Introducing the New Whitepaper for the Dai Stablecoin System

December 10, 2017

It has been nearly 3 years since MakerDAO was first announced alongside the first iteration of the stablecoin Dai (formerly called eDollar).

We have reached a major milestone, and are very excited to share that Maker and Dai will be officially launching on the Ethereum Mainnet December 17. Today, we are releasing a white paper which describes the exact design and features that you can look forward to on Dai launch, as well as a roadmap for the future of Dai.

The new, updated whitepaper can be found here:

This post is to highlight the specific changes that you can look forward to with the final Dai design. We also share insights into which early Dai features are temporary and will be upgraded at a later date.

1 USD soft peg

When Dai was first announced, it was actually called eDollar and was meant to always be pegged to 1 USD. After a while we decided that the USD peg should only be temporary, later to be replaced by something that’s guaranteed to be stable forever, regardless of the outlook of the US economy. To emphasize this change, the stablecoin was renamed Dai.

Dai will initially launch with a 1:1 USD peg. In the event of extreme market factors (such as a permanent imbalance between Dai holders and CDP holders), we have included a mechanism that can be activated in the short term, and allows the system to sustain itself in such conditions. This is called the Target Rate Feedback Mechanism, and activating it will move the Dai off the 1:1 USD peg without causing further disruption to the system.

We are actively researching and designing our own dynamic, low-volatility currency basket that performs better than both USD and SDR in terms of average volatility against world currencies. Thus, the plan is to move off the USD peg at some point the future.

When Dai moves away from being USD pegged, the role of USD pegged stablecoin will be replaced by a second-layer stablecoin that will be pegged 1:1 with USD and backed by Dai as collateral. There will of course also be other second-layer, Dai-backed stablecoins pegged to major fiat currencies, such as Euro, Pound, Yen and so on.

Single-Collateral Dai vs Multi-Collateral Dai

The Dai deployment that will launch on December 17 is a modified version of the prototype stablecoin system known as Sai. Basing the first version of Dai on the Sai codebase means that we can launch Dai much faster, and with higher confidence in its security, but it also means that there are a number of differences that will need to be upgraded later.

The biggest difference between the initial version, called Single-Collateral Dai, and the long running version, called Multi-Collateral Dai, is that the initial version only uses one type of collateral, whereas the final version scales to support an arbitrary number of collateral types. The type of collateral used for Single-Collateral is Ether, but wrapped in a special smart contract. This special Ether-derived collateral type is called Pooled Ether, or PETH for short.

Pooled Ether

PETH is the most striking of the temporary mechanisms that are in place during Single-Collateral Dai, and will be replaced completely in Multi-Collateral Dai.

The main reason for why PETH exists, and why Single-Collateral Dai works the way it does, is that the underlying code is very simple, making it significantly easier to write securely and easier to audit for security flaws. This allows us to release Single-Collateral Dai in 2017, confident that it can scale to hold billions of dollars in collateral without fear of vulnerabilities in the code.

The core feature of PETH is that it acts as the recapitalization resource of Dai, in place of MKR. This means that if CDPs get liquidated without enough collateral value to cover their outstanding debt during Single-Collateral Dai it is PETH holders who have their proportional ETH claims diluted (and not MKR holders). This means that there is an extra risk to holding PETH and using PETH as CDP collateral — your own PETH holdings could be negatively affected by a sudden, steep crash in the market price of ETH.

There is also a benefit to holding PETH, as it gains value if CDPs are liquidated with excess collateral value remaining to cover their outstanding debt. The liquidation process generates a surplus from the Liquidation Penalty that is distributed equally to all PETH holders. This surplus creates a special incentive for keepers, who trigger the liquidations in the first place, to also turn their Ether into PETH during the liquidation, and then immediately turn it back to ETH once the liquidation has processed. This allows them to capture some of the value gain from the Liquidation Penalty, and means that the Liquidation Penalty surplus is split between CDP holders and Keepers.

Once the system is upgraded to Multi-Collateral Dai, PETH will no longer exist. Regular ETH can instead be used as one of the available collateral types, and MKR takes over the role as the recapitalization resource.

Boom and Bust Liquidity Providing Contract

Instead of using collateral auctions and debt auctions, Single-Collateral Dai uses a Liquidity Providing Contract to buy and sell collateral (in the form of PETH) for Dai when it is needed for liquidations. A Liquidity Providing Contract (LPC) is a smart contract that anyone can trade instantly with according to a price feed, as long as the LPC has funds available. When a CDP is liquidated in Single-Collateral Dai its PETH collateral immediately goes on sale according to the Single-Collateral Dai ETH/USD price feed. A Risk Parameter known as the boom/bust spread modifies the price that the LPC sells at. If the Boom/Bust spread is negative, it means the LPC will sell below the market rates, creating instant arbitrage opportunities for Keepers that they are incentivized to exploit the second they become available.

Global Settlement

One of the biggest security features of Dai is called Global Settlement. This feature was originally tested and introduced with the Sai prototype deployments, as a way to facilitate an upgrading process from one system to the next.

Global Settlement is described in detail in the whitepaper, and is a crucial security feature of the system that allows us to deal with market irrationality, upgrade the system infrastructure to Multi-Collateral Dai, and most importantly is the first line of defense against hackers and crypto-economic attacks against the Maker Platform.

Price Feed Sensitivity

The other new security feature that has been added to the Dai Design and will be added to Single-Collateral Dai (however it will not be present at launch and will instead be added to the system while it’s running in-place), is Price Feed Sensitivity. It is really the icing on the cake in terms of crypto-economic security of the system, because in conjunction with Global Settlement it allows us to mitigate the majority of the damage from even the most serious attack scenarios: If an attacker manages to compromise and control a majority of the Oracle infrastructure, which is arguably Makers weakest point.

However with Price Feed Sensitivity, MKR voters can choose the upper bound of how quickly oracles can affect the system, and this allows us to protect the system even after an attacker has already taken control of a majority of the oracle nodes with minimal damage, by doing a global settlement in time before the effective internal price feed values have changed much.

Next Steps

Since this white paper release primarily focuses on the Single-Collateral Dai mechanics, it is not going to be the last white paper iteration, but it is an important step on the road towards it. An updated white paper that focuses only on Multi-Collateral Dai and doesn’t mention the mechanics exclusive to Single-Collateral Dai will be released during the last stage of preparations for switching to Multi-Collateral Dai, and will be developed in conjunction with the formal specification of the system, called the Purple Paper.

Dai release

Stay tuned for more updates and publications coming out about Dai, Maker and the December 17 launch. We have a large amount of exciting announcements to make over the next week leading up to the launch.

December 10, 2017