federal Reserve, central banks in general, they maintain the value of their currencies. So what they do is they modify the interest rates. And as a result, they basically change how likely it is someone in the market is going to borrow money, which expands the supply, right? Because when you borrow money

in a fractional reserve system, you're essentially creating new money, or we'll do the opposite, right, pay back their loans and actually just hold onto money if the interest rates are higher, right? So it's the same thing that the maker system does and that governance controls is they modify what's called the stability fee, which is the fee that someone pays to essentially borrow die or generate die by depositing collateral into the system and then utilizing the smart contract system to essentially print new dye. And then the stability fee is the price you have to pay for this service. And that's what I was referring to,

that this is what's being actively changed, actively modified every single week right now by the decentralized governance. This stability fee has gone up from, I think, initially something like 5% or 7% to currently over 20%. What do you make of that? So what do you think this means for the ecosystem? Not in terms of how expensive it is to borrow money, but in terms of what does this say about the ecosystem?

What has changed? What's the underlying metric that has changed? Yeah, it actually started at 0.5% when the system was launched. And the very basic assumption that turned out to be wrong is that it, The assumption was that there's going to be incredible demand for decentralized stable coin, which is kind of like the simple use case, right, and sort of the basic value proposition of the maker protocol. And then this, the secondary use case of generating die, which is a much more advanced type of way to interact with the system, right?

Which is, and it's similar to, it's similar to borrowing money in the bank or taking out a mortgage or even margin trading in some situations, where you deposit collateral into the system and you generate that, right? And yeah, it was just like, first of all, the interface to do this was incredibly complicated, and it took about seven Ethereum transactions to even have a CDP go through, right?

And it was also like, it's a very advanced and completely cutting edge and new type of service, right? Like the very first defy app and that had never, you know, before the term defy even existed, right? So we naturally assume that it was going to be more difficult to people to do that part,

whereas it would be easier to get them to use the more simple and approachable stable coin functionality. And this was also the case in the very beginning, but very quickly, like the idea of Defi, of being able to, in a decentralized system, actually access financing for your inventory and taking on decentralized margin positions, was like it was a very powerful idea,

and it's essentially spread like wildfire with people teaching each other, I guess, how to use this, right? Even in the very first stage where it was so difficult to use. So what ended up happening is that there were way more people interested in using the advanced dye generation functionality, right, to borrow and borrow die on open CDPs than there are people using die initially. And then what the system does is, because what this affects, right, is like the supply and demand, right?

So you have sort of the demand for dye, which sits at, it's, it's, it's. some particular level and then you have the supply of die which which sits somewhere else and they're kind of independent of each other as in people holding die are people who want to go out and use a stable coin maybe spend it people who open cdps have a have a different a completely different demand right they're interested in leverage they're interested in financing so the way you and what you have to what has to happen is they have to meet exactly in the middle so they have to be exactly the same because if they're not the price won't be one dollar so if let's say supply is higher and demand is lower, the price will be below a dollar.

And if it's the other way around, the price will be above a dollar. And so what governance does fundamentally to kind of like tie them into sync is to adjust the stability fee. So what that means is adjusting on the supply side, how interesting, how, how, yeah, just like the terms on which you can generate that, right? Because if the stability fee is higher, it costs way more to generate die unless people are going to be interested in it. So that's why, and that's then how we know that what happened is that there were tons of demand for generating diet, right?

Because the stability fee just shut up, which meant that without it, like if the stability fee had stayed the same, the system probably wouldn't be in sync today. It would probably be like there would be way more dye outstanding, but also the price would be below $1. So why was the stability fee the only way to modify the supply? I mean, in a way, shouldn't we expect that, you know, back when the dye price dip to like, you know, 80 cents or something, shouldn't we expect that the difference from the shelling point of $1 should provide the CDP creators enough incentive to arbitrage that and, you know, maybe buy a bunch of dye, close their CDPs, allow the system to go back up and then reopen the CDPs when the die prices back to a dollar? Yeah, and that's the basic assumption of how, at the very micro scale, the system remains stable, right? But the thing is that that assumption depends on, like, another assumption, right, which is that governance will actually act to deal with imbalance, right? And that's, of course, in the early stages of the system, there's less proof that the governance actually works, right?

So the fact that the scaling point even is $1 isn't really as established compared to, you know, after basically to, basically, day, right, where people are a lot more willing to trust the fact that the price will go back to one dollar. Do you think part of the issue might be that the set of people who are able to participate in arbitrage is limited, where, you know, I guess what I was first learning about die, like it didn't, I guess it didn't hit me. And then when I was looking at it again, like, you know, like a couple years ago, it took me a while to realize that, oh, wait, the die holders actually don't have any claims to underlying

collateral, assuming, you know, except in the case of triggering of global settlement. But because it's not possible for the die holders to actually, you know, go against the, basically, you know, the only people who are able to arbitrage it are the CDP holders and they have to over collateralize so heavily. And so that heavily limits the set of potential arbitrages, thus making it a much more inefficient market. What's actually being arbitrage? And this is what's, I mean, this is the part that can.

be very difficult to sort of wrap your head around, right? But it really is the cost of capital. So it's not a, like, because there is, like, there is no fundamental claim in any way to one dollar, unless in the situation as you describe the global settlement, right, which is a very like niche edge case that isn't actually meant to even happen. My point is that even a CDP holder doesn't have some like direct way of saying, if I have one die, it sort of automatically unlocks one dollar value elsewhere. I mean, you could, it does, of course, apply on the actual liquidation ratio, sure, but it doesn't, like, I mean, in the end, it's a different concern compared to kind of like the risk management at the larger scale, right?

