The Takeaway

  • MakerDAO, the flagship project of 2019's decentralized finance (DeFi) boom, launched the multi-collateral version of its DAI stablecoin on Monday.
  • Users can now "lock in" BAT as collateral for dollar-pegged loans. Previously, only ether could be used as collateral.
  • But despite the rapid growth of the sector and the diversification of assets involved, DeFi is still influenced by a handful of central players: Namely, Polychain Capital, a16z, 1confirmation, and unknown MKR whales.
  • With governance decisions largely influenced by those with the largest stakes to lose, some crypto veterans are pushing for a closer examination of MakerDAO's marketing directives.

MakerDAO may be diversifying the assets it works with, but it has a long way to go to decentralize the power to make key decisions.

On Monday, the cryptocurrency lending platform moved to multi-collateral stablecoin loans, marking a new era for the decentralized finance (DeFi) movement.

Previously, collateral for loans could only be committed in ether, but now MakeDAO also works with the Basic Attention Token (BAT) and also offers a DAI savings option. (The old version of the ether-backed DAI stablecoin is now called SAI, signifying “single-collateral.” For the sake of simplicity, this article will use the term “DAI” interchangeably because service providers may automatically convert it and community pages such as the MakerDAO GitHub are urging people to freely turn their SAI into DAI.)

But while users have more choices, a relatively small group of individuals govern the protocol.

More than 150 unique MKR token addresses voted in Monday’s transition proposal, one of the highest voter turnouts to date, MakerDAO president Steven Becker said. However, that vote included roughly 80,000 tokens estimated to cost $662 each and just five addresses represented more than 50 percent of voting tokens. In short, the votes cast by people with modest holdings were mostly a ceremonial nod of approval. 

“It was really important to showcase what governance [participants] have done in selecting BAT, in order to figure out what to do going forward with other collateral types,” Becker said in an interview Monday.

It’s unclear who the voters were that powered the BAT choice, but Becker said the attributes discussed in public calls included “liquidity in secondary markets” like Coinbase and other exchanges. The protocol itself is open source, but the people building accessible portals to it are generally working for such traditional firms.

The bottom line is the majority of people funding this movement, which they retain the power to influence, could fit into one room. In this sense, DeFi isn’t all that decentralized yet.

The current DeFi ecosystem is predominantly made up of “centralized products and services” with a better user experience than interacting directly with blockchain protocols, said veteran crypto investor Meltem Demirors.

“We are hopeful that over time, disintermediation will become possible,” Demirors said, adding that “market forces” and regulations have forced “intermediation and centralization by service providers.”

Rather than getting hung up on prompt decentralization, DeFi companies should focus on transparently disclosing their roles in the ecosystem and the fees they charge, she said.

Those roles are often intertwining. For example, ethereum creator Vitalik Buterin funded the early development of exchange tool Uniswap, founder Hayden Adams told CoinDesk in May. Then Paradigm, including Coinbase co-founder Fred Erhsam, led the first venture round for Uniswap. 

Paradigm also participated in the recent Compound raise, and this fund was just one of several from the Series A that hailed from the same group funding MakerDAO, like Andreessen Horowitz’s a16z crypto fund. Polychain Capital, headed by Coinbase alumnus Olaf Carlson-Wee, and Coinbase Ventures both also invested in the DeFi startup Dharma Labs. Following the raise, Dharma Labs switched to leveraging Compound’s protocol. 

Further, contrary to what the term DeFi might imply, MakerDAO can “terminate or suspend” access to DAI, and the Compound lending pools are actually custodial. This may be a compliance measure, to avoid usage that violates economic sanctions. After all, the people working for companies like the Maker Foundation and Coinbase interact with the technology in measurable ways, even if they do not claim ownership of it.

Recycling

Back in 2018, four years after MakerDAO started, Demirors described Coinbase as one of the entities using “fancy financial engineering” to offer the illusion of growth.

While there are many unknown DeFi users, those who benefit the most from it appear to be those who have influence in the system. 

Even Compound founder Robert Leshner said so far “teams in crypto that have stockpiles of DAI and crypto” are the most frequent protocol users.

Blockchain consultant Maya Zehavi, who agreed with Demirors’ recycling theory as it relates to DeFi startups Compound and Dharma Labs, tweeted it’s an open secret within the industry that MKR market makers are propping up the ethereum ecosystem with externalized risk. In her tweet, Zehavi said this model is evocative of a “central bank.”

For example, the largest liquidity provider currently contributing to the Compound ecosystem offered more than $1 million worth of DAI and appears to be repeatedly swapping parts of this pool for USDC, a stablecoin developed in part by Coinbase. Indeed, Coinbase announced in September it would be “investing USDC directly in the [Compound] protocol.”

It may be too soon to call the DeFi system “decentralized,” but there is certainly a great deal of capital involved. According to DeFi Pulse, there is over $660 million worth of cryptocurrency locked up in these smart contracts. This represents triple the amount involved this time last year, when there was $220 million worth of ether in these systems.

On the other hand, Tether co-founder William Quigley said the DAI ecosystem is far more decentralized than his godfather stablecoin.

“I would call it quite decentralized, aside from the oracle system,” Quigley said of contemporary DeFi. “On-chain leverage is a fantastic creation and I credit MakerDAO with that.”

