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