Grayscale's Deeper Dive into MakerDAO

Last Update 12/09/2021

Rayhaneh Sharif-Askary: Hi, everybody. Welcome to our deeper dive into MakerDAO with Rune Christensen. I am going to give folks a few minutes to join and then we will kick things off.

Okay. I am going to give it one more minute and then we'll actually get going. Just letting the participant number get a little bit higher here. Hi Heather, glad you could be with us today, just responding to the notes in the chat that people are sending us. Good morning, Anthony. Before I get carried away with that, this could go on for a while, so let's kick things off. So everybody welcome. Thank you for joining us this morning. I am for fortunate enough to be joined by Rune Christensen, who is the founder of MakerDAO. I'm also on with David Grider, who is our new head of research. And to take a step back, the purpose of these webinars, these grayscale deeper dive webinars is to basically make tangible the protocols underlying our products. And so to do that, basically we ask a bunch of questions, we have a conversation, and then we will answer questions that you all have at the end.

And for those of you that don't know me, I'm Ray Sharif-Askary, I'm responsible for investor relations at Grayscale. So before we kick it off, I'm going to do the disclaimer that I must do. Nothing that we say here today is investment advice. You should always consult your own broker or advisor if you are making decisions. And our private placements, including the Grayscale DeFi Trust, which has Maker in it, are available only to accredited investors. So with that, let's kick it off. I'm going to hand it over to Rune to introduce himself, give some background on himself and start to explain how MakerDAO came to be created.

Rune Christensen: Thanks so much. Yeah, I'm really excited to be here. And yeah, I mean, I'll just dive into the backstory. So actually personally, I got into Bitcoin in 2011. So I was in crypto since the really early days. And the thing that really struck me from the beginning is just this incredible potential that exists in blockchain technology. I mean, it's going to change the whole world and it already is having a lot of impact with... At this point, it's old news that, what is it? The New York Stock Exchange uses blockchain for instance. And I think that Bitcoin really catalyzed this excitement as sort of this potential.

But the thing that ended up with me starting Maker was realizing the problem with its volatility. So Bitcoin is great for speculation. It's less good for actual practical use in day-to-day life or businesses using it to receive payments or hold their float or people using it for regular savings. And so that's what got me into stablecoins. And in 2015, that's when I started the Maker Project basically after looking at all the different stablecoin projects that already existed and not really finding something that was able to really sort of, I think execute properly on it. And my co-founders, we built MakerDAO project on the Ethereum blockchain as, I think actually Maker might be the oldest Ethereum project that's still around today and we've really sort of been through the whole ride for what's now almost seven years. And so yeah, I also recently that we had some coverage in the Economist where they called us the first DeFi protocol, which I guess, it's not, you can't be... It makes sense in the context of us being very big at this point at least.

Rayhaneh Sharif-Askary: Yeah. I've heard the same. And so to spell it out for folks, maybe explain a little bit more about stablecoins and then higher level the problem that Maker is trying to solve.

Rune Christensen: Yeah, so it really is simple. Bitcoin is great. You can send it internationally and it has all these advantages of decentralization, but it's not stable, so you just don't actually use it as money. You use it for speculation. And so that's what stablecoins solve. They provide assets that have all the benefits of the blockchain, the fast, it's cheap, it's secure, it's decentralized, but then a stablecoin combines that with the benefits and sort of familiarity that we're used to from traditional banking and finance. In particular, having a price that's equal to one US dollar, and also the ability to earn sort of stable, reliable interest rates.

So yeah, that's what Maker creates, a stablecoin, which is called a Dai stablecoin, which has a lot of unique characteristics, but ultimately, like I said, yeah, it's one of the oldest DeFi projects. It's the oldest one that's still around today and it's just generally today, it's the second largest DeFi protocol based on total value locked, which is sort of a measure of basically the size of the protocol with about 12 billion of assets locked into the protocol today.

Rayhaneh Sharif-Askary: And in what way... So when we think about in what way the assets are locked in the protocol, let's talk about the protocol more broadly, the lending side and maybe explain to me how it works, like I'm a five year old.

Rune Christensen: So I mean, the closest thing to compare Maker to really is that it's similar to a digital, basically the accounting of a bank where you have deposits on one side, which are then people holding the stablecoins, and then you basically have assets and collateral on the other side, which is the assets that are actually backing the stability of the stablecoin. And so in a traditional bank, typically you have regular depositors and then it's mortgages or treasury bonds or something, that's backing the currency or the deposits in a bank. And then Maker, first of all, the main thing is that this whole sort of machinery of having deposits covered by assets that keep the deposits stable and secure, it's all programmed on the Ethereum blockchain. So this is actually not a company or there's no office, there are no actual employees sitting and keeping track of this stuff.

