Dharma Markets Report #8: The Importance of Smart Contract Insurance in #DeFi

Your go-to resource for staying up to date with the decentralized financial system

There’s little question that smart contracts are beginning to eat financial services — the numbers say it all. Not even a year into the “DeFi” movement and we already have over half a billion dollars locked up in financial smart contracts, a good chunk of which is coming from a new suite of decentralized lending platforms.

While it’s clear that value wants to be transcribed, stored, and transferred via smart contracts, many of the users we speak to, particularly those outside of the cryptocurrency ecosystem, are naturally apprehensive when it comes to moving their wealth on-chain.

Common questions we get include:

  1. What happens if you’re hacked?

  2. How do I know that your auditors found everything?

  3. But Binance got hacked, can’t that happen to Dharma?

Smart contracts are a new paradigm that’s 10x, if not 100x, more superior t their analog counterparts. They’re more transparent, open, and are actually much more difficult to hack than a traditional bank. But technology alone won’t be enough to win new customers, and even if smart contracts are theoretically immune to hacks, we’ve already seen numerous failures in their short history.

At Dharma, we think insurance for smart contract-based financial services is one of the largest market opportunities in #DeFi today. Users need a way to ensure that the money they use within #DeFi won’t be hacked, stolen, or subject to technical failures.

The interesting part is that these insurance contracts don’t even need to live on-chain, they can be built using traditional practices so that newcomers enjoy the technological benefits offered by smart contracts, but with the same protection they enjoy in the real world.

It’s pretty obvious that insurance is an integral part of any financial system, but how might we build these contracts for DeFi?

The risks associated with smart contracts are very different than those inherent in traditional finance. This will invariably require a digital first approach. It means we’ll have to create new risk inputs like total lines of code, contract complexity, and how much value a smart contract has handled throughout its history.

All of these new factors can live inside today’s legal system or in the new brave world of on-chain finance. Qualified custodians have already begun bridging the traditional world into crypto by working with insurance brokers to create custom policies for their offerings. This should help institutional clients feel more comfortable onboarding into a new, digital financial system. On-chain smart contract insurance is also in the works. Nexus Mutual recently launched their communal risk-sharing DAO on the Ethereum mainnet and prediction market platforms like Augur can be used to create synthetic insurance contracts on certain events.

We’re extremely excited to watch the smart contract insurance space heat up. The more protection we can offer our users, the more liquidity, faith, and trust can be transferred into DeFi, which means more open, transparent, and programmable financial services for all.

DeFi Reads

Ask the Chain: It’s Bitcoin Springtime

Felipe Santa Ana of Paradigma Capital and Renato Shirakashi put out an excellent report digging into Bitcoin’s demand side. According to their findings, on-chain analysis supports the conclusion that Bitcoin, and the crypto markets more broadly, bottomed out in December. They specifically point to a number of new indicators, including MVRV and SOPR, that signify the market reached oversold levels on Bitcoin’s fall to $3,100 USD. The report also claims that we’ve transitioned into crypto spring — a time period marked by recovering prices and greater on-chain activity.

The Unbundling of Ethereum

Kyle Samani of Multicoin Capital put out an excellent piece detailing the growing trend of developers building on top of chains other than Ethereum that better support the needs of more specific use cases. Kyle makes the case that Ethereum is best suited for open finance, and that the continued focus on financial applications has enabled ETH to develop a monetary premium. The post lays out the case for why developers building non financial uses cases will continue moving to other chains like Tron, EOS, and Kadena.

Decentralized Lending: An Overview
Antonio Juliano from dy/dx wrote an excellent overview covering the most popular decentralized lending platforms built on Ethereum. Antonio describes how users borrow and lend, what the most popular borrowing use cases are today, and how each platform optimizes for certain features. We highly recommend this piece for anyone wanting a detailed deep dive into the on-chain lending ecosystem.

The DeFi Series — A closer look into user community

Alethio released a data driven look into a number of decentralized finance platforms, specifically around the number of users that interact with the various products. From a thirty foot view, there have been ~39k unique #DeFi interactions made by ~11k unique users. The highest overlap between platforms is Maker and Compound, which share 1,302 unique users, likely because they offer such similar functionality. The post is filled with a ton of other insights, we highly recommend checking it out.

Crypto lending: too good to be true?

Roy from Wave Financial put out an excellent blog post on the state of crypto lending and specifically dug into whether or not today’s high lending rates have the legs to survive. Roy notes that today’s high rates are a result of speculation being the primary use cases for crypto borrowers. Viewed through this lens, it’s likely that rates remain high given the fact that speculators have the most demand for over-collateralized loans, not so much retail investors. Regardless of who’s borrowing, it’s still amazing to see smart contracts democratize access to the supply side of margin loans.

DeFi Data

The Death (and Revival?) of CDP 3228

The infamous CDP 3228 recently moved a majority of his CDP debt over to a decentralized lending platform that shall not be named (insert emoji). This is a result of numerous ‘ReFi with DeFi’ campaigns aimed at allowing CDP holders to refinance their Dai debt at a lower interest rate. What’s interesting is that CDP 3228 quickly re-opened his position shortly after ending his infamous reign, indicating to the broader market that he’s not finished accumulating ETH.

