Unchained - The Rise of MakerDAO: A Personal Journey - Ep.167

Episode Date: April 14, 2020

Mariano Conti of MakerDAO, head of smart contracts at MakerDAO, reads from his essay about his personal experience with cryptocurrency, particularly as an Argentine whose family has experienced periods of hyperinflation, and as a freelancer accepting payment from foreign countries. He describes the evolution of Maker from single-collateral Dai (now Sai) to multi-collateral Dai, and also gives his perspective on the events of Black Thursday and the subsequent debt auctions the protocol undertook to right itself.  Thank you to our sponsors!  Crypto.com: https://crypto.com/ Kraken: https://www.kraken.com Episode links:  Mariano Conti: https://twitter.com/nanexcool Linda Xie’s essay about crypto memes on Unchained : https://unchainedpodcast.com/how-memes-can-help-crypto-go-mainstream/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi everyone, this week, which is my last week in the series of essays that I'm running. I have an essay for you by Mariona Conti of Makerdown. This is definitely the most personal of this series, and this essay really shows how cryptocurrency has changed lives, which is something that I think a lot of people in the industry are striving for, but obviously that hasn't happened yet on a large scale. Mario No also covers the events of Black Thursday in MakerDAO, and I know that this is an event a lot of people are still analyzing. It's a fantastic essay, and I look forward to hearing your feedback.

And now here's Mariona Conti reading from his essay, The Rise of MakerDAO, a personal journey. In response to the challenging times, crypto.com is waiving the 3.5% credit card fee for all crypto purchases for the next three months. the crypto.com app today. Cracken is the best exchange in the world for buying and selling digital assets. It has the tightest security, deep liquidity, and a great fee structure with no minimum or hidden fees. Whether you're looking for a simple fiat on-ramp or futures trading, Cracken is the place for you.

The Rise of MakerDAO, A Personal Journey, by Mariano Conti. My grandparents died without access to their life savings. You see, in 2001, Argentina had one of its worst economic crisis to date. The Argentine peso, for years, artificially pegged one-to-one to the US dollar, could not hold on to its peg anymore. Export stopped being competitive. There was no independent monetary policy. People were exchanging pesos for dollars, withdrawing them from banks, and often transferring them abroad or holding them in cash under the mattress. There was fear of a bank run. So on December 1st, 2001,

the Argentine government decided that people's money wasn't theirs to enjoy and instituted the Corralito, a freeze on everyone's bank accounts, allowing for only a small amount to be taken out per week. No withdrawals from U.S. dollar denominated accounts were permitted unless you agree to turn those dollars into pesos. Credit and debit cards still. worked, but this lack of cash caused many problems in the economy. From December 21st, 2001 to January 1st, 2002, the country had five precedents in 11 days. The situation was getting worse. The bank freeze was still ongoing, but now most deposits were exchanged for peso-denominated bonds. To make matters worse, all dollar-denominated accounts

were also turned into pesos. or pacified. And then they devalued the peso. First going from one to around 1.4 pesos per dollar, and then as they let it float, it reached around four pesos per dollar in a matter of months. This was around December 2002, only a year later. You can see where I'm going with this. Not your keys, not your coins. Money in the bank or in the government's hand is not your money. I just wish I could have told my grandparents this mantra. This was not the first time something like this has happened, of course. For years, Argentina has seen many devaluations, periods of hyperinflation, bankruns, capital controls, asset freezing, among other things.

It is one of the reasons people buy dollars and keep them under the mattress, why grandparents give their grandchildren $10 bills on their birthdays, and why Argentina's general population does not trust the government or the banks. It is also why I believe Argentinians are sometimes more willing to take risks in other areas and at times seem more fine and savvy than in other places in the world. Here most people actively work to not lose, let alone make a profit. If you forget a hundred peso bill in your jacket pocket and find it a year later, congratulations, you just found a 50 peso bill.