Instead it's just a computer program that runs it completely automatically and it just works. It just runs by itself and it sort of carries out these automatic functions completely autonomously. And the biggest thing that people really think about or relate to in terms of how do you use the more advanced function of the system rather than just using the stablecoin itself is when they collateralize the ETH stablecoin, sorry, the ETH cryptocurrency and use that basically as collateral in Maker to then generate Dai, which means basically borrowing money through this autonomous system because anyone can do that directly. And that's kind of the beauty of DeFi and the beauty of Maker is that you build these financial perimeters, this extremely powerful base level financial infrastructure, but then instead of only being well-connected institutions that get to access the base level, in DeFi, everyone can access and however they can go and access it directly or they can access through some kind of third party sort of middleman service if they want to.

And you really have a lot of different users accessing Maker today, either as these large scale institutions that sort of access it wholesale or just regular individuals in particular in Argentina, there's a huge user base of regular people that use Maker to basically take their crypto assets and borrow against them at very, very cheap rates, which ultimately, Maker is able to offer because it's not a regular sort of lending protocol. It's not really doing lending and borrowing. So you're not sort of borrowing the money from anyone when you borrow from Maker. You're actually printing the money yourself in a sense, you're generating the Dai when you use it. And yeah, I could dive into the interface of how someone would go and generate a Dai stablecoin. I don't know. I could also talk about some of the use cases of Dai.

Rayhaneh Sharif-Askary: Definitely. I would like to do that in a second. So the bank analogy really works for me. It's obviously democratized and decentralized and when I want to go borrow money from a bank, I'm facing a centralized intermediary that is going to do a lot of diligence and do a lot of, I have to go through my credit worthiness for instance. And in this case, with the protocol you're solving for that preserving anonymity, using basically computation and collateralization, right?

Rune Christensen: Yeah, I mean, I think one thing that's really interesting to note is that, and in particular Maker, we are not anarchists trying to pull the rug on the system or something and build something completely new. So actually, Maker, it actually does a lot of similar things to regular finance, but it just then extends them with these advantages that are unique to DeFi such as being able to directly collateralize and borrow against cryptocurrency in this sort of instant, completely direct way. But Maker actually also does finance mortgages in a way that's very similar to how bank does it, which is where it basically, so the way it works in Maker is that it has collateral that is essentially tokens that contains little legal claim on physical assets in the US from a company called New Silver. That's the first example of this ever happening where New Silver, what they do is they're hard money lender, they lend out, they do short term mortgages and then they sort of get a claim on the real estate that is used as collateral for their loans.

And then they sort of turn around and basically tokenize that, turning it into a form that is compatible with the Maker system and then source their capital for Maker ultimately. And so this way, Maker is also able to funnel cheap credit directly to regular people, regular Americans that are doing some regular stuff like fix and flip short term mortgages. And in this case, of course it completely follows. It's fully compliant. So we're talking about regulated entities and everything being sort of the way that you used to with the only difference being at the very end, it's hooked up to this decentralized protocol that is just able to generate very cheap credit because ultimately, it has a decentralized, stablecoin that's used around the world. It's very popular and for that reason, has very low cost of capital.

Rayhaneh Sharif-Askary: Before we dig in more into the stable points, do you want to show us, why don't you take over the screen. I'm a very visual learner and I'm assuming that maybe folks on this webinar are too, so show us how folks interact with it. If a random person like me wanted to interact with it, what would that look like?

Rune Christensen: Absolutely. Yeah. Let me just show you, excuse me. This is one of the front ends that people use to access the Maker protocol. And one thing to note is that this is not kind of the official Maker website or something because there isn't even really such a thing. The Maker protocol itself runs with the blockchain and anyone can build services on top of it that accesses. So this is the most popular one, but there's actually a whole range of websites like this, that are also very high standard and used quite a lot. And so basically you simply go onto the website, connect your crypto wallet, which could be could any kind of Ethereum wallet, and then you can basically see you just have this direct access here to just all the different products that are basically available. So you can see here, I mean, so over here this is the asset, oh, sorry. You can use Ethereum, you can use Bitcoin. This is somewhat advanced-

Rayhaneh Sharif-Askary: The left is the asset that I use. So if I have a bunch of Chainlink, I can say, okay, I want to use Chainlink and if I want to borrow using Chainlink, I need to over collateralize, I need to do 165% collateralization.

Rune Christensen: Yeah, that's right. So you actually need to do at least 165% because that's where you get liquidated so-

Rayhaneh Sharif-Askary: Okay. That's the threshold. Got it.

David Grider: You guys have kind of different thresholds for each asset, right? Those are kind of set by community?