45m USD of loan originations in May

A recent announcement from Bloqboard highlighted the fact that over $45 million USD worth of  loans were originated across DeFi platforms in May. This number has been steadily rising as the Maker risk team has restricted increased supply measures, showing that users are taking towards many of the new decentralized lending options available today.

DopeFi Links

JPMorgan Adds Privacy Features to Ethereum-Based Quorum Blockchain

Big news for the Ethereum community last week as JPMorgan built an extension to the Zether Protocol, a system that provides privacy features for account based blockchains. The firm plans to open source their code shortly, which will enable much more experimentation of ZKP’s on Ethereum.

Grayscale Gets Approval for Retail Ethereum Trust

Grayscale made headlines for getting FINRA approval to list an Ethereum Investment Trust similar to their GBTC investment vehicle. The new trust, ETHE, will give a new set of investors the ability to have ETH exposure in their portfolio. This news came on the heels of Grayscale’s recent ‘Drop Gold’ marketing campaign.

Dai Listed on Coinbase

Dai was finally listed on Coinbase!

This is a big moment for the decentralized finance ecosystem as users can easily get their hands on Dai. Coinbase now supports Dai trading against USD, USDC, and ETH, bringing some much needed liquidity to the asset.


Vishesh recently put together a new website called Dai Decipher that provides a 24 hour volume-weighted-average-price for Dai. This is a great tool for seeing how Dai is trading across various exchanges. We’re excited to see Vishesh’s tool be used more frequently in Maker governance discussions.


We recently added support for USDC. Now, users of Dharma can borrow and lend USDC at 8% APR from anywhere in the world, instantly.

If you have any comments or suggestions regarding the product, like assets you’d like to see added or loan terms you’d like supported, feel free to email max [at] dharma [dot] io.

Dharma Markets Report #7: Interest Rate Indexes in Crypto

Your go-to resource for staying up to date with the decentralized financial system

With overcollateralized lending quickly becoming the “hello world” of programmable money, a large number of firms have created products to help service the crypto market’s pent up demand for credit. And while originations are skyrocketing, the market remains inefficient and fractured today.

A big problem in particular is a lack of agreed upon reference rates. Without a set of standard rates for the market to coalesce around, it’s extremely difficult for participants to accurately price risk and the opportunity cost of their assets. What this results in is decreased participation and lower liquidity.

In traditional finance, capital markets rely on two indexes, LIBOR and the federal funds rate, to provide a reference point for the cost of capital. Nearly all financial institutions peg their operations to these two indexes, making it much easier for them to transact with one another as everyone can come to a consensus on an accurate market rate. These rates also permeate all types of consumer loans like credit cards, home, and auto as banks adjust their offerings based on the rates that they’re charged.

Just like the legacy system has been able to coordinate around shared standards, the crypto capital markets will need to establish interest rate indexes to help bolster liquidity and price discovery. This undertaking won’t be easy, particularly because of the various inputs that go into each type of agreement. For example, the fixed-term Dai loan we offer at Dharma is much different than the open ended term loan an investor gets through Compound. As such, unique indexes will have to be created for all of the various lending agreements offered in the crypto markets.

Luckily, two firms have begun building interest rate indexes for the crypto lending markets.

The Block’s DIPOR

Originally introduced by The Block, the Decentralized Inter-Protocol Offered Rate (DIPOR) is an interest rate index specifically created for #DeFi lending platforms. DIPOR attempts to provide a volume weighted average interest rate for borrowing various cryptocurrencies within DeFi as well as a tool for Maker’s risk team to use when conducting stability fee research.

If implemented today, DIPOR would help MKR holders more accurately adjust the stability fee to help keep Dai closer to its $1.00 USD peg. As Matteo points out, when Dai trades under a dollar, Maker wants to guide prospective borrowers to borrow from alternate platforms like Dharma to avoid minting new Dai. To incentivize this behavior, MKR holders would raise the stability fee above the DIPOR rate. On the other hand, if Dai trades above the dollar, MKR holders would lower the stability fee below DIPOR to incentivize more CDP creation and subsequent Dai minting.  

A big benefit of having an interest rate index that lives squarely within the decentralized finance realm is that all of the underlying data is transparent and auditable on-chain. With DeFi, scandals like the one that took down LIBOR in 2012 are impossible because there’s no centralized party in charge of reporting interest rates.

A prototype of Dai DIPOR is already live on LoanScan — it provides a rolling 24 hr volume weight average borrow rate based on Compound and MakerDAO.

Messari’s CIRI

While DeFi is a rapidly growing part of the crypto capital markets, Bitcoin lending markets are much larger and have existed for quite a while longer.

In an effort to standardize Bitcoin borrowing rates, Messari recently released the Crypto Interest Rate Index (CIRI), a short-term risk-free rate for Bitcoin.

