Dharma Markets #4: The Importance of Secondary Dai Markets
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|Mar 11, 2019|
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.
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.
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
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 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 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
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