Rune Christensen:Yeah, that's right. So it's set by this decentralized governance process run by the Maker holders, which is how the whole thing works that it's possible to price this risk because there are people with skin in the game that are exposed to the income, but then also the risk of it. And one of the things to notice is that there are multiple versions of the same collateral because they can have different risk parameters. So you can have sort of cheaper collateral where you can borrow against Ethereum very cheaply with this ETH-C collateral type, but then you have to collateralize very highly. And then on the other hand, you can also borrow at 5%, so basically 10 times as high a rate, but then you can get much more leverage. You only get liquidated once you get down to 130%. And this is what we call collateral ratios of the inverse of LTB. So this is something like-

David Grider: And it's just like a mortgage where if I put 20% down, I can get a better rate, or if I want to put three, it's maybe cost me a little more. Super simple for folks, huh?

Rune Christensen: Yeah.

Rayhaneh Sharif-Askary: And can I think about the stability fee like an interest rate?

Rune Christensen: Yeah, that's right. One of the differences, one of the unique things is that you don't have to pay, or anything like that. It actually just net like automatically accrues on your position and there's no term limit. So some people, they actually borrow for only a couple of minutes and then paid back to do some kind of arbitrage. Whereas others, they actually literally never... I mean, they're users that have opened their positions since the beginning of the project and they just never sell because what they do is basically they just hold their assets and then instead of selling them and paying taxes, they just borrow against them and they just keep borrowing basically. And so it's very flexible in that sense. And that's also why there are so many just these basic building blocks here, Ethereum and Bitcoin that are these permissionless crypto collateral assets. They're being used in so many places across the entire blockchain and decentralized finance ecosystem in many different shapes and forms because there's such flexibility in them as sort of these building blocks or money legos as it's sometimes called. And actually I can show you-

Rayhaneh Sharif-Askary: If I open the vault. Yeah, keep walking us through an example. I think this is really helpful.

Rune Christensen: Yeah, I just wanted to... Well, so here you can see a chart of, as you can see, the 6.4 billion Dai in circulation. Here's a pie chart of the different types of collateral. This one over here shows all the assets locked in the protocol. This over here shows sort of what's the Dai actually backed by. And the one thing to notice is actually Dai is actually more than half 50% backed by USDC. So a centralized, stablecoin that's just one US dollar. So that means that Dai is actually very stable in the sense that there is a huge amount of just US dollars backing it. Although it's not ideal that the exposure is this high, but that's going to change very soon because of this recent trend of Maker being able to begin to actually do real world assets as collateral and do these things like mortgages, which are of course, incredibly scalable.

Rayhaneh Sharif-Askary: While we're here, can I ask, can we take a step back? Can I ask that you explain the two tokens associated with this protocol? You've been talking about Dai, so let's dig a little. Dai is a stablecoin, what's Maker? How does Maker fit in?

Rune Christensen: Yeah, so the best place to explain that with is background is this website called So this is where you go to check out what's happening with Maker. So MKR is the geometrical opposite of Dai. Dai is a stablecoin that regular people can use and you don't have to be a crypto expert to worry about crypto risks or anything like that. And there are lots of people that use Dai that have no idea that it's actually what they're using. That's sort of the source of stability under the hood in the FinTech ads that they're using. And MKR is kind on the complete opposite end of the spectrum because that's in a sense, it's the thing that ensures, or to use the bank analogy, it's like the bank equity that takes all of the risk in a system and ultimately keeps Dai stable.

Yeah, so like I explained earlier, there are these different risk parameters that you have to collateralize if a certain amount. And there's this process of if Maker goes out and does loans to mortgages in the US, we have to be able to pick the right ones and not just get into bad deals. And in all cases, it's MKR holders who decide that by voting and there's an open voting process where anyone can make proposals, but there's then a very sophisticated kind of pipeline that filters this and makes sure that it's a very professional process even though it's completely open. And then MKR holders, they can vote on that whenever there's a vote available. And the basic idea is that if they vote for good things and had achieved success and the protocols are earning a lot of money. And so right now, I can click on this and you can see this is the income accruing to the protocol right now.

So in stability fees, that's basically interest that the protocol is earning liquidations. That's basically what it earns when people get liquidated, which is quite high because it's meant to discourage people who can liquidate at all and use third party services. And then what actually ends up happening is that it became a big source of income for the protocol. Then there's also active trading in the market, trading Dai against other stable coins, which also generates a little bit of income.