It's the reason why we research every alternative available, always searching for access to dollars so many times denied to us. And in cryptocurrencies, it seems like we found our answer. My journey. My journey with cryptocurrencies started in 2014 out of necessity to control my own money. But let me take yet another step back. After a long period of living in Mexico City, I moved there in 86, at age six, I decided in late 2010 to move back to Buenos Aires, the city where I was born. I'd never felt fully Mexican or fully Argentinian, like I never belonged to either. And as I turned 30, I thought this was my opportunity to reconnect with my roots. So in April of 2011, having broken up with my girlfriend, sold or gifted most of my possessions, I traveled to

Buenos Aires with two suitcases, one filled with clothes, the other with a computer. And I could not have picked a worse time to relocate. Say what you want about Mexico, but it's close. closeness to the United States means it is a very stable economy for the most part. Most of what I've mentioned about Argentina, I had lived only through tales, anecdotes from relatives or the news. Just six months after having moved back to my home country, the government instituted new capital controls. Regular people were mostly banned from purchasing dollars in banks and exchanges. Pared this with an economy that regularly sees double-digial yearly inflation and the Argentine appetite for dollars, it was a recipe for disaster and black

markets. Dollars were bought and sold at a 50% premium of the official rate. This has gone on for years. So in 2014, when I found myself working at a small digital agency in Buenos Aires, I negotiated a regular salary in pesos and another under-the-table salary in dollars. This was standard practice for IT and tech professionals. The problem was getting paid those dollars. My employer could not deposit dollars into my dollar-denominated bank account in Argentina. They would be converted to pesos instantly, at a rate 50% or lower than what I could sell them for in the black market. We call it the blue market or the blue dollar.

Don't ask me why. At the time, the official government quote was around $8.00 to the dollar. In the blue market, a dollar could get me almost 14 pesos. A deposit to my local bank account was no good. Flying to Miami and opening an account there was not an option. PayPal had long been banned. My employer owed me more than six months of salary. Until one day he mentioned Bitcoin.

The Bitcoin era. Now, Bitcoin was already a thing in Argentina. It just wasn't my thing. For a long time, Argentine freelancers had used Bitcoin as a means of getting paid by US and European companies, often negotiating salaries that were denominated in dollars, and with the freedom of getting paid in something that the government couldn't get their hands on. I just hadn't seen its true potential till I personally had to find a way to keep my money into something stronger than the peso. So I did a bit of research, discovered that it was totally my thing,

and proceeded to collect six months of salary in the time it took to send some Bitcoin from one account to another. It felt like magic. I would later find out that I became part of a larger group. So many engineers in Argentina had gotten a head start using Bitcoin. Many because they saw the potential, but also many just out of necessity. Is this another avenue that leads to dollars and keeps inflation at bay? if so, then we will welcome it. It was a way to bid the system, a way to retain ownership of one's work, a sidestepping of regular banking.

It was not without problems. Someone getting paid in Bitcoin had to be sure that clear terms were drawn out. Do you get paid at the beginning of the month or when a project is done? What is going to be the exchange rate? Is it when payment is due or when payment is finally done? Depending on the answers to these questions, you could either make a lot of money or lose a lot of money. Oftentimes, these transactions did not unwell because of volatility. I love the freedom that Bitcoin provided, but there had to be more, right?

Enter Ethereum. I discovered Ethereum in late 2015, a few months after Maynett release, and instantly fell in love. Here was a blockchain and cryptocurrency that had all the benefits. benefits of Bitcoin, but it was programmable. To my engineer brain, there was nothing better. The possibilities were endless. It was like finding a new world all over again. I put most of my life savings into Ethereum, knowing that this was where I needed to be, where my focus should be. There wasn't much there yet, but the thought of what could be was alluring. And then the Dow hack happened. It didn't shatter my hopes in Ethereum.

but it did remind me of the risks involved with any new technology. I said to myself, I would be fine either way, hard fork or no hard fork. I decided such risks were very much acceptable, the alternative being using the traditional Argentine banking system. But there was still something missing from Ethereum. Stability MakerDAO I joined Maker in 2016 out of a series of a series of,

of coincidences. The digital agency where I was still employed, contracted for Maker, and I joined as a junior dev at age 35. Slowly, I began to learn about the premise of Maker, of decentralized exchanges of open finance. I designed the first version of the Maker Oracles, still used to this day. My main motivation was the promise of a stable coin, an unbiased world currency, a medium of exchange pegged to the US dollar, which is a known and universal unit of accounting, but with all the benefits of a cryptocurrency. I was in. This was my new mission. I had not been part of the initial team that broke the white paper or worked on the first prototypes, but I still consider myself a maker OG. During those days, we were still on the design and