Their index is comprised of the following instruments:

  1. BitMex futures implied rate

  2. CME futures implied rate

  3. Bitfinex lending rate

  4. Poloniex lending rate

There are a few reasons these specific rates were included. For one, to have a risk-free rate, the borrower needs to be fully collateralized. In a space as nascent as crypto, counterparties aren’t as well funded as, let’s say, the US government, so these agreements aren’t included in the CIRI. Another important aspect of the methodology is that they only use instruments that mature within 90 days. That’s because there’s only a small number of instruments that allow for loans longer than 90 days, which would skew the value of the CIRI.

Messari did note that this index will heavily rely on centralized lending avenues reporting the rates on a frequent basis. As it stands today, the rates reported in the CIRI vay widely, and would definitely benefit from the likes of Genesis, BlockFi, and Unchained reporting their daily rates.

DeFi Reads

The DeFi Series — An Overview of the ecosystem and major protocols

Alethio, an Ethereum data company, wrote an in-depth analysis covering various #DeFi protocols as well as the user overlap between Maker and Compound. The piece provides great summaries on MakerDAO and the Dai credit system, as well as Compound, Uniswap, and Augur. Alethio then goes on to highlight the total number of unique borrowers and suppliers of Compound as well as CDP openers. Interestingly enough, Alethio found that there 9,539 unique addresses that used both Compound and MakerDAO. We’re curious to know what that number looks like if you throw Dharma in the mix.

Crypto Mega Theses

Multicoin Capital released a big website overhaul and highlighted their primary crypto theses. They specifically mention open finance as one of the most investable use cases in the space, saying that this new breed of financial infrastructure will become more accessible and efficient than today’s existing rails. Multicoin also makes the point that open finance will first win retail markets before on-boarding institutions.

Bitcoin Can’t Fix Venezuela: I Should Know

Diana Aguilar wrote an excellent piece that debunks many of the myths the crypto community has previously made about the effect Bitcoin, and cryptocurrencies more broadly, have had in Venezuela. Diana notes that while Bitcoin does provide a glimmer of hope, Venezuela’s infrastructural gaps prevent it from being a place where cryptocurrency can be adopted by everyone. But while many of today’s claims are overstated, Diana does attest to the benefits Bitcoin brings to use cases like remittances and payroll for independent contractors.

Uniswap Traction Analysis

The Covalent team put together an interesting analysis on Uniswap’s traction using on-chain metrics. This piece provides valuable insights into the top exchanges created, average transaction sizes, user retention rate, etc.

DeFi Data

CDP Refinancing

Since we launched support for borrowing and lending Dai, our growth has been staggering. In particular, we’ve seen a number of the largest CDP holders move their Dai debt over to Dharma. After we launched our #ReFi with #DeFi campaign, we had an influx of borrow demand from users wanting to lock in a fixed term rate amidst an increasing stability fee. In the span of just two weeks, Dharma originated over $6 million USD in Dai loans and we now have over $16 million USD worth of collateral locked in our smart contracts.

Dai’s Return

Dai’s peg seems to be what everyone in DeFi talks about these days. Soon after Dai began trading between $0.95 - $0.97, MKR holders quickly raised the stability fee all the way up to 19.5% APR. The interest rate increase, along with some healthy buying demand created by secondary Dai markets, has helped bring Dai closer to its $1.00 USD peg. It will likely take some time until market makers are able to unload enough inventory, but all signs point to a healthy market responding to supply and demand.

ETH Locked in MakerDAO Below 2 million

As a reaction to the recent stability fee hikes, the total number of ETH locked in MakerDAo fell below the coveted 2m ETH mark. CDP holders have been closing out their positions in an effort to avoid increased interest payments.

#Dopefi Links

Grayscale to Investors: Drop Gold

Grayscale launched their provocative ad campaign last week urging gold investors to consider investing in a digital alternative. The advertisement aired across a number of major news networks and has made its rounds amongst most financial circles. Grayscale’s campaign arrived on the heels of a number of product launches geared towards making it easier for institutions to get exposure to the asset class.

Regulators Ready to Approve Ethereum Futures

A member of the CFTC commented that the firm is interested in launching an Ether futures product similar to the BTC futures product they rolled out at the end of 2017. Ether futures would help institutions familiarize themselves with the asset as well as bring some much needed liquidity to the markets. Assuming a successful futures launch, ETH borrowing should see an uptick as market makers and basis traders gear up to trade the product.

Fidelity on Institutional Investors

Fidelity investments showcased their new research in regards to institutional appetite for digital assets. Their report found that institutional investors are overwhelmingly positive about digital assets, with 47% of surveyed investors believing it was an innovative technology play. Among the investors surveyed, 22% already had exposure to the asset class, with another 47% saying digital assets belong in their portfolios. It will be interesting to see how institutional investors decide to engage with DeFi tools once they’re on boarded into the ecosystem.

Ethereum.org gets a redesign

Ethereum.org got a much needed redesign as the community attempts to re-focus its efforts on a number of key use cases including programmable money. The new site makes it easy for newcomers to learn about, use, and build on Ethereum.