And then this is actually kind of crazy in terms of what's happening in Ether, right? So this thing here is expenses and this is actually to pay for the full-time employees that the protocol has to retain to keep the protocol secure, to do business development and branding and education in South America and other areas where we are quite active and it's also legal experts and risk professionals. And all of these things are basically actually paid directly through the computer program itself in this completely decentralized manner. So there's actually no company anymore. Instead, there's something like 20 to 30 companies right now that all individually receive payments from the protocol. And I myself, I worked in the foundation which was this nonprofit, that bootstrap the whole system, but that foundation is now in the very last stage of dissolving and I actually left it a couple of months ago, so I'm not even working for the protocol in any sort of official capacity.

But the point is that the protocol basically pays for people to grow it and maintain it and then it earns income because of its activity. And that income then ultimately goes towards MKR holders in the form of a tokenomic system that's called buy and burn, which basically means that when there's a profit, the protocol takes that profit and purchase the MKR tokens and then destroys them, which is sort of analogous to a stock buyback except that it's not happening continuously. So you just constantly, this just a very small amount of buying pressure all the time equivalent to basically right now 36 million USD per year. And so that's how MKR holders gain value, which is great. But then they also deal with the flip side of this, which is they take the tail risk. So in extreme basically risk scenarios where, for instance, there are just under collateralized, like non-performing loans in the system essentially.

Then there's some sort of shortfall that means now that the stablecoins in circulation are not fully backed essentially, if there's not enough collateral. And then that gap has to be covered by the MKR holders, by inflating, by printing more MKR tokens and then selling them on the market to basically recapitalize the system. And so of course to avoid that, one of the main things that the MKR holders care about is having a very big reserve of cash that can take the first hit. And so that's the thing you can see here. Actually as it grows in real time from the income to the system. And there's a lot more to dive into in terms of how the governance works, but the basic idea is this concept of tokenomics that make decisions and then have skin in the game exposed to the upside and the downside.

David Grider: I think this is a good point, maybe why you just talked about that, the tokenomics and how that works to maybe emphasize a few things for folks just for perspective. So you obviously have all these assets, these assets are generating kind of fee revenue that kind of on the dot against from the Dai that you've issued, that's kind of going to buy back the Maker for folks. Just to recap then, so you have, let's just say here, 36 of really profit buy back of stock. It's kind of revenue but also kind of profit. So you're a 50 times almost kind of value multiple on the profit. For folks who maybe don't understand that maybe crypto isn't all Bitcoin right. Some of these things are economic and in 50 times, it's kind of in line with growth stocks and tech. Is that maybe one of the right ways to think about this and about a high level sense?

Rune Christensen: Yeah, and so this thing here says the profit that is pure profit, so the revenue is basically something like 60 million minus the 31 million expenses. So you get the true number, which is actually all this... That's pretty unique in crypto. Yeah, I believe that basically all of the projects in crypto, they have these huge piles of treasuries basically that pay for employees and all these expenses. So it's sort of hidden how much are they actually burning and no one really knows, but of course, one day the pile will run out and then the protocol will have to take over in some way. And basically, we decided to go through that transformation of making it completely transparent as early as possible. I guess because we were actually profitable. So it was possible to do it without, and still it wouldn't sort of harm how people viewed the stability of the project.

So basically what we did is we returned that big treasury and so now today the protocol owns something like 84,000 MKR tokens that were returned from the Maker Foundation and then instead the protocol took over these recurring expenses of paying for everything. Yeah. So it's pretty nice that we are crypto protocol that's actually profitable at this point. And I actually also think we are the only one. So most other projects in the space, when they do Lending, like what Maker does for instance, they have a very high cost of capital because they're not offering a currency, they're offering kind of a high yield product. And that's really the superpower of Maker is that our cost of capital is 0%. In fact, people actually pay a small spread to be able to lend to Maker at 0% and Maker then can turn around and lend that as at very, very low rates, but then still make this solid profit that allows the whole thing to be fully self-sustainable.

Rayhaneh Sharif-Askary: So if I go out, if I'm an owner of MKR, do I have a stake in the treasury and in this profit?

Rune Christensen: That's basically a question of the tokenomics. So the question is how does the cash flows of the protocol impact the value of the token essentially? And so in Maker today, the way it works is through the buy and burn, right? So basically what you essentially have is you-

Rayhaneh Sharif-Askary: You mean the governance token holder.

Rune Christensen: Yeah, the economic advantage is that you can sell the token to the protocol when it's out there buying at the market basically. And of course, as it buys more MKR tokens and contracts the supply, that's beneficial for the holders of as well. But all in all, I actually believe that if you look at other DeFi protocols out there, like I said, basically there's none of them that are actually profitable, but many of them have a much higher valuation than Maker.