And in reality, what they're, what they're really looking at is the cost of capital. So what they're interested in is how likely are they going, like, are they going to make more money if they hold onto the CDP and they hold on to the leveraged position of ETH, for instance, in there? and despite and paying whatever cost they have to pay on the, both on the, you know, on the stability fee side, but also on whatever potential, you know,

arbitrage gain that would be. And the thing is that in many cases, you know, the, even if the arbitrage potential is huge, it might not actually outweigh the, the sort of imagined gain or like the projected gains of a CDP holder. So there's just so many dynamics playing into this where,

there's only one solution and that is very proficient management of the stability fee and the monetary policy of the system. But with that in place, it should theoretically be exactly as efficient as the current monetary system is in this regard. But of course, with the extra benefit of also being even more seamless and blockchain-based and so on. So to make it as efficient as the current monetary system, that would make the claim that the MKR holders are as proficient at monetary policy as the, you know, the people at the Federal Reserve who are, you know, generally much, you know, trained economist and stuff. Two questions here. One, which is a, you know, question I've had for a long time.

And I just unfortunately couldn't find any good resources answering it on the internet is how was MKR distributed? Because, you know, there was never any sort of ICO or anything done for MKR. So, yeah, kind of how does that distributed? what percentage of it is still in the hands of the foundation as well as VCs or and then what percentage of is in the hands of, you know, the wider public? And then two, how do we make sure that the people who are holding this MKR are necessarily the most sound monetary policy decision makers? Yes, this is really the fundamental question of the system, right? Because like I said earlier, the decentralized governance is the core feature.

And I mean the basic underlying assumption is that if you have a proper open and like equal playing field, I guess you can say, for the science and the knowledge related to monetary policy, you'll always be able to beat any amount of experts, right? Because you will have the entire global body of knowledge participating directly in governance, which means that you could even have, let's say, central banks participating potentially, right? And they would all have the exact same point of access and the same framework to participate as, well, every other central bank or every other commercial bank or every other like random econ nerd sitting in the basement and kind of like thinking about innovative new, you know, ideas around it. And the thing is that in the end, it's very hard to sort of say who is like, I mean, it's very hard to pick kind of like this, the genius person who knows how to like run the world economy, right? because it's kind of, it's, you know, global, like macroe economics and monetary policy,

it's actually to some extent a bit similar to voodoo in that it's not totally, like, it's not, you know, it's like quite fluid and it's quite, to some extent, an art form as well, right? So what that means is that it's not really guaranteed that kind of like the highly decorated ultra expert is the guy that will prevent the financial crisis from happening. It could just as easily be someone who's just seen something that, no one else saw because they all were locked in their old way of thinking or something like that, right? And the core idea of the maker down decentralized governance is that what we want to do is we want to create, I mean, what we really think of as something like something similar to a scientific community, right,

where there is a free, again, like a free playing field and free sort of open framework for all ideas to participate in a, like, an unbiased forum, right, where you can have, like, where every perspective gets a chance to participate, right? So whether it's established central bank or the sort of the more radical and more modern or whatever new innovative approaches. Of course, there has to be, like, I mean, once you sort of open that Pandora's box, there's so many questions there, such of moderation and like priority and so on, right? That needs to be considered. And in the end, And that's maybe also like a critical other piece of it, is that you have to, of course, you have to ground yourself in a conservative mindset, right?

Because, of course, if you just go out and sort of do radical monetary policy, you very quickly end up looking like Venezuela or Turkey or something, right, where people try to defy gravity, which, of course, you can't do, right? Yeah, like the basic answer really is that you could say that, like, even if the Fed had the world's top economists and monetary policy gurus, they will still just be a subset of the people who will be able to participate and have direct line, like both have direct access and line of sight to maker governance, but also have that direct ability to actually influence the governance itself.

This then comes back to the question of decentralized governance and MQR holders and how you actually implement this in practice, right? Because many people think that the sort of the basic idea of maker governance is just mkr holders just vote and decide whatever they want right they basically do whatever they want and that's the end but it's actually a much more sophisticated framework where it's more it's more that mkr holders have this role of trying to surface that you know like the key rational points made in this scientific framework and and only sort of by going for this rational approach and trying to reach something that's as objective and as as vetted as possible um

Are you able to actually reach a shelling point where you can even get consensus around that direct approach? Before we dive into the governance, Sunny asked earlier, so how were the maker tokens actually distributed initially? So who are these people who actually hold Maker? There was initially one million MQR tokens, right? Created by me, really, and a couple of other guys in the early days. And we knew from the very beginning that because, again, like, the MKR token holders are not meant to kind of like run the system through a popularity contest. But they are, of course, very important in that with the wrong set of stakeholders, you could have, like, you could easily see how the system could fail, right?

So we knew very early on that it would be too risky to just do, for instance, an ICO and try to pump the token and get a bunch of speculators in, right? But rather it's all about choosing the right set of stakeholders. So the very first approach was to distribute it directly to people who volunteered to work on the project, contributing with science or engineering or just like various forms of contributions to the project. And then also selling directly to some like engaged community members that were kind of like essentially like a part of the early sort of the core engaged group, right, which was very different from how an ICU operated because the early major project actually distinguished itself by sort of almost doing negative marketing like five club style like it was actually meant to kind of be a bit of a secret club where the right people needed to get some space to get their head around it before the masses came in I guess you'd say right and of course after a while the system grew to a point where the community felt confident enough to kind of open up wider and make the project more widely known which actually coincided with then when I did those very early podcasts, including here on Ebrizona, right?