early experimentation stage. There was no open sepulent, no truble, no truble, or if there were, they were still also on their very beginnings. Everything we did was new. If we needed a tool to solve a problem, we would build the tool. Joining Maker also meant that I stopped getting paid in Bitcoin and I started getting paid in Ether. This turned out to be a good thing for me as the price of Ether and really almost every cryptocurrency was going up and up. But trading some of that Ether into pesos to pay rent and groceries but not so easy. Bitcoin was still the most traded crypto in the market,

so I had to do a jump from Ether to Bitcoin before I could enter the Fiat world. Still, it was worth it. Enter June 2017. After years of work, Maker released a private version of single collateral dye, which we now call Sci. The sole purpose of this first version was to be deployed to Mainnet,

where the foundation would open a CDP with Ether, as collateral and create enough side to pay for the salaries of a few volunteers in SightMaker that wanted to dog food what we were building. After creating the SIE and sending it to employees, the system would be immediately

shut down, and those of us with SIE would be able to claim a portion of the ether collateral. It worked perfectly, and it showed us that the system was getting ready for prime time. A few weeks after,

and with some bugs fixed, a second version was deployed to Mainnet. This is the version we now refer to as Protocy. Only the Maker Foundation and a few partners were invited to test it. There was not much of an economy around it, but still, this was the first asset-backed stable coin on the Ethereum blockchain, soft-pegged one-to-one to the US dollar, backed by Ether. And again, in the ultimate show of dog-footing, many employees and contractors, myself included, of course, decided our next paycheck would be 100% sigh.

It was a historic moment. Seeing that number on an Ethereum transaction, knowing that as long as the system worked, it would remain stable, was eye-opening. I got flashbacks to the Dow, then those flashbacks turned into memories of tales of the Argentine banking system, and I felt safer. If I'm going to trust someone with my money, let it be the nerds and the innovators, not the politicians, the banks, or the government. There wasn't much I could do with my newly minted sigh. This was still a private beta, and there was no die-savings rate or uniswap or compound. Other than sending it to a couple of people for novelty,

the idea was that it would be converted once more into ether. This happened a few times during the development. but it gave us a glimpse of what was possible, of the future. And so we arrived in December 2017, the month when single collateral die launched. This was the proper release, the one the ecosystem was waiting for for so long, and it did not disappoint. It's a wonder seeing a whole financial system grow before your very eyes, stemming from the simple promise of a stable asset. we saw the birth of decentralized finance, or open finance, whatever you want to call it. To put things into perspective, projects like Uniswap or Compound Finance, so ubiquitous now,

would not launch until almost a year later. I like to think, and I hope you agree with me, that having single collateral die around kickstarted so many of the projects that we see today because of the promise of a stable medium of exchange. Companies like Instadap started off as 48-hour hackathon projects, giving us different and sometimes better tools to interact with the Maker Protocol. And they didn't need to ask permission. There's nobody from whom to ask permission in a decentralized permissionless protocol. But who makes the decisions?

Who says how much side one can borrow for an amount of ether? Who determines how much stability fee one has to pay for the generated side? Well, that's the role of Maker Governance. And it's what makes MakerDAO a decentralized autonomous organization. Today's episode is brought to you by Cracken. Cracken is the best exchange in the world for buying and selling digital assets. With all the recent exchange hacks and other troubles, you want to trade on an exchange you can try.

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The role of maker governance. In single collateral dye, there were not many levers you could use. It mostly consisted of two things, size trading above a dollar, lower, were the stability fee. Size trading below a dollar raised the stability fee. They were simpler times. Still, the maker community gathered every week, as it had done since 2015, to discuss how the system was operating and what to do about it. Fun fact, governance calls used to be held on Sundays, and in my case at lunchtime, I cooked many assados with headphones on, listening in on calls, much to the chagrin of my family. But of course, as per the white paper,

single collateral dye was not the end goal. Being backed only by ether, Sai is still very vulnerable to Black Swan events. Say the price of ether drops drastically in a manner of minutes or hours. It would be very hard for the system to recover from such an event. And even though Sai went through the greatest bear market crypto has ever seen, it maintained its peg and remained a stable coin. Ether's price went from

800, around the time Sai was released, up to 1,400 and down to 80. It did so over the course of several months, though. And yet, Sai kept up its promise of one Tsai equals one dollar, and to an Argentine, this meant yet another way of getting access to dollars. When I said that it used to take me some hoops to go from ether to Bitcoin to pesos. After a few months of Sai being on the market, those hoops were gone. Traders and over-the-counter trading desks started accepting SI as much as they were accepting Bitcoin and Ether. Exchanges made it easy to buy and sell SAI and have pesos deposited directly into your bank account. Debit cards loaded with SAI became the norm. and gone were the days of discussing whether your invoice denominated in Bitcoin would be honored at the price when it was issued or when it was paid.

