Dai has been live for more than a month, and we are proud to observe its ongoing stability thus far. This marks a major milestone in our years of effort to bring Ethereum its first stablecoin.
There have already been many interesting real world stories of how the members of the Maker community have utilized the system in innovative ways: we have heard stories of people refinancing their houses, taking out a loan to buy a new car, and even financing the creation of a small business — all done using decentralized, ETH-backed loans.
Single-Collateral Dai will continue to roll out through the spring, leading up to the final transition to the scalable Multi-Collateral Dai this summer.
Increasing the Debt Ceiling
The Debt Ceiling, which is the total amount of Dai that can be issued, was initially set to 50 million at the launch of Single-Collateral Dai. The Debt Ceiling is a system parameter that is controlled directly through MKR voting by the Maker community. Voting still isn’t available in an easy to use interface, so the core team is taking responsibility for actively voting to manage the risk parameters in the critical early phase of the system. We initially set the debt ceiling parameter at the relatively low 50 million in order to guarantee the system wouldn’t grow too big before it has been fully proven in the market.
Now that the codebase has been open source and publicly scrutinized for more than a month, and running live with millions of dollars without any concerns, we are analyzing the viability of increasing the debt ceiling of Single Collateral Dai in the short term with a modest amount, such as a doubling it in capacity to 100 million.
Activation of the Target Rate Feedback Mechanism
We are working with integration partners to begin using Dai in large scale pilot programs, which will help drive its usability in the real economy. However due to the anticipated surge of demand caused by these integration efforts, we expect to reach the 50–100 million debt ceiling over the course of the spring. When the debt ceiling is hit, users will only be able to open new CDPs as existing CDPs are closed.
An important consequence is that the Dai supply will no longer be able to grow to meet additional demand. If nothing was done, this would threaten the stability of Dai. One month ago, at the launch, we announced that in the event that the debt ceiling was hit we would trigger global settlement of the system. However, this would be very disruptive to partners who are testing their system with Dai. Thus, rather than triggering global settlement, we have decided to activate the Target Rate Feedback Mechanism (TRFM) when the debt ceiling is hit. The TRFM allows the system to remain in a stable equilibrium even with a fixed supply of Dai. Global settlement will still occur with the transition from single- to multi-collateral Dai.
How the TRFM works:
While Dai is pegged to the US dollar, it means that the Target Price of Dai is $1, and the Target rate is 0%. Target price means the internal value of Dai in system, used to calculate how much Dai can be generated from collateral, and is the amount of collateral Dai holders will be able to claim per Dai in the event of global settlement. Target Rate is the change in Target Price over time; if the Target Rate is 0%, Dai is soft-pegged to the current Target Price.
When the TRFM is activated, the Dai target rate will no longer be 0%. This will cause the Target Price to move away from $1, meaning that Dai would be de-pegged from the US dollar, but still be denominated in USD.
The TRFM changes the Target Rate based on the measured imbalance between Dai supply and demand. If there is too much demand for Dai, market dynamics will cause the market price to exceed the Target Price. The TRFM then responds by decreasing the Target Rate, making it less attractive to hold Dai, decreasing the demand until a stable equilibrium is found where the Dai market price is equal to the Target Price.
If there is too little demand for Dai, meaning the Dai market price is lower than the Target Price, the Target Rate will instead be adjusted upwards by the TRFM, making it more attractive to hold Dai and thus increasing the market price until it is back in line with the Target Price.
If the debt ceiling of Dai is reached, there will tend to be too much demand for Dai while there is a cap on the supply. This means the TRFM will drive the Target Rate down significantly, likely making it negative. A negative Target Rate means that Dai holders will lose money over time in exchange for the opportunity to hold Dai. Effectively, Dai holders will compete to see who is willing to pay the most for the limited bandwidth of stability that Dai offers.
Activation of the TRFM is done by MKR holders voting to change the Sensitivity Parameter to a nonzero value. The Sensitivity Parameter limits how quickly the Target Rate can change over time, and guarantees that the TRFM isn’t able to surprise Dai holders with a sudden steep loss of value. As an example, the Sensitivity Parameter can be set so Dai holders won’t experience a Target Price drop of more than 2 percentage points in the first month.
The state of Single-Collateral Dai can be considered similar to the limited scalability of pre-Casper Ethereum. Fees on transactions are very high when there is high demand for the limited capacity of the Ethereum Network. Just like how sharding will help relieve the scalability and fee problems of Ethereum, the launch of Multi-Collateral Dai this summer will be our scalability solution and allow the system to sustainably maintain a 1:1 Dai/USD soft peg.
The Dai Upgrade Process
When the community upgraded from Sai to Single-Collateral Dai, users were able to easily swap their Sai to Dai 1:1 on OasisDEX. This is because the Target Price of both stablecoins was $1. For the upgrade from Single-Collateral to Multi-Collateral Dai, we will be able to offer a similar user experience. The only difference will be that, because we expect to have activated the TRFM, the upgrade ratio likely won’t be 1:1. Since the Target Price of Single-Collateral Dai will be determined by emergent market dynamics, we cannot predict what the ratio of Single- to Multi-Collateral Dai will be when it launches this summer. As an example: it could be that 1 Single-Collateral Dai will be upgradeable to 0.95 Multi Collateral Dai. In any case, we will ensure that upgrading is a simple one-click process.
As always, we are extremely thankful for the support of our community. The vision that we share for a stable cryptocurrency will change the landscape of decentralized applications forever. This project has come a long way, but 2018 is sure to be the biggest year yet.