This came at the same time as like the increased scrutiny of the blockchain space as well as new regulation and new kind of like concerns around, you know, especially token distribution, right? So basically once like once we reached that point, it became very clear to us and from the perspective of our legal strategy that the only reasonable way to distribute tokens, like a token like MQI, would be to sell it to like, essentially like, you know, like established and just like the, you know, very, very proficient institutional investors, right? So, so in the U.S. accredited investors, for instance, right? And just in general, the kind of, like the kind of stakeholder where you can, you could, you could sell them a token and it could go totally proof and be worth nothing. and everyone would be like, that was your own fault, right?

Because you knew what you were getting into and you did your own research, right? And on the other hand, if you actually try to, again, like if you try to sell to the masses and things blow up, it's a little bit different. Like, there's a level of trust there that's kind of expected to be maintained when you do that, which is also where we saw the whole ICO craze go wrong, right? But the biggest event of when we started this new approach of selling MKR to large established stakeholders was of course when we sold actually a total of 6% to Andresen Horowitz, which was among their very first purchases of digital assets. And to this day is kind of like one of the absolute core pieces of their, of their cryptocurrency. portfolio. That also really put the project on the map, right, because it was a huge stamp of approval in the more established VC and like crypto world and even wider financial space

or tech space to get at Driesen Horowitz buying into this project. And also participating directly, right, like in terms of promoting it and sort of talking about the implications of the project and as well as supporting the foundation in all sorts of activities we were doing. So like, I mean, Today it's basically a mix of kind of like early community contributors, early community like buyers, like people who've bought on the secondary market, especially in the early days. There's particularly a lot of Chinese people who did, who bought in like that. So there's actually a very significant Chinese community in the Makado ecosystem. And then there's a lot of these institutional stakeholders.

including Andreessen Horowitz, which is one of the biggest, but then also actually a lot of other sort of smaller, like I guess you can say medium-sized institutional stakeholders. This episode of Epicenter is brought to you by Microsoft and the Azure Blockchain Workbench. Getting your blockchain from the whiteboard to production can be a big undertaking. And something as simple as connecting your blockchain to IoT devices

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To learn more and to build your first application in less than 30 minutes, visit aka.ms.m.s.compsenter. And be sure to follow them on Twitter at MSFT blockchain. We'd like to thank Microsoft and Azure for their supportive Epicenter. Before we dive into what exactly governance means in this instance and what MKR holders can actually do with their maker tokens, the stability fee that is generated currently still goes to maker holders, right? It doesn't go to the dye or as it goes exclusively to maker holders. What was the rationale behind that design decision when you made it?

it's really the fundamental economic dynamic on the system that kind of makes the that makes it go around in a sense that it aligns incentives between the different participants in the system right so it really it's very basically that mcareholders they sit sort of at the I guess you can say they set the core of the system and they they fundamentally perform the governance function of the system right so they decide really how like the business logic of the system and what it's actually doing So, which includes like stabilizing the price of die and so one by levying a stability fee on CDP holders. But also in the future other more advanced functionality such as also setting the die savings rate,

which and a whole range of other stuff, more advanced governance. But most crucially, the thing that they're like they're doing, right, is that they're setting the kind of like the risk parameters and sort of the logic around how do we keep the system safe from a crash, right? How do we make sure that we don't put all our eggs in one basket so that we're only relying on, you know, a single cryptocurrency as collateral, even when we are at a scale of several billions? Because that's when you really get that systemic risk, right? They could just see the whole thing wiped out. And also the ratios are set correctly so that, you know, like, I mean, you have the right amount of buffer, you know, in excess of a particular position in the system where you've put in some collateral to generate die. And the careholders then make sure that when you do that, the excess collateral that you put in is enough to cover the volatility of that asset.

And then the key aspect is that if they set this incorrectly, right? So if they fail to correctly protect the system from excess risk, they have to absorb that excess risk. So let's say that they allow a cryptocurrency that's not particularly good into the system as collateral. and they allow it in with like a very small gap, right? So you can generate a lot of die from that cryptocurrency. And it then just like goes, poof, right? It's gone. There's no money left. Then what you end up with is bad debt, right?

Uncollateralized, unbacked debt. And without any other measure, you actually have insolvency in that case, right? You actually have a situation where there's no longer guarantee that all dies backed by unchain collateral. Right. But then that's where the MKR token, steps in and takes the loss essentially through an automatic, like fully autonomous mechanism that what it does is it just starts printing MKR to raise funds. So basically it prints MKR like automatic, like the system detects that there is a loss, right?

The text is a shortfall. Then it prints MKR and then it automatically sells it in the market to raise, to raise die from the market right to yeah, basically raise the same amount of dye as there's a shortfall in the system, and then it used the dye that is raised to essentially cancel out the shortfall by burning the dye, like by removing the dye from circulation so that it can kind of like have the two things equal out and make sure that now the amount of collateral that's in the system is congruent with the amount of dye that's in circulation. So is this lender of last resort functionality actually implemented on the current live maker contracts?

No, so in SIGL who Letteladol die, there's actually this additional mechanic called Peth. And all of this logic is implemented more on the kind of like the, like the ETH CDP holder side. I mean, it's actually, it's a, it's like, it's a functionality that sounds very complicated when you explain it, which is like that, this aspect of the, of the force dilution of, kind of like the underwrite of the system. with the people who also hold collateral in the system in the event of a serious crash. So I guess my question is that in the moment, in the single collateral die instance, is there any risk that the MKR holders take on? Because currently the lender of last resort risk is passed on to the CDP holders. So what is the risk that the MKR holders are currently being rewarded for?