It just worked. Stability brings prosperity. We all know that. And in an economy so unstable like mine, you pair stability with decentralization and transparency, and you get an unstoppable economy. Here, permit me to jump ahead almost two years. to November of 2019 and the release of Multicolateral Die. Multicolateral die, or NCD, represents the culmination of years of work by hundreds of people.

It takes lessons learned from two years of running single collateral die, iterating and fixing bugs and assumptions. Here, Maker Governance has a much tougher job to do. It has to manage not one but two different assets uses collateral for generating. die, ether and basic attention token or bad. Sa is also a collateral, but it's a special case since it is only used for migraining from the old single collateral system into the new one. And in recent weeks, USDC has been added as the third collateral. Governance has to discuss weekly the state of the peg, the relation between price and stability

fees, and also one of MCD's greatest achievements, the die savings rate. And as time passes, the community has not only grown, but it has become better at organizing itself, raising its voice, proposing changes to the system, and overall reacting quickly to market conditions. The markets collapse. As I was writing this essay at the beginning of March 2020, there was a perfect storm brewing, an oil price war, a virus generating uncertainly. in the markets. Late February brought unease to everyone. Eventually, we saw an outright collapse of both traditional and crypto markets on March 12, 2020. Around 50% of ether's value and most cryptocurrencies in general was erased very quickly.

And multicolateral dye being backed mostly by ether was impacted as well. The Ethereum blockchain became congested, with gas prices going up well into the 300s of Gway per unit of gas, something practically unheard of. Not only were transactions insanely costly, there were so many of them going on at once that most remained in the mempool, waiting for the chance to be mined. Every actor in the ecosystem was affected, be it liquidity pools, maker vault owners, dieholders, or keepers. Keepers are usually automated vots that scan. the Ethereum blockchain looking for arbitrage opportunities. In the case of the Maker Protocol,

keepers participate in collateral auctions that happen when positions become under-collateralized and the system auctions off this collateral to recover die and remain solvent. Oracles as well were affected. With the increasing gas bidding war and so many transactions in the queue, the oracles, which are charged with updating the system

with real-word prices were slow to update. In retrospect, this allowed some vault owners to add more collateral to their vaults or pay off some die because they had some extra time to do so before the Oracle would update with a lower price, triggering their liquidation. But even then, there just wasn't enough room in the Ethereum blocks to feed everyone's transactions. As a result of all the above, a large number of collateral auctions were triggered. and a subset of these auctions were won by bidders who submitted bids just above zero. This was truly the perfect storm.

Vault owners struggling with high gas prices and network delays trying to add dye to their vaults. Exchanges were hit as well. Coinbase effectively froze withdrawals for a while because of how much gas it was costing them. And with increasing demand for dye and the liquidity crunch, the price of dye started going up, reaching almost 1.14 die per dollar on March 12th. Keepers struggle, too. While the Maker Foundation runs a keeper to participate in collateral auctions, it too felt the stress of high gas prices and delay transactions, and the lack of liquidity.

With so many auctions happening at once, there was not enough time to recycle collateral backing to die to participate in further auctions. Out of four known keeper bots that participated in this auctions, two started submitting zero bits. In fact, bidders submitting bids decimal points above zero and ended up winning more than four million dollars worth of ether for basically free. After a while, keepers managed to regain liquidity and started bidding again, restoring competitive auction space. In the end, around 1,200 volts were liquidated, resulting in 4,000. 4,447 auctions. Because of the collateral auction shortfall, the maker system would need to recover approximately

5.4 million die. Here is where a decentralized and transparent maker governance and community becomes so important, and it's also here where it shined the most. In maker forums and chat, the community started discussing the events and planning how to best react to them. There was a vote to change some risk parameters in the system, giving keepers more time to bid on auctions. Also important was to bring the peg back down to $1. Stability fees were lowered and the die savings rate was brought down to zero for the first time since it was created. Also, a new collateral uncorrelated with the crypto market was added,