And I actually attribute that to Maker having... I mean, we were the first one to ever invent any kind of tokenomics. So doing this buy and burn before anything like that ever existed back in 2015. And since then, there's been so much innovation on that front that you have other projects, they have a much higher valuation yet not even be profitable. And that a lot of that comes down to them having a much better way to distribute that value to their token holders than simply doing buy and burn, like what Maker is doing. So that's one of the things that the community right now is seriously considering is how can we just overhaul that aspect of the protocol? And then really start to capitalize on the fact that we are so profitable.

Rayhaneh Sharif-Askary: So when you talk about tokenomics, if you were going to just address a audience of folks that were used to investing in financial products, how would you in the most layman's terms possible, explain why MKR would be an investible asset?

Rune Christensen: I mean, basically, you really can think of it as being a computer that automatically runs a function that is analogous to a company doing stock buybacks, but it's just done by this automatic system that earns money directly through its own sort of code and then just directly buys its token on the market and reduces its supply over the time. So I mean-

David Grider: This is kind of huge, right? Because I mean, really, you're replacing banking with software and that's an incredibly large market and there's more of this stuff moves to crypto and on chain, this protocol can just kind of autonomously capture share, right?

Rune Christensen: Yeah, and that's where that superpower of the zero cost of capital for instance, which is no one else really has that in the space, but we are not even really tapping into a lot of these things yet just with the tokenomics. Maker has just been so focused on establishing the base system that really, really works and is secure. And that's at the point we're now and we are seeing this autonomous growth and autonomous income and profitability. And then the next phase is to think about how can you really expand that? And one of the things is in particular to then get into real world financial deals and then taking this zero cost of capital advantage and then allocating that to short term mortgages in the US or maybe, I mean, one of the things that I think has a big potential for is just allocating some of it into corporate bonds across the world so that you can really diversify your income stream and your exposure, but then that way, really just capitalize on the fact that you can borrow 0% and earn a return.

Rayhaneh Sharif-Askary: So taking a really big step back, and this might be a little bit of a remedial question, but I think it's important because these things are complicated. If I'm new to cryptocurrency and I'm accumulating some of, I'm buying Bitcoin or Ethereum or whatever else, how do I think about MKR in the context of those tokens? How do I think about a governance token versus those other types of tokens?

Rune Christensen: I think you can compare it somewhat to Ethereum in the sense that Ethereum has now entered this new phase where it actually is profitable, it has lot of positive cash flows, it also has burn space and its fees and once it moves past proof of work, it does this new upgrade, it will just purely self-earn a lot of income through its fees.

And then on top of that, Ethereum is also currency, which then makes it even more valuable and Maker basically is... It doesn't have that currency element to it because it has a lot of risk filled, but there's a lot of responsibility in the sense that there's the voting component and of course, you can delegate so you don't have to actively vote yourself. You can delegate your votes to someone else that sort does it professionally, but there is the tail risk of protecting the whole system and protecting a stability and arguably, it's basically Ethereum, but then higher risk and higher reward is the potential there. So it doesn't really function as a currency, but then it could have even more potential for positive cash flows and growth in those terms. And I guess... Sorry, go ahead.

David Grider: I was going to say just because you mentioned the Ethereum and kind of how they have staking and some of the way the fees are paid, you don't have to do anything with the Maker just to be clear for folks for the way the process works. The protocols automatically does it if you just hold it, it's different than when you have to stake or run or do anything like that, right?

Rune Christensen: Yeah, that's right. So you essentially hold it and then possibly delegate it to provide your voting power to someone else. And if you hold it and you don't delegate in that sense, you're basically just giving everyone else a due vote of your own voting power. But yeah, because it works through buy and burn, there's not even something like you receive tokens or receive dividends or whatever some other protocols do. You really just hold onto it and because the protocol is buying the token itself, that's how you basically get the reward.

David Grider: Yeah. Perfect. Thanks. And then, so Bitcoin, right? There's no economics like Ethereum like that, so that's maybe one of the differentiating features around it. Is that fair?

Rune Christensen: Yeah, I mean, Bitcoin, you can now compare Bitcoin to the Dai stablecoin, so kind of the product that Maker creates and in some sense, you could actually think of Maker as taking Bitcoin and splitting it up into two pieces because Bitcoin both has that universally used trusted currency element to it. But then it also has the speculative potential for value increase. And the problem is those two things kind of work against each other because you don't really want your currency to swing in value. But on the other hand, the value swings is mostly what drives people to use it so much. And then with Maker, you just split it up into two pieces. So you have the Dai stablecoin which is stable and it's what you use for currency. And then you have the MKR token which is unstable and speculative and which is what people that want the speculative exposure to crypto use.