Yeah, this is a very common concern, I guess you say, point made about the system, right? But if you really think about it, then right now as an MKR holder, you're taking more risks that you ever will, right? Because at this stage in the system's lifecycle, there's a way larger probability that will just completely and outright fail, right? And that's the big, like that's the big additional dynamic of the MKR token today, right? that because you're acquiring mkr that's i guess you'd say freshly made right because the system is brand new there's a way bigger risk that you're not really you know you're just buying into an experiment right and not and of course it is by far the most established experiment on ethereum right but ethereum still is just i mean defy really is this still like a thing that has yet to

fully prove itself so from that perspective um i mean mkr holders really I mean, they still take by far the largest risk of anyone in the system, right? Because I would say that there's a bigger risk of MKR. I mean, like, Ethereum as a whole is obviously better established than MKR, right? So the dynamics of the system itself still doesn't directly impose a loss on MKR holders, right? But of course, if you had the system wipe out, it would sort of, I guess, as a second order effect, also just wipe out the MKR token. But I mean, the thing is that none of that really, it doesn't really matter that much, right?

Because we're just talking about the very early stage and sort of microcosm of the system. And it's really, you know, it's like, yeah, it's like, it's kind of like initial phase where it hasn't yet scaled. Right. So these dynamics become a lot more important once we actually hit a larger scale where you have to, you know, where there also is a real job for MCAholders to do in the sense of doing proper risk management. by diversifying different assets. So let's talk about what the MKR holders, what the scope of their governance currently is.

So there's a couple of parameters that can be set and reset in the system. Can you describe what they are and how this voting or casting a spell happens? Yeah, so I want to explain all the parameters that can be modified by governance because there's actually a huge amount in the system is incredibly modular. But the standard risk parameters, right? So the standard things that MKI holders, they deal with in the current system is, so there's a stability fee, right, which is the cost of generating dye from a CDP. Then there's a debt ceiling, which is the total amount of dye that can be generated out of ETH. And then there's a liquidation ratio, which is the sort of the buffer between debts and collateral.

You need to have in a CDP before the system liquidates your position. And so governance really, I mean, the job of governance is to modify all of these. Primarily, obviously, it's the stability fee because that's how you stabilize the high market price in the wild. And then there's a death ceiling, which is more like a, it's like a routine thing you do as the system grows. You kind of like evaluate the overall risk to allow it to grow to a larger size. And you would still, I mean, you would very rarely see something like the liquidation ratio be adjusted. that in the wild in single-hedral die because of the significant direct effects they would have on CDP holders who are actively holding a CDP who could have the effects effectively have the rug pulled out from under them right so so it would be it would be quite unlikely they would actually see the liquidation ratio changed and then there's also some other like some other more administrative things that that MCC holders could do such as changing the set of oracles right and choosing picking the oracle providers.

That hasn't happened yet, though. So the oracles that exist in the system today are the same oracles that it was launched with. And then there's also another very critical functionality, which is emergency shutdown. So the ability to shut the system down in the face of some sort of, like, I mean, the main reason is you want to use that

in the face of a crypto economic attack, or perhaps a buck found in the system or some other significant problem, or maybe even a run on the back. which is where you then establishes direct ability to turn the dye into underlying collateral. So how does the voting system itself work? If I'm a maker token holder, how do I participate in the governance? There's two aspects to that, right?

So there is the unchain infrastructure, which is very simple. So it's basically a constantly, it's like a vote that's constantly happening inside the smart contract called the chief where what the governance participants do is they essentially you can say they stake um they stake their mkr inside the chief although that's not really like it's better to think of it as they just participate in voting and it's just like a technical effect like it's a technical detail that they actually move their mkr into the chief but once they've done that then the mkr is able to vote and then they're actually able to essentially point their votes on any smart contract on the entire Ethereum blockchain.

And the system then is constantly keeping track of, like, which smart contract or which Ethereum address has the most votes. And whichever has, like, the single address of smart contract that has the highest number of votes on the entire blockchain of all the votes and that's happening in the system, is then given direct admin access into the core of single collateral die. So the way that you, for instance, modify the stability fee is that you, the way it works is that you have a smart contract that basically says, target the, like it says, send a message to the core of single that will die that says raise the stability fee by 2% or something, right? Or rather, set this stability fee to 14% if that's what you want to do, right? And then once that smart contract gets the highest number of votes in the system, so it gets the admin axis, then anyone can then go and poke it essentially, which is called casting the spell, because it's like a technical term for this kind of smart contract is a spell, right?

So what happens is anyone is able to then just trigger the proposal from, like, trigger the execution of the proposal, and the transaction is then set into the system to modify the internal state of the system. to modify the internal state of the system. So that's the, and that's the smart contract infrastructure, right? So then just very briefly, there's a layer on top of it, which is this user-friendliness layer, right? And right now, the foundation is the only one who maintains this kind of, affronted, but really what it is, is like a voting dashboard where you can, like, see different options for voting,

and, like, you can see different, like, there's even, like, both a polling system, so sort of like a pre-vote, And then there's the actual system voting as well where you actually execute on decisions made in the community. And it's then presented through an easy and secure interface that allows a larger amount of the community to participate. Cool. What percentage of makers typically pointed at proposals that then become the frontrunner and become implemented? So right now it's typically between 5 to 10%.

