Talk to the core engineer of MakerDAO: RWA is a bull engine, and stablecoins are killer applications

Panelists: Sam Macpherson, MakerDAO Core Developer, and Tadeo, Developer Relations Engineer, Spark Protocol

By Sunny, Deep Tide TechFlow

"I think the whole financial system will eventually run on the blockchain, and then there will be no default in traditional finance, it will be just finance, and all transactions will be cleared on the blockchain. So, I don’t know how long this will take, but in my opinion, this is the inevitable future. ”

–Sam Macpherson, MakerDAO Core Developer

Background to the conversation

At this year’s Token2049 conference in Singapore, Rune Christensen, founder of MakerDAO, proposed the “ultimate plan”. The program aims to address scalability issues and inefficiencies within MakerDAO. The “Ultimate Project” proposes a shift in the role of Maker at its core. Instead of the Maker core directly pursuing various small projects and growth initiatives, it has shifted to a role more akin to a “wholesale creditor”. In this new role, Maker Core will provide loans or support to other sub-DAOs (Sub-Decentralized Autonomous Organizations) that will operate independently. These sub-DAOs are described as mini-versions of MakerDAOs, each focusing on different growth initiatives and projects. These sub-DAOs will be isolated and independent of each other.

Spark Protocol is an emerging sub-DAO that aims to build a DAI-focused lending protocol and has been integrated with MakerDAO. Sam Macpherson is the founder and CEO of Spark Protocol and previously served as a core engineer at MakerDAO. Tadeo is a Developer Relations Engineer in Spark. Since the end of 2022, Spark Protocol’s total value locked (TVL) has exceeded $1 billion. At the Istanbul ETH Developers Conference that ended last month, SparkFi sponsored ETHGlobal Istanbul with a prize of 20,000 DAI to reward the winning builders who made projects in the SparkLend category. The Spark team aims to build a decentralized lending engine with the goal of providing Dai’s users with the functionality and capabilities of a modern lending platform, as the existing MakerDAO core contract is considered somewhat outdated.

During Sam’s interview with Tadeo, we learned that Spark does not require third-party liquidity and is different from other DeFi lending protocols, the impact of on-chain U.S. bonds on the Web3 market, and whether stablecoins are the killer application of Web3.

Sam is a firm believer that Real World Assets (RWAs) will trigger the next full market average. The current interest rates in traditional finance are so high that basically all liquidity is sucked away from decentralized finance (DeFi). So the first step is to bring these rates on-chain, so the interest rates of decentralized finance and traditional finance will continue to be close until they match. Decentralized finance can only flourish again if interest rates are internalized into decentralized finance. Moreover, all this is already happening.

The following is a summary and summary of this interview:

Knowledge storage

MakerDAO:

MakerDAO is a decentralized autonomous organization running on the ETH blockchain. It is best known for its stablecoin, Dai, which is backed by collateralized assets. MakerDAO allows users to generate Dai by locking collateral in smart contracts, known as vaults or collateralized debt positions (CDPs).

Users can interact with MakerDAO through Web3 wallets and other decentralized applications such as Lido and Aave v3.

The stablecoin issued by MakerDAO has DAI become one of the top stablecoins by market capitalization.

DAI’s overcollateralization model:

Dai has been described as an “over-collateralized” stablecoin. This means that in order to create and maintain Dai, users need to deposit more collateral assets (cryptocurrency or other forms of value) than the value of the Dai they created. This overcollateralization serves as a security mechanism to maintain the stability of the stablecoin.

Importantly, the collateral that underpins Dai includes crypto-native assets (such as ETH) and other assets such as “sticky assets” (which may refer to stable assets within the MakerDAO ecosystem) and BTC. In addition, cash-like assets are included, which may be stable assets or fiat currencies.

Dai’s overcollateralization ratio is exactly 0 or equal to 1, unlike other stablecoins that require a higher collateralization ratio (e.g. 150% or 200%). This means that you can generate Dai with collateral equal to the amount of Dai you created. This is a unique feature of Dai.

MakerDAO’s native DeFi protocol: Spark

Since launching a modern lending engine within the MakerDAO ecosystem, Spark has experienced significant growth, making it one of the top 20 protocols for total DeFi value locked.

Subprime Lending Markets: Subprime lending markets, such as Compound and Aave, were mentioned in the interview, which allow users to borrow and borrow a variety of cryptocurrencies, including stablecoins such as DAI, USDC, or Tether (USDT).

Middleman demand: In these subprime lending markets, intermediaries or intermediaries (lenders) are needed to provide liquidity. These lenders need to have a certain reserve of assets (e.g., DAI, USDC) and seek to make a profit by lending those assets to borrowers.

Maker’s Role in Spark: The innovation introduced by Spark is that MakerDAO itself can act as a lender on this platform. In other words, instead of relying on profit-motivated individual lenders, liquidity is provided directly by MakerDAO.