USDC, the Fiat Back Stablecoin. This would provide diversification and be an additional source of liquidity should it be needed. This was not without controversy, and I encourage anyone to watch or read the transcripts of the governance calls from March 12 through March 20 to understand why the community made this decision. The system also needed to recover 5.4 million die. The Maker Protocol is designed in such a way that MKR holders cover this shortfall by way of MKR dilution. If a vault is liquidated and the collateral auction does not raise enough dye to replace the vault's outstanding dye, after a waiting period, a dead auction is created that seeks to raise this dye by minting of MKR and thus diluting MKR value. It is a risk that MKR holders know about and early.

them to us act responsively, be informed, participate, and vote. As I write this, the Maker Protocol created and successfully completed 106 debt auctions. Each one raised 50,000 dye and offered decreasing amounts of MKR. The total MKR minted was 20,980. The Maker community is discussing the circumstances. around the zero bits and liquidations. And it is they who will ultimately determine how to address this issue. I encourage you to go to the Maker forums and participate in this discussion.

There is much to be learned from this experience, and I expect everyone to come out stronger in the end. There is increased participation in governing calls and voting. New tools are being built to deal with auctions, both by the Maker Foundation and the greater defaults. community. MKR holders understand now that it is a great responsibility to hold MKR because their swift action or inaction can have good or bad consequences. As for me, I fully believe in the system, the foundation and the community. My paycheck remains 100% die, and I will continue to work

on making the Maker Protocol more resilient for as long as I can. Today. Did you notice something? At some point during my tale, I stopped discussing Argentina's economy and its inflation. This is because Dai has given me the privilege and opportunity of earning a stable asset that doesn't require so much effort than planning. It doesn't make me think, how much am I going to lose this month? Or do I put my money in savings or try to buy something tangible like a motorcycle that more or less follows inflation? I just work, and every month I earn a salary in a strong currency. It's as simple and beautiful as that. What so many countries take for granted, we cherish. Linda She mentions in her own essay released on Unchained, how memes can help crypto go mainstream, that she asked for perspectives of different kinds of crypto users.

And she says, and I quote, I receive by far the most responses from Argentina. I am not surprised by this. The journey to control one's money in this difficult economy has led many regular Argentinians to discover cryptocurrencies, but in a different way than I or a technical person would have done back in 2012, 13 or 14. With the rise of stable coins, the idea of money that cannot be censored or ceased

yet remains predictable in its value has gotten people of all aspects of life interested. And it is here where I make the distinction that gives us South Americans an edge, an insanely high tolerance for risk. When you believe and know in your heart that nothing is riskier than your government or a bank, any alternative becomes much more enticing.

I've seen a new economy, formed before my very eyes on the internet, in telegram and WhatsApp groups via weekly meetups that I never saw possible with volatile cryptos. If you want to see the real power that cryptocurrencies have on regular people, I urge you to look south. You will find a large number of savvy users who have been finding ways of protecting their money for years and always looking for the next big thing. I believe decentralized stable coins like Dai are the next big thing they've been waiting for. These aren't people looking to go long or margin trade or leverage.

There are Argentines, Colombians, Venezuelans, and others that want to save and transact. They want to stop fighting to just break even, always lagging with inflation, and take back control of their money. They want to look at a banking system that has year after year, decade after decade, ruthlessly taken from them and say, Basta, enough. Abuelo, I wish you could have seen this. This is Mariano Conti, head of smart contracts for the Maker Foundation. I want to thank Roon Christensen for giving me the opportunity of a lifetime.

everyone at the Maker Foundation for putting up with me and the Ethereum and Maker communities who never cease to amaze me. Thanks so much for joining us today. To learn more about Mariano and to read his essay at Unchainedpodcast.com, check out the show notes inside your podcast player. All crypto, no hype, some merch. Shop Unchained T-shirts, hats, mugs, and stickers

at shop.com. Again, that's shop. com. Unchained podcast.com. Unchained is produced by me, Laura Shin, without from fractal recording, Anthony Yun, Daniel Ness, Josh Durham, and the team at CLK transcription.

Thanks for listening.