Dharma Markets Report #6: Trading Strategies in #DeFi

Your go-to resource for staying up to date with the decentralized financial system

Trading is integral to any well functioning capital market. By taking advantage of supply and demand mispricings, traders help the market with price discovery, and in the act of trading, also serve to bring liquidity to a market. Traders that excel at providing these services are rewarded handsomely.

Crypto markets are no different. In fact, crypto markets need traders more than ever to help bring liquidity and price discovery to an immature and inefficient market. For their crucial role in helping bootstrap a global market, crypto traders have generated massive returns. An argument can even be made that crypto markets to date have been much more lucrative to, and psychologically easier on, traders than they have been to long term investors. While the latter requires relentless patience in the face of massive volatility, traders are able to take advantage of irregular price movements without bearing as much risk.

Just as traders were needed to bootstrap traditional crypto markets, they’re needed more than ever within the decentralized financial system being built on Ethereum. Not only are these markets nascent, but the actual infrastructure that underpins them is still in development. Given such high levels of inefficiency, #DeFi is a breeding ground for traders who are willing to take on risk in exchange for massive returns.

To take advantage of the new opportunities available in the decentralized finance ecosystem, a number of new trading strategies have emerged.

  1. Token Pair Trading

Summarized well in this article, pair trading is a market neutral strategy in which traders take advantage of mispricings between two highly correlated assets. So let’s say that two assets usually have a price ratio of 2:1. If the price ratio moves substantially, say to 2.2:1, then a token pair trader would short the outperforming asset and long the underperforming asset. The expectation will be that the ratio will revert back to 2:1, and the trader will profit from the “normalization” of the prices back to this ratio.

To illustrate a pair trade, let’s use ETH and BTC as an example. We’ll assume their correlation is high, somewhere above 0.75. If the price of ETH appreciates 3x relative to Bitcoin, a pair trader would go short ETH and long BTC, then wait for the prices to converge back to their norm and repay their debt. Remember that for going either long and short, the trader must borrow some other asset.

Pair trading has been a particularly popular strategy given how correlated the cryptocurrency market is. In today’s landscape, if you own one cryptocurrency, you own them all.

  1. Uniswap Short Straddle

Uniswap is a novel system in which users can earn a return for supplying assets to liquidity pools. Essentially, users act as market makers and are rewarded when there’s a lot of trading activity in the pool they supply assets to. You can think of liquidity pools as ‘order books’ — they represent the liquidity available between two assets. For example, ETH/DAI is its own pool, as is ETH/MKR.

Generating returns on Uniswap is not as simple as it might seem. Summarized well in this article, liquidity providers earn a great return when the liquidity pool they supplied assets to has a lot of volume and when the price ratio between the two assets remains fairly constant.

Given this return profile, many traders have been treating supplying liquidity to Uniswap as a short straddle. In this trade, the trader is betting on low volatility and a lot of trading volume between the two assets they’re supplying. Since market makers on Uniswap are supplying both sides of a trading pair, they’re basically hoping the price of one of the underlying assets doesn’t shift against them all the while they can collect a premium for the trading volume.

  1. Staking Yield Arbitrage

With the emergence of Proof of Stake, cryptocurrency holders can earn a yield for participating in network consensus. For many traders, this represents an arbitrage opportunity if they can get exposure to the staking yield without actually holding the asset. The trader would borrow either the underlying asset or a stablecoin which they can use to buy the underlying. In both scenarios, traders are looking to borrow at a rate below the staking yield.

Take for example Tezos — holders can earn 7.34% APR by staking XTZ. A trader who wants exposure to the annual yield, but doesn’t want to hold XTZ on their balance sheet, can either borrow XTZ or USDC/DAI at a rate below 7.34% APR. They can then stake XTZ for some duration, repay their debt, and pocket the profit. This strategy works much better if the borrower can get a fixed term loan as a variable rate agreement can make the trade unprofitable.

DeFi Reads

Introducing DIPOR: LIBOR for Open Finance

As lending markets within decentralized finance continue to grow, a community of organizers is leading an initiative to introduce DIPOR: the Decentralized Inter-Protocol Offered Rate. DIPOR aims to be similar to the LIBOR index in that creators and consumers of open finance products can use DIPOR as a foundational benchmark to make decisions and price risk. One particular beneficiary would be the MakerDAO risk management team as they could use DIPOR as a tool to better price the stability fee. While DIPOR is a great idea in practice, the market is likely too fractured to support a standardized rate. As the ecosystem develops, we expect DIPOR to play an influential role in helping coordinate decentralized lending markets.

DeFi Liquidity Models

Alex Evans at Placeholder wrote an excellent overview of the strategy behind sourcing liquidity in decentralized protocols. Alex notes that today, open finance systems are split into three categories: peer to peer markets, liquidity pools, and smart-contract based counterparties. An interesting observation emerged — protocols in which users interact with a pool or smart contract are much better at sourcing liquidity than peer to peer markets. The main reason being, peer to peer markets always require a counterparty on the other end of the trade. To counteract this difficulty, many protocols are moving up the stack and getting closer to the end user. This is exactly what we did with our recent product launch, and our volume numbers affirm the hypothesis made in this post.