And then there is this element of the Dai stablecoin being used to earn an interest. So all across the blockchain ecosystem, you can get very high rates on the Dai stablecoin, 5% is quite common. And the Maker protocol itself actually has the ability to offer a risk-free rate. So directly in the protocol itself can offer something we call a Dai savings rate. It's just that there's simply too much demand for it right now.

So we almost have the opposite problem, that there's too much demand and we're not able to place it into productive capital fast enough. And for that reason there, there's none of this risk-free rate act in the system right now, but that could change in the future. And that really means that there is this potential to grow in the same way that this viral value, cashflow driven growth where it's possible for the maker protocol to pay a good Dai savings rate, but then attracts more users to hold it and then with the additional capital, it can then go out and place them into assets that make an even greater return and then just continue the cycle of growing beyond what it's already doing.

And yeah, I mean-

David Grider: Can I ask one more question that builds on that Rune? So obviously DeFi is super composable and there's a lot of different DeFi applications, you guys being one of them, the first one and Dai is used and is probably one of the most used stablecoins in there. And can you maybe talk folks through a little bit how Dai is actually incorporated in some of the other protocols that really are built kind of interoperable with it and on top of it that kind of help generate those rates of return because people were wondering which stablecoins, how do these returns exist? Rates are so low. Maybe talk folks through what's going on there at those mechanics if you could.

Rune Christensen: Yeah, so there's sort of a part to it that not many people are aware of, but that explains where... I mean, you may have heard about these completely crazy interest rates that are possible to make in crypto, but first I'll just talk about this. The normal stuff, which is basically lending protocols or automated market making. So a lending protocol is where you basically, you deposit your Dai into the lending protocol and then the lending protocol pays you some interest rate of return and then it turns around and lends it out again to someone else at an even higher rate. And this other use of the borrower of the lending protocol deposits some collateral into the lending protocol. So it actually works like Maker, basically just with higher rates and then more aggressive risk parameters. So you can maybe do more leverage.

Rayhaneh Sharif-Askary: Oh, I think Rune froze for a second. I will take the opportunity to let everybody know I'm getting a few questions. Yes, there's going to be a recording, it's going to be sent around to everybody. Fear not. I'm seeing a bunch of questions come in. We're going to try to get to some of these. We're getting close to time and so we'll definitely get through the ones we can. But otherwise you can definitely feel free to reach out to us [email protected] or reach out to the investor relations team and we'll try to get your questions answered. We'll get them in front of Rune or the right people. Are you back?

Rune Christensen: Yeah, sorry.

Rayhaneh Sharif-Askary: There you are.

Rune Christensen: Yeah. And so what as I was saying is you have lending protocols where it lended out, you get high rates. The other thing is this really amazing innovation that came out of blockchain and DeFi, which is automated market making. So it's kind of being able to be a high frequency trader or market maker, sophisticated financial actor, except you just let a computer program do it for you, instead of having to have this super high-tech set up. And so there are lots of people that what they do is they basically just deposit Dai into these protocols and then the protocol will sit and trade the Dai for other stable coins and trade back or trade it for other risky assets and trade it back and then constantly earn a small interest rate from that as well. And this is the lower rate in DeFi and with Dai is generated, which is still quite high, it's still four to 5% is often possible, but then there's this additional component called yield farming that often is put on top of this.

And so yield farming is the concept of, it's basically the equivalent as if Maker gave MKR to users of the system. So you received free MKR tokens because you use Maker and Maker actually is... It's actually pretty much the only major DeFi protocol that does not do this. So everyone else, they do this in one way or another and that allows them to really boost their interest rates to become much higher and then attract a lot more users and sometimes also attract more people to their communities.

But of course, then it's also pretty expensive because ultimately, you're diluting your token holders in order to do this. But then Dai is one of the most popular assets to use for these kind of yield farming schemes and especially when it comes to really experimental, really cutting edge financial schemes basically, which often are, well basically always are extremely risky. Dai is kind of the currency that people choose to use for that because it's a decentralized stablecoin so you can just directly use it and you don't have to worry about Maker sort of shutting you down or something, deciding that you're not allowed to do that because that capacity simply doesn't exist in the system.

It just cannot control sort of... It doesn't have that centralized controlled or ability to censor, which is why it's so popular for innovation.

David Grider: So sort of recap for folks, DeFi is this economy of just a bunch of different applications across all of these different sectors, lending and stuff like you guys, trading, asset management and it's really kind of integrated now and Dai has just gone across that and has become this asset that people use and invest across it. And that's kind of the way that these returns are generated and this ecosystem is really kind of formed and it's kind of amazing, isn't it?