And you also have at, like, you have this important dynamic of around also 5% to 10% of people are always voting at, at kind of like the current active proposal, which then sets the bar as like, you have to get at least, I say, 7% of the vote to be able to, like, trigger a new proposal in the system. And kind of like, it really acts as a quorum in that sense. You said earlier that Andreessen holds 6% of the maker tokens And there's a couple of other maker whales as well as well right So basically it would it would only take one or two of those To actually force a proposal through right

Yeah I mean theoretically it's possible for someone to in the current system Try to like pass a measure proposal right And then the reaction or like the response to that would be to then trigger an emergency shutdown, right, and actually try to shut down the system from the crypto-economic perspective, right? But the challenge in the system right now is that whereas in the multilateral die

when the final version of the governance system is implemented, right, there's actually some incredibly strong game theoretic checks and balances in place that makes this kind of behavior, even if you had, let's say, like anonymous actors holding, let's say, 50% of the time, tokens, right? Or even like all the tokens. Well, okay, I mean, just like significant amounts of the tokens, right? You still have just like, like incredibly rigorous game theoretic systems in place

that prevent anyone from actually acting maliciously in the system. In the current, in the current state of the system, rather than like a key defense comes from the fact that it's, it's known to the foundation, for instance, like the foundation has been very careful in who it has sold to these like least large blocks to, right? And it doesn't involve, like, say, a nation-state actor, which could for some reason decide that they want to shut down the system, right, and kind of like vandalize it.

Rather, it is just very rational economic actors that, you know, wouldn't harm themselves by burning the system down. But, like, I mean, that's always a dynamic of all decentralized systems, right? And all decentralized governance is that by the very nature of having the governance be fully decentralized and having the sort of the final and the fundamental control of the system being available to a decentralized community,

you always have this element of allowing people to shoot themselves in the foot if they want to. The question always is what percentage of people actually have to collude to shoot everyone in the foot? And one would wish that in a system that creates so much value and hold so much money it would have to be more than 5 to 10%. So can you tell us what's going to change for the new governance model that you talked about? Yeah, so it's really, like, so the way that we solve this problem, right, it's really based on two fundamental approaches, right? Like two fundamental constructs.

So the first is what's called the governance security module. So this idea that, like this is like a smart contract where it kind of sits between the voting system and then the core system itself. as kind of a security buffer, right, a firewall in a way. And it works quite simply. It's that when you create a proposal and you execute a proposal in the voting side, it then passes into the government security module and then sits there for some predetermined amount of time, which initially would likely be between 24 hours and up to a week.

And then once it has sort of run its course in the government security module and been subject to the security delay, it then executes and enters the core system. And so you have this approach combined with what's called the emergency shutdown module, which is really just an upgrade of how emergency shutdown currently functions in the system. And what the emergency shutdown module does is it allows a much smaller, like it allows a fixed and quite small, potentially, percentage of MQI holders to trigger an emergency shutdown, which right now it's at launch, it's going to be 5%. And so what that means is that any constellation in the community that's able to muster 5% of the total MCAO supply will be able to counter a malicious proposal that's sitting in a government security module.

So if someone tries to, let's say, yeah, just like burn down the system or steal all the collateral or somehow like try to harm the system, then they will need to, you know, they will need to, first of all, let's say, buy 51% of all the MQAO, or maybe if there's only 15% voting, then 50%. 15% of them care, right? But some significant amount of MCO. And then they use that to trigger the proposal, but it then just goes into the governance security module. And in the meantime, the honest access in the system can then essentially rally and respond by triggering an emergency shutdown of the system. And what then happens is the system shuts down, right? It totally unwinds. Everyone is able to exit the position at the technical blockchain level. But in practice, the way it plays out is that you immediately deploy a new system and then you provide what we call a smooth transition, right? So we provide this what's really more like an upgrade process where you can transition from the old system that is now shut down and then to the new deployment as seamlessly as possible. And this is also how we, for instance, do the upgrade from single-collateral die to multicholateral die, right?

The point is obviously to make it as painless and as seamless as possible for the end user. But the really critical game theoretical piece to this is that in the new, deployment because anyone is able to do a new deployment right it's it's just an open like you just deploy some open source code right but the community will ultimately will in most situations reach consensus and kind of like uh equilibrate towards a single successor deployment that then just becomes the new maker system and this deployment could in response to for instance an attacker just blatantly trying to attack the system right a steel collateral or harm the system in some way and using a significant amount of MCR for that. In response to that attack, you can actually just burn their MQR in the new deployment.

Like, you can choose to what you call honor the MQR of everyone else. But you can choose to kind of like let everyone else's MQR transition over. But obviously, there's not really a good reason to allow a clearly malicious attacker who has voted to harm the system from gaining governance power, right? So what you then get is that you get stronger governance with the bad access cut out of the system. And you also get like a significant MKR burn, right? So you get a significant reduction in total supply, which then makes up for all the friction that having to go through this whole process costs you, right? And the same dynamic also actually exists for someone who abuses in the first place its power to do an emergency shutdown, right? So someone goes and kind of like, let's have some fun and shut the whole thing down because it's quite easy to do.

The barrier for doing that is still initially, for instance, 50KMKR, right? So it is still, which will then not be honored in the new deployment if it was purely a troll attack. And then again, you have this dynamic where, yeah, like, the attacker did manage to shut the system down, but there was a smooth transition to a new system, and it cost them a ton of money, and that money actually went to M.K. Aldous. So who decides whether a shutdown was, in fact, a troll attack, or whether a proposal was malicious? because there could have been just a bug in it, or the people honestly thought that the system was under attack.

So who actually determines whether to penalize maker holders or not? So it's quite a complex question, really, right? Quite a complex issue, right? But the basic answer is that the community decides, right? Because anyone can deploy a maker system at any point in time, right? Because the co-opem is open source, you could actually very easily imagine that, Immediately after an emergency shutdown, there might be four, 10 or like a thousand new deployments, right?