The IEO Phenomenon’s Impact on Markets and Token Models

Derek Hsue of Blockchain Capital provides an in-depth analysis of the rise of IEO’s and what they mean for the crypto capital markets. While IEO’s haven’t reached the scale that the ICO  craze did in 2017, it feels like the fundraising method was created to give exchange tokens the same monetary premium ETH received during the last bubble. IEO returns to day very well may have contributed to the recent market uptrend as early investors were able to generate a quick return off of risky assets. Luckily, it doesn’t seem like IEO’s will be as pervasive as ICO’s once were.

The Next Wave of Crypto Unicorns

Token Daily researcher, Mohamed Fouda, made the claim that blockchain data represents the next billion dollar opportunity within the crypto markets. Mohamed defends his claim by highlighting the importance of easily indexable data and who the core customers are. The Dharma team is very much aligned with the thesis laid out in this post. We think whoever can make the global financial system’s data accessible to all, stands to capture a great deal of value.

Augur v2: A Tour of the Prediction Protocol’s First Major Upgrade

Last week, Augur unveiled the specifics behind their upcoming v2 protocol upgrade. There are a ton of great improvements, but the ones that stand out include the ability to denominate markets in DAI, protocol inflation to create a decentralized oracle, and immediate dispute rounds. You can find the full spec from Augur here, and an in-depth twitter thread going into the upgrade details here.

DeFi Data

Growth Post Launch

It’s been a huge week for us at Dharma! On Monday, we officially opened our product to the public and saw a large influx of demand for both DAI and ETH. On the borrow side, we broke $1,000,000 USD in cumulative borrow across both ETH and DAI. DAI borrowing constituted over 90% of total demand as the recent market movements look like the crypto markets could be making a comeback.

Our lend side saw even more growth, with over $1,400,000 USD in cumulative lend volume. Similar to the borrow side, most of our lend volume was concentrated in DAI, which represented over 70% of all lent capital. Given the stability fee was just raised to 11.5%, our assumption is that DAI holders are looking to lock in some savings rate and wait for the stability fee to fall back down.

Dai’s De-Pegging

Dai spent the majority of last week trading between $0.94 — $0.99 as selling pressure continues to come from investors using Dai as a way to get leverage on their ETH. To combat the increased use of leverage, MKR holders just voted to raise the stability fee to 11.5% in the hopes that CDP owners would buy Dai on the open market to pay back their debt. So far, it seems like the market isn’t phased by a 11.5% interest rate. We wrote about this in our last Dharma Markets Report and we feel strongly that Dai must develop use cases outside of speculation if it wants to maintain its peg.

ETH Locked in DeFi

The total value of ETH locked in DeFi just crossed $400,000,000 USD, further proving there is demand for a new class of globally available financial services. Lending makes up for most of that demand as Ethereum, in its current shape, is perfect for in-frequent, high value transactions. In the traditional system, taking out a line of credit can take days, if not weeks, and borrowers interested in buying more cryptocurrencies would have to pay additional fees to move their principal onto exchanges.

#DopeFi Links

Dharma officially launches to the public

Last Monday, we opened our doors to the public, allowing anyone to earn interest or take out a line of credit against crypto, from anywhere in the world. We saw a surge in interest on both sides of the market. The most volume came from DAI borrowers as the market is starting to feel better about future growth. You can follow along with all our stats here.

Eurozone Debt Crisis Effect on BTC

An interesting article out of Galois Capital last week discussed what effect, if any, a eurozone debt crisis would have on the crypto markets. The piece briefly goes over what happened to the prices of the Euro and of Gold, and then extrapolates what could happen if the same amount of capital flees into Bitcoin. Something to keep an eye on cryptocurrencies continue to enter the mainstream.

Binance researches market cycles

Binance research put out a great report on how to evaluate crypto market cycles. Spoiler alert: seems like consensus is that we’ve transitioned from a freezing winter, into a slowly thawing spring. The report goes over asset correlations, how investors have behaved throughout previous cycles, and how global regulation is affecting institutional participation.

Maker votes to raise the stability fee to 11.5%

Early Sunday, MKR holders voted to officially increase the stability fee to 11.5% APR, marking another quick rate hike aimed at getting Dai back to $1.00 USD. As we covered above, Dai is seeing increased use from margin traders, which is adding sell pressure to the asset. It will be interesting to see how the price of Dai reacts to the increased fee.


Dharma is officially open to the public! In just under a week, we originated over $1,000,000 USD in loans and we couldn’t be more excited to show our users what’s next.

If you haven’t yet signed up for Dharna, you can experience the future of finance here.

Dharma Markets Report #5: Visions of Dai

Your go-to resource for staying up to date with the decentralized financial system

MakerDAO is currently undergoing its greatest ever stress-test as Dai has spent most of March trading under its desired $1.00 USD peg.