Rune Christensen: Yeah, I mean, I'm completely mind blown by what it's all grown into, especially considering that we were basically the first ones and then other people just started doing the same thing and it just exploded into this massive ecosystem. I mean, just completely unbelievably huge. And the secret is that because Maker is decentralized, anyone can build on top of it.

So from the beginning, as soon as we launched a stablecoin existed and then if someone else wanted to build some product, they didn't have to worry about how to provide stability to their users, they could just use what we had already built and they never had to come to me to ask for permission or fill out some forms or something. They just write the code and send it out there and if it's popular, it's going to succeed. And there are a lot of these rags to riches stories of people that don't have the typical Silicon Valley or the typical background you would expect for some financial innovator. For instance, one of the biggest DeFi applications in the world that builds on top of Maker and some of the others made was made by two Indian teenagers that were just sitting in India and with no connections, no money, no nothing, I never spoke to them. And then they built something on top of Maker and it became one of the most popular apps in the world now in DeFi.

David Grider: They probably couldn't do that with JP Morgan, huh?

Rayhaneh Sharif-Askary: So as we get a little closer to time, since we have so many audience questions and listener questions, I want to do a quick poll, which I actually should have run at the beginning because it does ask about the familiarity that folks have with the project, which hopefully has changed over the course of the last 45 minutes. So I'm going to do that and then I'm going to ask Rune to speak to us a little bit just about the vision and how he sees the user base changing over the next three or five years. And then we will go to questions. So let's see if I can pull this off with the new polling feature.

Rune Christensen: So Maker was from the beginning, the goal was we identified this potential blockchain, but we saw Bitcoin as not being able to really get into the real world because of the volatility. So our goal was to basically, how can we use all this amazing power of technology and actually benefit real people? And then that's where we realized we need then to create stable currency. So to sort of relevant and relatable and I mean, we've succeeded in, for instance, there's been this mass financial inclusion in Argentina where in particular in Buenos Aires, there's a lot of people that use Dai to escape hyperinflation. And there's across South America, there's a lot of people that use Dai for remittances and or in particular for USD exposure and digital basically banking, which is banking the unbanked as the term is. And that's what we were always really excited about.

But I think where I really believe the potential of this project can go is it's really about reforming the financial system and make sure that we can build more transparent base level infrastructure into how the way that global finance works. And actually, really the primary thing that I think now that sort of needs to be addressed by the financial system is sustainability and climate change. Because in some sense, that is actually cost ultimately by the financial mechanisms and incentives that right now are also extremely short-term driven, that you have the global economy not being able to see that it's kind of eroding its own ability to prosper.

And if you have a system like Maker where decision making is open and the data insight into what's actually happening is fully transparent, I think there's a much greater potential to evolve the financial system to something where it's able to consider its own long-term value rather than only its short-term value, which then should just be way better in the long run I believe. And so concretely, I'm really excited about the possibility of Maker being used to fund large scale renewable energy projects and there's one solar farm in the pipeline that is one of these early, very early real world asset projects that Maker is doing. And the advantage there is basically the fact that we have so much cheap credit available that we can allocate that to projects that don't necessarily provide high yields but instead provide some stable reliable value that is what you want to back a currency with.

Rayhaneh Sharif-Askary: I think that makes a lot of sense. And for us too, for me personally, the opportunity around financial inclusion has been a reason that since I've been in this space, call it three or four years has been exciting to me. So I think that what you guys are doing is really, really great. Onto the poll. So I'm launching this poll, what is your level of familiarity with decentralized lending platforms? Letting folks answer for a few minutes.

All right, here we go. And poll share results. So most people, this is interesting. This is a pretty sophisticated group I guess. Or we've just done Rune, it's your credit to you, you've done such a great job explaining it that almost half of the people on the webinar are feel like they're familiar and around 20% have actually... Apparently 20% or so have actually been involved and used these protocols own tokens and only 3% are like, what's a decentralized lending platform? So this is really promising. As we said, we are going to take some investor questions. So there are a ton here and please again, if we don't get to your question, reach out to us. I think I had, one of the questions that I thought was interesting was around digging in a little bit more into how specifically the liquidation thresholds are calculated. Can you talk a little bit more about that?

Rune Christensen: Yeah, so I'm not the right guy to explain it in detail because of course, there's an actual professional or a whole team of professionals that do that kind of work and I'm just an MKR holder. So from my perspective, it's really more of basically receiving recommendations from these experts that are hired and there are multiple groups that work independently to produce different recommendations basically that are then discussed publicly and then voted on. But sort of behind the scenes, I mean some of the models, I think the really basic fundamental models that are used are these quantitative models that basically, what do you call it? Simulate what's going to happen in different scenarios and then uses, what's it called? Value at risk to say how much are we willing to, are you willing to lose in what we consider the worst possible situation that could happen?