And everyone's saying, this is my, you know, all super awesome deployment, right? Where I haven't, you know, and then maybe, I mean, there might be people trying to, like, give themselves extra MKR, or there might be people to, like, or they might be people to, like, or something, right? And the question is, which new MKR distribution is able to basically, you know, get the faith of the overall community and the economic majority of the ecosystem, right? And in most cases, like in clear-cut cases, such as someone blatantly attacking the system, it's really obvious that you have this. I mean, you essentially have a governance convention.

You can even call it a social convention that if you try to attack the system, you don't deserve your MQAO, right? And there's a good reason to migrate to a system that doesn't include MQR holders that have proven that they're malicious to the system, right? So it really comes down to, like, the dynamics of what do the users of the system think is best for them when they're picking what system to migrate to. And that's also actually another, like, that is actually like one of the, maybe the most fundamental point of mega governance, right?

Because that is the point where you actually see that the power of MQI holders isn't infinite. They don't actually decide everything. Like they kind of run the system on a day-to-day basis until the moment that a very significant event happens, right? until like to the point where the governance has to kind of like fracture and reassemble itself. And then what happens is the power actually falls back to the economic participants themselves. And if careholders become totally powerless.

And the only thing they can do is kind of like point to their past actions and say, hey, I was so good at governing the system, right? So I should totally be a part of the new deployment. So what's the worst thing that they could get away with? So could they, for example, steal all the collateral by like setting the stability to 100%, Stability feed 100% of get away with that. What would be the potential reward that they could get away with with an attack? Like if there was no response from the community?

Yeah, it could actually be anything. Like it could be printing. Like I mean, the system is like because the system completely relies on this dynamic of, you know, triggering an emergency shutdown within the timeframe allotted by the government security module. Like because it would be impossible regardless. So there's no attempt to kind of restrict what kind of technical access governance theoretically has. The question is, is that outcome ultimately going to be better for like the average user and the average m-careholder in a system, right? And anything that isn't following the regular governance process, right?

So like actually trying to scientifically optimize the system and following the consensus of the community is always going to make people worse off, right, because it breaks the fundamental social contract. And so this dynamic of like a blatant attack also works on sort of smaller levels, right? Because the, you know, it's not just that, it's not just a dynamic where, you know, you want to protect the system, right? Like you want it like from very powerful attacks. You also actually want to kind of like police and try to catch people from breaking the social contract and sort of catch them in the act of doing something where this is a situation where the users most likely wouldn't like will most likely. actually consider this behavior like negligent or malicious to them and as a result migrate to the system where this actor, the M-Care of this actor isn't included. Because then you have this very strong dynamic, right, where people have to be very careful

about like carelessly trying to push some proposal through that could actually get the whole system shut down and maybe even get them penalized for being responsible for it. Cool. So there are two very significant updates coming to the maker system soon. The first one is the interest generating dye. Can you talk about what that is and what made you roll that out? Yeah, so the die savings rate, which is what allows you to hold dye and actually get a savings return on it as you hold it in your wallet, for instance,

is a really fundamental feature because it's kind of the counterpart to this. fee, right? So right now, when the system is balanced, you have like, you can only change the stability fee and then you can modify the supply. And then the downside of that is that that means that when the system really grows, but the supply grows more than the demand, your only option is to pull down on supply. So you kind of have to let the system become a victim of its own success, right, and artificially restrain the growth of the system, which is what's happening right now, where the interest, like the stability fee is just incredibly high, right? And actually really, yeah, it is kind of great. A lot of people coming, you know, why are people

even generating die when the fee is just that crazy high, right? And it's amazing to see the people still are using it. But the problem is that the system has no way to spur dye demand, right? There's no way to kind of like make it more attractive the whole die. And that's what the die savings rate solves. So instead of just pulling down on the stability fee side when the system is growing, you can pull up on the demand side as well, right? So if you have like the mismatch like this, you can pull it into sync like here and actually see overall growth of the system. The actual effect of that in practice could very well be quite, you know, quite a quantum leap in terms of hitting some sweet spots in product market fit where the system suddenly

becomes interesting to a lot more people, right? Because on one hand, you get the CDP functionality, which is right now incredibly popular even with these ridiculously high fees. You can get that down like you can well rather you get the because you can you can get that down to a much lower rate because you can now suddenly make die incredibly attractive right because with a stability fee of 20 20 percent for instance on on generating die theoretically and i mean this is a this is an edge case like it wasn't wouldn't actually happen right but theoretically there is at 20 percent like there's sort of 20 percent available to give to die holders right so imagine if holding dying die gave you a 20% return

and this was without any additional risk whatsoever right it was just like holding a regular die like it just gave you this massive return right you would immediately see tons of people moving the savings into this because they would want to take advantage of that very high savings rate quick question about this though

like about how this works isn't the stability fee paid in MKR and then the die savings rate would be accumulated in die How does that work, the transition from the stability fee from MKR, does it have to go through some exchange or something to be paid out? The feature of the fee being paid directly in MKR and single level die is it's kind of one of the features that were in the end not done for any like business reason or any sort of user facing reason, but rather because it was easier to implement.