The Dai-depegging is primarily due to Dai having only one use case: speculation. While Dai usage exploded just a year after launch, nearly 80% of all Dai was immediately transferred to an exchange or some other financial services platform. This has had a very unidirectional effect on price as demand for speculation means holders immediately sell their Dai for other assets. Without anything to offset this sell pressure, the price of Dai quickly fell under $1.00.

To combat Dai’s sinking price, MKR holders recently voted to raise the stability fee to 7.5%. This came swiftly after the stability fee was raised to 3.5%, which did little to move the price peg. The most recent rate hike seems to have worked as the price of Dai is nearing $0.99 USD on legitimate order books.

Nevertheless, the only way to provide a truly price-stable asset is to have many use cases where users are relatively insensitive to small price fluctuations. Greater demand from use cases like payroll and remittances, to gaming and e-commerce will help absorb the selling pressure created from speculators selling Dai for other assets. DeFi entrepreneurs out there, PLEASE BUILD THESE FOR US!

Without more Dai use cases that drive genuine demand for the stablecoin, the stability fee will continue to wildly fluctuate in response to market volatility. What happens to the interest rate in a bull market when speculators are expecting 100% + returns? What if ETH stays relatively flat for several years?

Irrespective of these growing pains, Maker is a remarkable system and one of the defining use cases bringing decentralized finance into the mainstream. At Dharma, we couldn’t be more excited to take part in such a disruptive experiment.

DeFi Reads

Delphi Digital’s DeFi Report

Delphi Digital, a boutique research and consulting firm, put out an extremely insightful research report on the emerging decentralized financial ecosystem. They provide both a high level executive summary of the space as well as analysis on various verticals including decentralized exchange, credit, derivatives, and composability. The report also outlines many of the projects that comprise each vertical and offers a deep dive on what makes each project unique. You can find a breakdown of Dharma and our most recent growth in the ‘Lending & Borrowing’ section.

This is the first institutional-grade report covering DeFi that we’ve personally seen. It’s amazing to see research efforts that will reach a much more institutional crowd. Education is the first step in helping create a more global, efficient, and equitable financial system.

The Real Bitcoin Market’ by Bitwise

Bitwise Asset Management, the creator of one of the many Bitcoin ETF proposals, sent ruptures through the crypto community after they released their 227 page investigative report on cryptocurrency volume data. For those of you who don’t have enough time in the day to read a 227 report, we’ll summarize the key takeaways for you:

  • 95% of crypto exchange volume is fake

  • BTC’s real daily spot volume is ~270M

  • 10 exchanges make up most of the trading

  • Bitcoin arbitrage is one of the most efficient in the world

This report confirms the previously widely held suspicion that most of the exchange volume on sites like CoinMarketCap were’t organic. BitWise plans to calculate its ETF’s daily NAV based on the prices reported on the 10 regulated exchanges.

Important note: Decentralized Exchange would solve many of these issues, making markets more transparent and more expensive to wash-trade.

How does crypto OTC actually work? From Circle Trade

The Circle Research team put together an in-depth look at the OTC industry and the key role it plays in the crypto capital markets. In short, OTC desks make it easy to buy and sell large amounts of cryptocurrency. Instead of going through a traditional exchange and incurring slippage and fees, large buyers use OTC desks to secure a better price for their orders. The post also distinguishes between the two dominant types of crypto OTC desks, the principal desk and the agency model.

Ikigai’s Valuation Depot

Ikigai Asset Management put together what we view as the canonical resource for crypto valuation frameworks. The depot is split includes qualitative and quantitative frameworks, as well as a set of research papers and tools aimed at helping institutional asset managers make sense of the crypto markets. We’re excited to see more rigorous tests emerge for valuing crypto assets as its a necessary ingredient to attracting more mature capital and talent into the space.

Ethereum vs. Ethereum Classic: Does Immutability Matter?

The SFOX team explored whether or not the market actually values immutability by comparing the network growth in Ethereum and Ethereum Classic. From a thirty-foot view, it’s quite clear that the market doesn’t place that much value on immutability. By looking at market cap, transaction fees, and active addresses, it’s quite obvious there was far greater social scalability around Ethereum. The post also examines dApp usage, transaction volume, and hash rate, again showing that Ethereum is the dominant chain.

DeFi Data

Growth at Dharma

We’d be remiss if we didn’t mention the growth we’ve seen over the last week. We saw over $280,000 in aggregate borrow volume,  most of it coming from Dai as a result of the increased stability fee. It will be interesting to watch whether or not CDP owners elect to borrow Dai or purchase it on the open market to pay back their debt.

The lend side saw similar growth. We had over $350,000 in aggregate lend volume, which again, mostly came from Dai holders helping meet the influx of borrow demand. This past week, we were also offering the most attractive lend rates on the market. Passive holders could earn 6% APR on their Dai compared to ~3.5% APR on Compound.

