‘Impossible’ To Arbitrage MakerDAO Dai, But That's Not Its Purpose

Colin Muller

A recent investigation by independent crypto researchers Hasu and Su Zhy has concluded that the Dai (DAI) algorithmic stablecoin is not an effective vehicle of high frequency arbitrage trading, and thus cannot rapidly scale. The investigation considers Dai to be less like Tether (USDT), and more like “a highly efficient, decentralized version of [crypto-lender] BlockFi.”

In Brief

Dai, also known as MakerDAO Dai, is a stablecoin pegged to the US dollar - almost. In fact, MakerDAO Dai is comprised of two separate coins: The Dai stablecoin itself, and the Maker (MKR) token, which is used for transaction fees associated with creating and burning Dai tokens (MKR also gives voting rights in the Maker ecosystem).

While not always keeping a perfect peg to $1, the Dai has overall proved to be incredibly resilient during the massive price falls of 2018, seeming to quash early fears that the coin was unstable and doomed to fail.

daichart.png(source: CryptoCompare)

Slow Cycle

But even if Dai seems to work as designed, it doesn't really work quickly.

Aside from buying Dai tokens on the open market, the only way to get Dai is to lock up Ether (ETH) tokens (more options are planned).

But the process is heavily collateralized: To get $1 of Dai, users must lock-up $1.50 worth of Ether. And get that Ether back out of the Dai contract, users must also pay a fee in MKR tokens.

The process ultimately operates at a premium, in that it is difficult enough to break perfectly even when using Dai, let alone profit. For these reasons, Hasu and Su Zhy consider professional arbitrage categorically “impossible” for Dai. And since arbitrageurs can have no attraction to this particular stablecoin - preferring the instant, limitless liquidity of centralized stablecoins like Tether - in the authors’ opinion Dai has little potential to scale rapidly.

None of this presents a problem to the authors, however, as the Tether-like use case “was never the goal, to begin with.” Instead, the primary use cases for Dai, they argue, are long leverage, tax arbitrage, “treasury/payroll management for ICOs,” and overall “censorship resistant stability for anyone holding a volatile censorship resistant asset.”

Bullish

CryptoGlobe reported late last year on MakerDAO Dai’s growing adoption and usage, at one point growing by 50% in only two weeks and locking-up about 1.4% of the entire Ether supply.

ethsupply.png(source: Mkr.tools)

This trajectory has hardly changed since then, with the Ether supply committed to Dai growing by about 26% to over two million ETH. Hasu and Su Zhy believe that this growth all came from “a natural demand for debt.”

Coinbase Makes Stablecoin USD Coin (USDC) Trading Available in 85 Countries

On Tuesday (May 14), digital asset exchange Coinbase announced that it had expanded support for USD Coin (USDC) crypto trading in both Coinbase Consumer (Coinbase.com) and Coinbase Pro to 85 countries.

This is how Coinbase announced the news today (at 14:06 UTC) on Twitter:

As CryptoGlobe reported on 26 September 2018, "USDC Coin" (USDC for short) was launched on that day by Goldman-funded FinTech startup Circle Internet Financial (better known as "Circle"). This is a regulated fully-collateralized dollar-backed stablecoin that was originally announced on 16 May 2018. USDC is based on an open source fiat stablecoin framework developed and governed by the CENTRE project.

Circle said at the time that the problems with existing fiat-backed solutions (such as Tether's USDT) were that they "have lacked financial and operational transparency, have operated in unregulated jurisdictions with unknown banking and audit partners, and have been built as closed-loop ecosystems and closed proprietary technologies."

In contrast, Circle's USDC stablecoin deals with these issues by "providing detailed financial and operational transparency" and "operating within the regulated framework of US money transmission laws, reinforced by established banking partners and auditors." USDC tokens are ERC-20 compatible (meaning that they run on the Ethereum blockchain); they are minted, issued, and burnt/redeemed based on network rules defined by CENTRE. 

Then, on 23 October 2018, Circle announced that Coinbase (another member of the CENTRE consortium) was making USDC available to its customers on Coinbase Consumer and Coinbase Pro, and that customers could "tokenize dollars into USDC and redeem USDC into dollars through both Circle and Coinbase."

In a blog post titled "Expanding USDC crypto trading globally", Coinbase said that:

  • It was making USDC trading available on Coinbase Consumer and Coinbase Pro in 85 countries.
  • It was doing this to help "accelerate the global adoption of crypto trading" and to provide wider access to "a stable store of value."
  • There are more than 300 million USDC tokens currently in circulation today, and that USDC is supported by 100+ ecosystem partners.
  • Stablecoins "have the potential to materially improve the lives of people in countries where inflation is eroding wealth." It mentioned Argentina and Uzbekistan as two examples of such countries.
  • Coinbase serves customers in 103 jurisdictions, 50 of which were added today: 

    Angola, Armenia, Aruba, Bahamas, Bahrain, Barbados, Benin, Bermuda, Botswana, Brazil, British Virgin Islands, Brunei, Cameroon, Cayman Islands, Costa Rica, Curaçao, Dominican Republic, Ecuador, El Salvador, Ghana, Guatemala, Honduras, Jamaica, Jordan, Kazakhstan, Kenya, Kuwait, Kyrgyzstan, Macau, Maldives, Mauritius, Mongolia, Montenegro, Namibia, Nepal, Nicaragua, Oman, Panama, Paraguay, Rwanda, Serbia, South Africa, Taiwan, Trinidad and Tobago, Tunisia, Turkey, Uganda, Uruguay, Uzbekistan, and Zambia​

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