So it was easier to get single letter like done and get the get the, get the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the. you know the system live and rolling and sort of see it play out in the real world right wasn't that depletionary aspect of mkr because the fee is burned also important to the economic design oh absolutely but the way it's going to be implemented in multilateral dye is just a more like a more like a better approach overall right which is that the system takes in fees and die and then what it does is it accumulates kind of a pool of die called the buffer and when the buffer hits a certain size it triggers what's called a surplus auction. And the surplus auction is then where the mkai is burned. And then what that means is that buffer is also available as kind of like an account where

die can also be taken out of and put into the die savings rate, for instance. And actually today you can also pay the stability fee on a CDP with die. Because it is actually super frustrating and was one of the biggest concerns. Alder users had that they had to like go and, you know, they had to use ETH to open a CDP and then they get dye. a second token, and then they also have to go and get a third token, like some dust, MQR dust, right, to then pay the fee to retrieve their collateral out of it, right? And it's just like incredibly, you know, user-friendly, really. And as a result, the feature to pay the stability fee with die was added to the front end.

And kind of like means that it takes care of it automatic to go and buy MKR on an exchange and then pay the stability fee for you. But that convenience functionality is moved into the core of maker in multilateral die. So the release that also supports the die savings rate and is then fundamental to facilitating the die savings rate and the flows of money that that really go from from CDP holders paying the stability fee, right? And then a part of that going to die holders and another part of it going to have careholders. What happens if people don't actually use this stability fee? And so, you know, you promised the locked die this interest rate, but then it's, turns out there's not enough people actually, you know, closing their CDP.

And so you don't actually have the money. Like, isn't there a liquidity concern here? Like, you know, what happens if you don't have the money to actually pay out the interest rates that were promised? Yeah, there would be if it used the current model where you pay all the fee when you close the CP. But in the next version of the system, the accounting is continuous. So you actually see the diet, like rather than a CDP accruing, you could say like a fee,

over time, right, this will sits there and has to be paid. What a CDP does in multilateral dye is it actually continuously generates more and more die. So it doesn't kind of like accumulate a fee you have to pay. It just generates dye on your behalf that it then sends to the buffer. So what that means is that it's just like the direct, like when the DSR pays out, that die has been directly generated out of the CDPs at that moment in time. So there's always like real time solvency in the system, right? Because of course, that's necessary or you could run into these weird edge cases. That sounds like a very major upgrade.

One thing I'm curious about, so in my understanding, to actually have your dye generate interest, you have to put it in a particular smart contract, and only then does it generate interest. Why was that design decision made? Why don't you just have all die in existence generate interest, or at least have a tokenized claim against that dye and that smart contracts similar to, what compound is doing with C-Dai, because that would let people not just have dye sitting there, but also let them be able to use it in depth. Yeah, so the short answer is that it's for the sake of use of friendliness,

because while it sounds great to always have like a DSR accumulating, there might be many situations where, for instance, if you're trying to write a small app or you're trying to, like, create a smart contract, or you're sending some amount. Like there could be a lot of situations where you don't, you know, you just need to send an exact amount of money and you don't really care about getting some small savings for like, let's say, a couple of days or a couple of hours or something.

Also, I feel that there might be an issue here, you know, just, you know, we've had issues like this in design of cosmos as well where it's like you don't want to iterate over all die holders every single time you want to pay out interest. And the problem is, you know, okay, maybe you can pick it. So you add it to a pool and what actually happened is die holders have shares in a pool. But then the problem is then dye is not stable anymore. That defeated the whole point of what we were trying to do with creating the stable coin.

So I'm not sure how it would actually be possible to have it go to all die holders in a computationally efficient way. And there are a lot of use cases where currently you're locking up dye. So for instance, say you'll use it in a prediction market as, collateral for instance and you really wanted to be in to be to be to be generating interest and don't you kind of push people into compound and into using compound die for this instead of interest generating die yeah i mean that that would be a that could totally be a concern but the the thing is that it is actually implemented in a way where that is completely possible so you would see you know you would see let's say the prediction market implement on their end the like an integration

where the moment you deposit die onto the platform, it's automatically sent into earning the die savings rate. And on top of that, it is even technically possible to create this concept of the, you know, the C die with the DSR, where you actually can use the die directly in the DSR as tokens. And the long-term vision is in fact that like one day far out in the future, right, when the ecosystem is way more mature and the, you know, the standards are able to handle this and kind of like the accounting,

systems and even the accountants can sort of wrap their heads around it, you would have all die in real time always generate the savings rate, right? Because rationally, there's no reason to do it if there's no friction in doing it. But the fact is just that today, if you try to force it on people, it would, like, it would create more losses through friction and confusion that it would create, like, then it would sort of, you know, create the gains of like, let's say, you know, like, when you're sending die to your friend, instead of like pulling it out of the die savings rate, sending it to him and then a day later he puts it into the dye saving street right like sure you can you can save you can save like or you can sort of gain one day extra of interest earned by just sending it directly but the problem is that what you then create is like a much bigger burden on the wallets to properly integrate and implement this so that's really that's the big tradeoff in the beginning right that is actually simpler technically to deal with kind of this fixed idea of the die savings rate where you

deposit your die into and you pull it out when you then want to send it around rather than you always have to account for the the savings rate accumulating because it is actually it is it is implemented in exactly the way um you know um you described right that it is this it is a share in like a pool, I mean, that's a very rough and like very simplified explanation of it, right? But it's like, it's, it's, it's, on the back end, it doesn't actually change over time, but the front end kind of updates the value. So it looks like it's kind of like a transaction that's happening, right? But in reality, it's really just kind of like numbers that's modified in, you know, various ways, right?

Which is exactly actually how the stability fee works right now. So stability fee doesn't actually update individually on every CDP. It just looks that way. And in reality, it's a single number called the accumulator that's updating. And then it's displayed across all CDPs when it gets updated. Do you think that over time that, you know, currently what Maker Dow essentially is, is this like decentralized central bank, right? A decentralized bank.