Reduction in the Dai Supply

The total supply of Dai is reacting as intended to the stability fee hike. The outstanding supply currently sits at 88M, down from a high of about 95M, meaning that CDP holders finally started paying back their debts. It’s encouraging to see Maker’s unique governance system working in the wild.

#Dopefi Links

This Artwork Is Always On Sale

Probably the coolest experiment in Ethereum today: A piece of digital art represented by an NFT that employs a Harbinger Tax model. The artwork can always be purchased at a price decided by its last owner. Anyone can buy it at that price and set a higher sale price, so long as they pay a 5% annual patronage fee to the original creator.

The Rainbow Network

We know how much everyone loves LaTeX papers, so we included one on cutting edge DeFi research. In all seriousness, Dan Robinson published an excellent paper describing an off-chain non-custodial exchange and payment network for blockchain assets. The paper proposes ‘Rainbow Channels’ which are variants of regular payment channels in that user balances are based on the current price of other assets. A short summary doesn’t do it justice, highly recommend the read!

Square Crypto

Jack Dorsey and the Square team shook the crypto world last week through a provocative tweet hinting that Square is planning to fund open source crypto development. The announcement shouldn’t be seen as a surprise as the firm has indicated their strong support for Bitcoin in the past.

An Introduction to rehypothecation with cryptocurrency

CEO of BlockFi, Zac Prince, makes the case for why crypto markets would benefit from rehypothecation. Zac notes a number of benefits including increased consumer access, liquidity, and price discovery.


As we mentioned in the newsletter, demand for borrowing Dai has far exceeded our expectations. In order to meet this demand, we’re currently looking for Dai lenders who are interested in earning 5.5% APR on their idle holdings.

If you’re interested in borrowing or lending Dai, please shoot myself an email at max@dharma.io

Dharma Markets #4: The Importance of Secondary Dai Markets

Your go-to resource for staying up to date with the decentralized financial system

The Dai credit system has been one of the most remarkable developments in the #DeFi ecosystem. As we’ve previously discussed, anyone in the world can now get their hands on a trust-minimized stable currency regardless of where they live or their socioeconomic standing. The fact that the U.S. dollar is now a globally available and censorship resistant asset is game changing.

Dai opens the door to a number of financial services including wealth storage, peer to peer payments, and margin trading, all of which can be accessed without a central party. To date, the primary way of borrowing Dai is through MakerDAO. Borrowing Dai through Maker is simple, all you need to do is send your collateral — denominated in Ether — to a smart contract, and then select how much debt you want to draw down. And while this process is fairly straightforward, having a single avenue to borrow DAI limits its potential utility and the potential ability of MKR holders to stabilize its peg.

At Dharma, we recently announced our Dai integration — our users can now borrow and lend Dai from anywhere in the world, instantly, and affordably. We see this as a massive step forward for the #DeFi ecosystem for a couple of reasons. For one, creating a much more friendly user experience around the cryptocurrency will help expose it to more users. Secondly, having additional Dai debt markets creates a number of positive externalities like tighter feedback loops for interest rate changes and new ways of accessing yield.

As more crypto debt markets emerge and mature, we expect them to have a synergistic relationship with Dai by making it more useful and accessible.

Dai as collateral

With our new Dai integration, Dharma users can now borrow Ether by locking up their Dai as collateral. Being able to use Dai as collateral creates two primary benefits.

First, the ability to collateralize Dai in a Dharma loan increases its usefulness as money. Simply being able to use Dai for more use-cases is by definition a good thing. Moreover, Dai as Dharma collateral indicates that the market believes Dai has value, which, in a self-fulfilling manner, gives Dai more value.

The second advantageous bi-product of being able to use Dai as collateral is that MKR holders can more quickly move the price of Dai to their desired peg. The reason for this is that Dai being used as collateral reduces the circulating supply, making order books thinner and price reactions to stability fee changes sharper.

Stability fee pricing

Another reason that secondary debt markets for Dai are beneficial is that they create more avenues for borrowers and lenders to converge on a free market interest rate. MKR holders can use these additional markets as another data point in their stability fee calculations. If secondary markets are pricing the cost to borrow Dai at 2%, there’s a greater justification for the stability fee to be near that rate.

CDP-less Dai

Having secondary Dai markets allows people to freely acquire Dai without minting more supply. This becomes particularly important during times when MKR holders want to disincentivize CDP creation as borrowers aren’t reliant on CDP’s to get their hands on Dai.

The reason for wanting to decrease the number of outstanding CDPs is to move the price of Dai closer to its desired peg. When the stability fee is low for a long time — as it has been throughout most of the bear market — Dai becomes cheap to create, to the point where the supply on the market outstrips demand. When there is too much supply and holders are more willing to sell Dai for other assets, the price of Dai falls below $1.00. This is exactly what’s happening in the market today and the reason why MKR holders just raised the stability fee to 3.5%.

While a higher stability fee encourages CDP owners to buy Dai on the open market and pay off their debt, it might not be enough to deter borrowing demand. A secondary market for borrowing Dai enables this access without creating more sell pressure.