And one of the things that we like to do is also analyze crashes and the really worst market conditions that we've seen in the past and then sort of figure out how would a particular set of risk parameters do in that situation. And Maker in general has this big advantage that it's really lived through. It's quite old now, so it's been through some really crazy times. And actually, the risk parameters themselves, the liquidation thresholds and this stuff, they've actually always held it up.

So it's never been a time where there's even come close to the risk parameters themselves being a problem. We've had situations where we found out that it was of these technical, not actually bugs or anything like that, but more the way that certain technical pieces were set up made it so that it amplified issues and then it meant that the risk parameters were not behaving as... Yeah, basically the system wasn't behaving optimally. And then by testing that and sort of trying it out live, we were able to fix it. And which I think it's kind of interesting because I would've expected the opposite that we would've found that if you get a little bit too greedy and set too aggressive risk parameters, you'll get burned and you'll find out. But that's actually just never happened to us. And the quantitative models and these expert built models are just always held up so far.

David Grider: Can I ask a follow on to that, Rune, we didn't talk about how collateral gets liquidated and Dai gets bought back and retired and that's probably a key point that folks should understand, if you could talk about that.

Rune Christensen: Yeah, so what happens is, you got a position with debt to here and then you've got your collateral to here and at some point, they get too close to each other, you hit the liquidation ratio as we call it. The most common right now is 145%. So if the value, if you have a hundred debt and you have $145 worth of collateral, you've hit the point where you're going to get liquidated and then the system gives you two hours to fix that situation basically. And then after two hours, it liquidates you and then what happens is the first thing that happens is it applies a liquidation penalty of 13%. And so that's why we are making quite a lot of money from the liquidations because the liquidation penalty is there to make sure people don't rely on liquidations and just let the system take care of selling their assets for them and balancing their exposure with them.

So then the debt becomes a hundred, and in this example of a hundred dollars a debt, it becomes $113 of debt and then the protocol then activates a Dutch auction. So it basically, it puts the collateral for sale and then it starts at a very, very high price that's sort of significantly above the current market price. And that's because it's uses, it takes a very conservative approach that assumes that, yeah, because it's very careful about security, things work a little bit more clunky than normal because it can fall back, it can sort of recover from situations where it has bad data or it is confused. So it starts very, very high price above the market and then just counts down and Dutch auction. And then eventually someone will buy the collateral at the price and then if the system is able to recover the $113 of debt that it needs, then it takes whatever collateral is left over and just returns it to the user.

And then if it's not able to recover the $113 of debt, then it just sells all of the collateral. And if it goes below the hundreds or sort of goes below the principle of the original, the original debt that's outstanding and it's actually there to back the Dai that's in circulation, then it reaches a point where we'll eat into the surplus of the system. So the system reserves will have to then just make up the loss. And then in the worst case scenario where the system runs completely out of reserves and then sort of the reserves go negative essentially, then MKR tokens begin to get issued to then recapitalize and just get the reserves back to zero.

Rayhaneh Sharif-Askary: So I think we have room for one more. This one is interesting. How do I use this protocol to get a mortgage? Can you walk me through the process?

Rune Christensen: Yeah, so right now, we are not doing any real asset vaults, so vault is kind of a transaction of this type. So we're not doing any real-world asset deals I guess you can say for consumer mortgages. But we do have this example of New Silver, which is this New England based northeast US based hard money-lender doing the short term mortgages. And so basically, the way it works is that you would go to them and apply for a loan through them and you would not know or care about the fact that Maker is behind the scenes basically, but you would be getting a really good rate because they're borrowing an only 3.5% from Maker and so through that, their cost of capital, they're able to provide very competitive rates and that's kind of idea that the way that you would interact, you would sort of borrow from Maker in the real world would always be through some kind of regulated intermediary that's just getting sort of supercharged with by Maker on the backend.

In particular, it's often the real potential lies in segments that are underserved by the traditional system. So that's why for instance, this fix and flip example is that's a really good place to start because they have a hard time getting sourcing capital elsewhere, but we can kind of actually pay experts to review their model and review of the junior positions that's protecting us from risk and so on. And ultimately, be confident in extending this credit to them.

Rayhaneh Sharif-Askary: Well, I think we have to wrap. We are at time. Thank you so much Rune for joining us. Thank you everybody for dialing in. Again, if you have extra questions or you want to learn more about our grayscale DeFi fund, which does have MKR as a component, please reach out to us, [email protected]. We are happy to help. And thanks again for joining. Have a great rest of your day and rest of your week.

Rune Christensen: Thanks so much.

Rayhaneh Sharif-Askary: Bye everyone.


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