4 questions to DAI and the future of stable cryptocurrency
The new stable cryptocurrency DAI has a lot of possible functions, and the ambitions are huge, so we asked a blockchain expert to evaluate the technology behind the project and the potential of stablecoin.
Bootstrapping just wrote an article about the new cryptocurrency DAI. But there are loads of new cryptocurrencies on the market, and even on the market of so called “stablecoins” DAI is hardly the only player. One example is the stablecoin USDBit.
Omri Ross is an assistant professor in mathematics at the University of Copenhagen and specialises in blockchain. We asked him to the technical specifics of DAI and the potential of stablecoin in general.
Is it realistic to make a functioning cryptocurrency that is as stable as the US Dollar by tying it to the dollar? As MakerDAO is trying.
“Well yes and no. What sets the Dai apart from an I Owe You token (IOU) with full or fractional reserves like Tethers USDT or similar projects, is that the entire operation of collateralized debt positions/obligations functions on chain. Apart from the global settlement feature, (simultaneously closing all CDP’s) this makes the MakerDao a fairly distributed solution for achieving relative stability with a cryptocurrency.
However, just like the US dollar and any other asset class, the system is dependent on the market. In the event of a”crypto fire sale” Dai stakeholders will have to liquidate their positions in a hurry. The Maker team has created a sophisticated set of checks and balances to retain and redistribute value in a black swan event, however, there are no guarantees that a sudden flash crash could not circumvent these mechanisms as well.
As we know financial markets and any markets are not always rational, this is a risk we need to take seriously. Also, any similar project may suffer from execution and security risks and in the case of blockchain this risk cannot be easily resolved.”
How can a stablecoin be a good thing for cryptocurrency?
“First of all, a stable currency enables the users to actually use the currency for transactions, rather than speculation.
In the secondary markets, a stable asset will allow people to engage in long-term financial contracts, knowing that the marginal value in their derivative contracts retains value. This will, in turn, allow a growth in sophisticated trading, leveling the aggregate volatility of the common assets over time, as arbitrageurs race to close gaps in valuations.”
Do you think that a stablecoin can be used for distributing aid in third world countries or Universal Basic Income?
Yes. But so can other cryptocurrencies with fluctuating values and to large extend fiat too. The fact the Maker is a thesis-driven organization is a fantastic quality, which should be applauded and supported. However, a stable asset is not necessarily a requirement for micro finance, remittance or other instruments for foreign aid.
Also, keep in mind that if your country’s currency is instable and your debt for a micro loan is in a stable coin it is not necessarily great from the point of view of the receiver of such a loan. There are also other alternatives, look at projects like the BitPesa or Colu.* Here the focus is more on infrastructure than on providing a stable asset for foreign aid programs.
Can stable cryptocurrency function as a tool for making the financial sector more robust and streamlined? Or is cryptocurrency in reality less efficient than the technology already used by the financial sector?
Cryptocurrencies offer possibilities to radically change the financial sector as you mentioned, but we are only in the beginning of a wave so it’s very hard to make clear comparison between a very established industry and a growing technology. The financial sector is fairly efficient today and the technology has the potential to radically change it, but it will take time to be able to use it in main stream finance as we know it today.
My point here is that building decentralized infrastructure for secured peer-to-peer interactions with various degrees of automated transaction events, privacy, off chain settlements and a lot of other qualities, is to be considered a serious upgrade, but it’s a long journey with bumps on the way and we can’t today assign full credit to the idea of stable coins or to make a comparison to fully functioning solutions such as visa.
Personally, I hope that cryptocurrencies and blockchain technology will exercise great influence on conventional finance and I am a fan of the idea of stable coins in principle if it can be done efficiently. But I guess we will have to wait and see.
*Disclaimer: Dr Omri Ross is an Assistant Professor at the University of Copenhagen and CEO of firmo.network, a blockchain company looking into bringing safe financial derivatives to the blockchain. Dr Ross has consulted a variety of blockchain companies including Colu and Bancor.