Do you think that over time maybe there might be competitor to central banks that kind of compete with the maker system? and, you know, maybe they claim that their government, whatever, their governance processes that they use might be more better than what the MakerDAO system does. I think this is actually kind of what the Libra project from Facebook is kind of going down that route a little bit. And so how do you think the maker ecosystem will react to alternative decentralized bank stable coin designs, whether that's, you know, a copy of the maker system with, you know, a different governance system? or even a different system altogether, kind of more like the reserve system, which uses slightly different mechanics. Yeah, I always expected that we would see

like copycats and competitors and similar types of systems much earlier, right? And it would really be this big space and there would be just like a lot of different versions all competing. And it's quite interesting that the reality ended up being that Maker pretty much became the only decentralized stable coin with decentralized governance, and then the whole ecosystem of centralized stable coins was what ended up completely exploding.

But you're totally right that the way that, like the thing that makes Maker Dow unique is a decentralized governance. And the way that you would sort of have something that would actually be a competitor, they would actually operate in the same space as Maker, would be by having a different type of decentralized governance that could somehow add more to the table, right, and be more efficient or better at managing risk or something like that. And, I mean, I don't think that so far there's really nothing like it yet. I mean, there's no attempt at actually creating this type of self-organizing and self-sustainable community that we are trying to bootstrap, right?

And if you look at something like Libra, for instance, I would say that, like, it is actually quite different. So based on my not totally perfect, understanding of Libra, it has a bit more of kind of like a fixed monetary policy where it's kind of predefined and based on the individual actions of the participants in the ecosystem. So they're not really, they don't have the same, like it prioritizes liquidity as I see it, but it what it sacrifices is kind of like a coherent and unified monetary policy. So you end up having a, they end up having a collateral portfolio and you end up having an inflation rate and a pick that's a little bit

more random because you're prioritizing this ability for anyone to always create them by by pledging collateral into a system without any sort of framework to do that within. And that's what I think, I mean, ultimately, I think that's what is by far the most powerful, right? Because that's also what, you know, thousands of years of traditional finance coalesce that, right? And what you need to then do to make something that's better. than maker is you need to get better at still playing, you know, like creating, like operating within that framework and kind of like setting that framework correctly so that you do get this like optimal liquidity, optimal peck point, right, optimal inflation and best risk management.

The question is whether you can kind of like innovate on top of this idea of having token holders ultimately curating the decisions, right? maybe there's something like paying for votes or like paying for like or rewarding activity or paying experts or something and all of these ideas is actually also something that maker governance is very heavily focused on trying to innovate right because of course this is only the very beginning of decentralized governance let's fast forward maybe five or ten years so you just added six tokens for multi-collateral dye the choice of tokens or the move to add exactly six tokens makes me think

this is the first of many additions to come. So basically if you look at the market cap of the six tokens that you're adding, they're only on the order of a few percent of what the Ethereum of market cap is, so the collateral that was already available, the last version

of the system that was technically much simpler. What are your plans for expanding the scope of collateral in five years? Will I be able to use my house as collateral? on Maker. Yeah, the short answer is that, yes, that would absolutely be the dream, right?

That where the project is going is that it's kind of trying to break beyond the boundaries of blockchain and crypto. And just like, I mean, to some extent, the bubble that crypto still lives within, right? But instead try to reach out to the real world and integrate with the real financial system, the real global trading system. and most importantly have real assets and real value in the real world actually back die. So it's not just hot crypto air, but it's, I mean, which actually does have its own in very unique benefits and very unique risk characteristics, right? But ultimately, you want as much diversification and you want as much kind of like as many different perspectives and avenues of stability as you possibly can behind a stable coin. right. And there is actually some incredibly exciting and quite a fast-moving innovation happening exactly within the space of like figuring out how do we make it so that, you know,

five years is maybe a little bit optimistic, right? But potentially five years from now, you can kind of like open an app on your phone and then you click a button and that app uses some sort of third-party service to legally connect the ownership and the deed of your house to a token, which is then directly set to some sort of automatic or automated, you know, risk assessment function that's connected to Maker that kind of like does an assessment of your house and the value of your house and the risk associated with that house. And then ultimately creates a new CDP type unique to you and kind of like your house and your risk parameters and your sort of conditions as a debtor, right?

and then ultimately you can deposit that token again with a single click on your app into Maker directly and generate die directly and go and you know like re-well maybe refinance your current loan or something like that with it right i mean that is certainly like very cyberpunk and very like a really cool and like very a concrete way that you could think like you could actually imagine that you know the mom and pop pops of the future would like have blockchain directly in their face because that's how they would do their, you know, their mortgages, right? But of course, the steps along that way are most likely going to be a lot more about integrating on the back end of existing financial infrastructures, right? So it's a tough

stretch to take it to the end user and really make it like usable and accessible and and powerful for the sort of the regular, you know, retail credit seeker, right? But it's a lot easier if you start trying to implement it to something like large-scale trade finance or even just like large-scale securities or bonds repo markets because there's so much like institutional capture and like lock-in of the platforms right now in those spaces and there's so much I mean really like paperwork and bureaucracy and just like old thinking around it that it's it's you know it's it's incredibly ripe for disruption by by just modern technology. Maybe let's end on this very cyberpunk notion.

I think those are fantastic closing words. Thank you so much for being on the show. This was super interesting. And I apologize to our listeners for going over a little bit. I hope you're all still here. Yeah. Sorry, that happens quite often for me. That's the nature of maker being so complicated.

Thank you. But thanks a lot for the great. questions and a great conversation. Thank you guys for listening and tune in next week. Thank you for joining us on this week's episode. We release new episodes every week. You can find and subscribe to the show on iTunes, Spotify, YouTube, SoundCloud,

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