However, the addition of BAT as the first asset beyond ether supported by Monday’s multi-collateral update complicates notions of a Coinbase “mafia” calling the shots in the DeFi realm. None of the known investors in Brave Software, the company behind BAT, are DeFi leaders. The BAT token sale in 2017 notoriously sold out within seconds, which implies whales and veteran investors gobbled up the tokens. It’s unclear whether DeFi investors are among them, although 1confirmation said it did not participate in the BAT sale. (CoinDesk reached out to the BAT team and will update the article if we hear back.)

“I have my suspicions as to why BAT was chosen as the first collateral, and that has to do with voting,” Quigley said. “I haven’t seen a lot of communication among them [BAT fans] saying, ‘Wow, we really want this.’ But someone is going to use it. And there will probably be some sort of arbitrage.”

He added that, although voter turnout is low and possibly skewed by niche interests, the DAI DeFi system is more decentralized and accessible than stablecoin predecessors that relied on just a few companies, like Tether. 

Theoretically, anyone with internet access and software engineering skills could build an interface to access these protocols. This possibility, which so far has yet to be realized to any measurable scale beyond the interfaces funded by ecosystem creators themselves, is what Andreessen Horowitz partner Chris Dixon said inspired his firm to invest in both Compound and Coinbase

“Compound is a lending protocol that is open to anyone in the world, that disintermediates banks and allows anyone to earn interest on their money,” Dixon said. 

Community growth

To be fair, MyCrypto CEO Taylor Monahan, an MKR holder, said MakerDAO’s loan system does a “pretty good” job informing users about the risks inherent to these loans while still scaling this experiment.

“When you think about what’s been accomplished it’s super exciting. You can’t undermine that,” she said, referring to the sheer number of loans issued through the DeFi ecosystem.

Compound’s website tallies at least 1,278 borrowers and MakerScan lists more than 1,960 DAI loans created so far in November alone (out of 148,173 loans over the past 12 months). These projects also actively encourage user participation through public polls and open-source code. 

“To the point about participation, that is a general condition that needs to develop as the protocol develops,” Becker said, adding “up to 100 people and organizations” now dial in to the open governance calls, which only attracted six or seven people a year ago.

Yet there are less than a few dozen people, via the above-listed ventures, who currently dominate both liquidity and voting power across the leading DeFi platforms. Monahan, for example, said she has yet to vote because she said the process is still too cumbersome to be a priority for her. Ethereum community veterans like Monahan and developer Georgios Konstantopoulos have also expressed concern that the updated language used to market these automated services as “vaults” and “savings” misrepresents their current level of security.   

Meanwhile, Nadia Alvarez, MakerDAO’s head of business development in Latin America, is busy working on educational initiatives to collect user feedback from marginalized user groups.  

“We want to develop their curiosity around the blockchain and other financial options they have,” she said, speaking of Brazilian students in one such program. “It’s an incredible opportunity to create new solutions thinking of the actual needs of people in different countries.” 

Argentinian ex-pat María Paula Fernandez, an ethereum community veteran who holds her savings in DAI and uses DeFi projects to pay for her daily expenses, said the risky collateralized loans seem to her like a financial crisis waiting to happen.

Although she also is bullish on the potential of DeFi, Fernandez tweeted in the lead-up to multi-collateral DAI that she hopes the community stays mindful of “not creating a bubble of over-collateralization and marketing.”

MakerDAO’s head of smart contracts, Mariano Conti, based in inflation-riddled Argentina, also relies on DAI for everyday expenses.

"I put my money where my mouth is. I've been getting paid exclusively in Sai for over two years, and I can't wait for my next paycheck to be in (Multi-Collateral) Dai,” he said via email. “I hope Dai continues to be the backbone of DeFi on ethereum."

Governance

The DeFi user base is diversifying far faster than the community of influential participants – that is, those who vote, serve as market makers and build products that tap into the open protocols.

The investors behind DeFi projects like the Maker Foundation, Uniswap and Compound are all heavily invested in the tokens supported by these systems. For example, the public vote to add MKR support to Compound was weighted to favor voters who had earned the most interest using the protocol. So it favored Compound’s investors that include institutional MKR holders, namely Polychain Capital and a16z. (This isn’t unique to DeFi ecosystems; it is a general dilemma presented by proof-of-stake systems.)

The Ethereum Foundation’s founder himself, Buterin, also owns MKR in addition to tokens from two projects he advised, Augur and OmiseGo. All of the above are already supported by Compound or are under consideration for multi-collateral DAI. Becker said there is no finite deadline for which assets will be added to DAI’s collateral system, or when. 

“That’s really up to Maker governance, that is MKR token holders, to decide going forward,” he said. 

To their credit, Becker said the foundation is currently working with Ernst & Young to restructure the non-profit’s board, which does not include the above-listed MKR holders. Thousands of people who own small amounts of MKR can, and do, sway polls by participating in governance calls, forum debates, and signaling their commitment by casting votes with smaller amounts of MKR. 

“It ranges from leverage traders all the way through to basic transactional users as well, folks that want to pay freelancers or put their DAI onto various wallets and use it for transaction purposes,” Becker said. “In doing that [voting on new collateral types] it provides the necessary robustness to the protocol as a whole.”

For MakerDAO’s Alvarez, she hopes the educational programs she is working on will prompt crypto companies around the world to offer marginalized DeFi users jobs and internships. This could, in addition to offering these users income, empower diverse users to participate in governance. 

“It would be great if more projects, beyond MakerDAO, could help give tools to these people so we can help create new solutions,” she said. “For us, it’s very important to have this integration with society.” 

Mariano Conti presents on using DAI for daily expenses at Devcon 5, photo by Leigh Cuen for CoinDesk

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