Happy BirthDAI: Time To Maker Cake
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It’s been a pretty gray winter all around, but at least one coin is having a good day. DAI, a stablecoin collateralized by cryptocurrency, celebrated the first anniversary of its launch yesterday, marking one full year in which the coin successfully remained pegged to the dollar.
Ironically, that’s not the only anniversary in the crypto world. On the same day that DAI launched, Bitcoin reached an all time high of over $19,500.
Since then, one of those cryptocurrencies has performed significantly better than the other. While Bitcoin has lost over 82% of its value, the DAI token—which one notable critic said was “doomed to fail,” has successfully maintained a dollar peg.
Winners of the Year
2018 has been described as the “Year of the Stablecoins.” Not only did it see the introduction of new fiat-backed tokens, like TrueUSD and Circle USD, but these tokens have also occupied a growing share of the market capitalization, as traders hedged their bets against a falling market.
In addition to fiat-collateralized stablecoins, the past year has seen the introduction of tokens backed by precious metals and even pure code.
However, some of that enthusiasm has proven short-lived. Fiat-collateralized stablecoins have not been able to escape the fundamental centralization of the banking system, and even projects like Basis—with over a hundred million dollars in funding—have been forced to fold.
In part, Dai seems to work because of its unique collateral model: each dollar in DAI is backed by 2.8 dollars’ worth of Ethereum. As Ethereum fluctuates, some of the collateral is liquidated to keep DAI backed.
Will Dai celebrate another birthday?
But that doesn’t mean the system will last forever, and there are some justified doubts about DAI’s ability to survive. Significantly, BitUSD, a stablecoin on BitShares, used a similar stabilization system. Despite having each BitUSD token backed by $2 USD of crypto, the token has slipped from its peg several times. It’s currently trading for about 0.70 cents.
Critics warn that something similar could happen to the DAI token. As Hackernoon explains, a sufficiently sharp drop in the price of ether could break DAI away from its dollar peg. However, that hasn’t scared away the market— there are now 1.6 million Ethers locked in DAI contracts, representing 1.5% of the total Ethereum supply.
Meanwhile, the Maker token—the governance contract which manages the creation of new DAI—isn’t doing too badly, either. MKR lost a *mere* 73% of its USD value from its all-time high, outperforming Bitcoin as well as the vast majority of the cryptocurrency market. Measured against the Ether coin, Maker is at an all-time high.
The system is continuing to develop. In addition to Ethereum, two new assets, OmiseGo and Digix, have been proposed for Maker smart contracts and are now working on testnet. The latest version of Wanchain supports its own version of the Maker/DAI smart contract system.
There are still plenty of causes for concern, especially if Ethereum continues its downwards trajectory. But among the Ethereum and MakerDAO investors, the anniversary was celebrated as a vindication of smart contract technology, demonstrating that a cryptocurrency can stabilize its value without an anchor to real-world assets.
The author is invested in digital assets, including BTC and ETH, which are mentioned in this article.