New Yield Opportunities

Lastly, secondary Dai markets allow holders to generate yield on idle assets. While multi-collateral Dai will similarly give Dai holders access to a savings rate, as it stands today, holders are only able to lend out their Dai through secondary markets.

This can work out particularly well for Dai holders if demand to borrow the asset increases on secondary markets. We saw this play out on Compound Finance when a large asset holder borrowed Dai from the money market instead of selling their existing assets and taking a tax hit. During that time, Dai lenders were earning over 15% APR on their holdings.

ETH Locked in #DeFi: 02/18/2019–03/10/2019

The total number of ETH locked in MakerDAO consistently grew over the course of the last 3 weeks — roughly 100,000 ETH was deposited during that time frame. It’s interesting to note that the total number of ETH locked in MakerDAO has started to decelerate a bit as MKR holders recently decided to raise the stability fee to 3.5%. This trend can continue if the first hike doesn’t successfully bring the price of Dai back to $1.00 USD. In the case of another hike, we expect demand for CDPs to decrease and demand for Dai in secondary markets to increase.

Apart from Maker, the only two protocols that saw sustained growth were Uniswap and dy/dx. Activity on Augur and Compound was flat over the last three week period, but the lending rate in Compound’s Dai money market recently rose above 3% APR.

Uniswap continued its uptrend as the total number of ETH locked in their contracts more than doubled over the course of the last three weeks. The two largest liquidity pools are MKR and Dai, which contained $2m and $1.6m as of last week, respectively.

dy/dx saw a large increase in the total number of ETH locked in their contracts as the value doubled from the start of the three week period. There was a large influx of ETH activity on March 5th, March 6th, and then again on March 8th. The two leveraged ETH contracts — 3/15 and 3/30 — have seen the most demand as traders are speculating that the price of ETH will continue to trend higher.

#DeFi News

💲 Dharma announces Dai integration

Last wednesday, we announced that early users of Dharma can now borrow and lend Dai from anywhere in the world, instantly, and affordably. Current users can borrow Dai at .10% APR, making it the cheapest place to get Dai. We’re excited about the potential doors this opens up for users to easily access Dai and use it throughout the #DeFi ecosystem.

Dai on Dharma is also important because we’re alleviating one of the most common complaints we hear about permissionless financial products: usability. With Dharma, users don’t need to worry about metamask, decentralized exchanges, and block explorers. We’re taking #DeFi’s favorite asset and wrapping it in a beautiful user experience.

The integration comes at an interesting time as MKR holders just voted to raise the stability fee to 3.5%. With Dharma, users don’t need to rely on a CDP to access Dai. They now

📉 Dai has been trading under a dollar

Over the past few weeks is that Dai has been trading at a discount to USD, which is interesting for a few reasons. First, it gives credence to the theory, popularized by Hasu, that one of the scalability challenges for Dai is its relatively difficult arbitrage model. Because Dai is difficult to arb, it is more difficult to maintain the peg. And now we’re seeing that play out in real time.

Additionally, Dai trading below 1 USD indicates that in order to develop real stability, Dai needs more use-cases. The current situation indicates that Dai would benefit from more use-cases that give Dai utility, thereby providing stable demand as well as stable supply. And so even though Dai has one use-case for which is has established remarkable product-market fit, namely leveraged ETH, we’re excited about more use-cases that generate stable utility.

🕵️‍♂️ Compound announces transparency bounty

Compound recently launched a transparency initiative in which they prompted community members to try and gather more information about the lending practices employed by Celsius Network and NexoFinance. Both Celsius and Nexo are custodial lenders who offer extremely competitive rates relative to the market, calling into question how they’re able to guarantee such attractive rates.

Compound is offering 50 ETH to any parties that can offer transparency into their practices. We haven’t yet heard if any new information was unearthed.

📈 InstaDapp issues 500,000 Dai

InstaDapp recently announced that their users have issued a total of 500,000 Dai through their easy to use platform. InstaDapp users have supplied 10,145 ETH as collateral across 213 debt positions. We’re excited to keep watching this team grow!

What Team Dharma is reading

Open Finance: Loan Origination Snapshot for January and February 2019

Why you should care about crypto finance

Decentralized Finance Is a Continuum

Maker Network Overview

Privacy and Cryptocurrency, Part I: How Private is Bitcoin?

DeFi Pulse (paying close attention to this one ;))

Past, Present, Future: From Co-ops to Cryptonetworks

A Privacy-Focused Vision for Social Networking

Why Open Source Finance Will Win

The Fed Versus the Narrow Bank


As we’ve already mentioned, last week we launched Dai on Dharma. Our early users can now borrow and lend Dai from anywhere in the world, instantly, and affordably.

Our community has long been asking us to support a trust-minimized stablecoin and we couldn’t be more excited to see the positive reception the integration has received to date. Be on the lookout for more asset additions as we continue to build out the core product experience.

If you’re interested in the best borrowing and lending experience on the market, you can sign up for the waitlist here: dharmalever.com

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