Minting DAI: MakerDAO can mint DAI tokens directly to Spark’s lending platform. When users want to borrow DAI, they are actually borrowing directly from MakerDAO, similar to how MakerDAO’s internal vault system works.

Predictable borrowing rates: A major advantage of Spark is that users can borrow at a predictable interest rate set by MakerDAO. In contrast, in other secondary markets, interest rates can be highly volatile and dependent on the availability of liquidity. Sometimes interest rates can soar to very high levels, creating uncertainty for borrowers.

Governance process: Spark’s predictable interest rate is maintained through a well-defined governance process. Users are notified of any upcoming interest rate changes a few weeks in advance. This advance notification allows users to plan and adjust their positions accordingly.

Lowest interest rates: Due to MakerDAO’s massive liquidity (“unparalleled liquidity” as Sam noted), interest rates on Spark are expected to be among the lowest in the entire market. This makes borrowing more cost-effective for users.

The ins and outs of RWA

Historical Background: Two years ago, traditional banks and money market funds offered very low interest rates (about zero) to users who held USDC. This means that users are content to keep their USDC on the blockchain (on-chain) for various purposes, such as for trading ETH (ETH).

Variation: Over the past two years, traditional banks have started paying higher interest rates to their customers (5% in this case). This change in interest rates makes it more expensive to hold USDC on DeFi on-chain, as users are now unable to earn potential interest income by transferring USDC to their bank accounts.

Changes in user behavior: Due to this change in interest rates, users are more inclined to consider moving their USDC out of DeFi and into their bank accounts. This action takes liquidity (funds) out of the DeFi ecosystem and can impact DeFi projects and markets.

Tokenization of Treasury Bonds: To solve this problem, there is a mention of “tokenization of Treasury bonds”. This refers to the process of converting U.S. Treasury bonds into digital tokens that can be used in the DeFi ecosystem. Users can use these tokenized treasury bonds as collateral for lending and other DeFi activities.

Impact on DeFi Interest Rates: By introducing the Treasury rate (the interest rate on Treasury bonds) into DeFi through tokenization, users can now earn interest on their tokenized Treasury bonds while participating in DeFi activities. As more users use these tokenized assets as collateral, DeFi platforms are starting to offer higher lending rates and other service rates. The effect of this is to increase the base rate in the DeFi ecosystem.

Interest Rate Comparison: Sam mentioned that DeFi borrowing rates, which used to be close to 0%, are now typically between 3% and 4%. This means that DeFi’s lending rates have become competitive with the risk-free rates offered by the Treasury.

The next killer app to promote mass adoption

Web3 needs a killer app: Sam and Tadeo acknowledge the importance of having a compelling and widely adopted app (a “killer app”) that can drive the adoption and use of blockchain and cryptocurrency technology among everyday retail users. However, they admit that they don’t have a specific idea for such an application, but emphasize the importance of building the underlying infrastructure.

Current Retail Use Cases: Currently in the cryptocurrency space, the primary use case for retail users is seen as speculative investments, where individuals buy and hold cryptocurrencies in the hope that their value will grow over time. However, Sam believes this will change in the future as blockchain technology’s scalability solutions become more popular.

Stablecoins’ Potential: Tadeo noted that stablecoins have demonstrated potential as a retail use case. Stablecoins are digital assets designed to maintain a stable value, making them suitable for everyday transactions. They are considered a superior product to traditional fiat currencies, especially for cross-border payments, mainly due to the inefficiencies of systems like SWIFT and the high fees for international money transfers.

Challenges of stablecoins: Despite the potential of stablecoins, speakers mentioned that there are still challenges that need to be addressed. They expressed a desire to make improvements to the stablecoin to make it more practical and user-friendly for everyday transactions, such as buying coffee.

Both Sam and Tadeo believe that speculative investments and the use of stablecoins for cross-border payments are currently two prominent retail use cases, but there is room for improvement and innovation in making cryptocurrencies easier for everyday transactions.

Conclusion

Finally, when asked if more and more engineers are now opting in to Web3, Tadeo pointed to an interesting phenomenon, namely Commits and ETH Price Correlation Index. And as the price rises and falls, the number of submissions also rises and falls (the last month has not risen but fallen, which may be due to holidays). Therefore, as RWA drives the next round of bull market, it is believed that more and more developers will join the industry to promote the development of infrastructure.

Source:

Note: Protocol security

Sam acknowledges the existence of smart contract risks inherent within the DeFi space. However, they stressed that a wide range of precautions were taken to minimize these risks. This includes having their smart contracts subject to multiple audits by independent auditors and conducting internal reviews to ensure a deep understanding of the code. The goal is to provide the highest level of security for user funds and follow standard practices for smart contract development.