The MakerDao claims to do the impossible with two cryptocurrencies. The cryptocurrencies are the Single Collateral Dai (SAI) and the Multi-collateral Dai (DAI).
The impossible is a cryptocurrency with no volatility. Specifically, MakerDao promises “financial freedom with no volatility” at its website.
I think that claim is bullshit because you cannot have a market without volatility. To explain, the Merriam-Webster dictionary defines volatility as the “quality or state of being volatile.”
To elaborate, markets are always volatile and both the Sai and Dai trade in the cryptocurrency markets. Thus, the Sai and Dai are volatile and there is nothing MakerDao can do to prevent that volatility.
Yes Volatility affects all Cryptocurrencies
Consequently, volatility affects all cryptocurrencies. However, you can make a cryptocurrency less volatile.
MakerDao reduces volatility the Singe Collateral Dai’s (SAI) volatility by “pegging” it the US Dollar. Essentially, the Single Collateral Dai is a stablecoin.
A stablecoin is a cryptocurrency that contains a mechanism that automatically pays recipients in a fiat currency. Note: a stablecoin does not contain dollars or Euros as many people think.
How to Make Cryptocurrencies less Volatile
You can reduce a cryptocurrency’s volatility by linking it to a strong fiat currency such as the US dollar or the Euro.
However, volatility affects all fiat currencies; and all cryptocurrencies. Volatility affects all currencies because they trade in the currency markets (FOREX).
Fiat Currencies Suffer Volatility
There is no way for a government or central bank to keep a currency from trading in the markets. Interestingly, the People’s Bank of China (PBOC) limits trading in the Yuan by limiting yuan trading and banning cryptocrrency trading in the People’s Republic.
In detail, the PBOC tries to limit yuan trading to a narrow range of 2%, CNBC reports. Volatility still affects the yuan, because the yuan trades in offshore markets the People’s Bank of China (PBOC) cannot control.
Consequently, there are two yuans; the offshore yuan and the onshore yuan, with different prices. The onshore yuan trades in the PBOC sanctioned markets, the offshore yuan trades elsewhere.
China pays a terrible price for this monetary policy because Mr. Market priced the Yuan at 14₵ on 30 January 2020. In contrast, Mr. Market priced the Euro at $1.10 on the same day.
I think one reason for the higher price of the Euro and the dollar is the refusal of the U.S. Federal Reserve and the European Central Bank to tinker with the currency markets.
Cryptocurrencies and Volatility
Cryptocurrency creators such as Maker Dao cannot replicate the PBOC’s power over the markets. However, altcoin builders can make crypto more stable by limiting supply and linking their coins to fiat currencies.
For example, they only link the Single-Collateral Dai (SAI) to the US dollar. The hope is that dollar’s strength will rub off on the SAI.
Additionally, they link the Multi-Collateral Dai (DAI) to a basket of fiat currencies. Maker Dao hopes to limit volatility with diversion through this strategy. The hope is that a strong Euro could make up for a weak dollar or vice versa.
Interestingly, the strategy behind the Multi-Collateral Dai is not new. The great economist John Maynard Keynes proposed a similar mechanism with his “bancor” proposal during World War II.
The bancor was a proposal for an international currency based on a package of precious metals. They based today’s Bancor (BNT) cryptocurrency on Keynes’ bancor plan.
What Value does the Single Collateral Dai have?
CoinMarketCap listed the Single Collateral Dai (SAI) as its 127th most valuable cryptocurrency on 31 January 2029
In detail, CoinMarket gave the Single Collateral Dai a Coin Price of $1.01, a Market Capitalization of $24.984 million, and a 24-Market Volume of $316,564 on the same day. In contrast, Bancor’s Liquidity Network gave the SAI a Coin Price of $1.01 , a 24-Hour Market Volume of $6,478 and a Liquidity Depth of $87,117 on 31 January 2020.
They designed the Bancor Liquidity Network to make cryptocurrencies easier to convert by offering Liquidity or cash value to support the altcoins. Hence, the Liquidity Depth is the cash value of a cryptocurrency in Bancor’s network.
I think MakerDao is trying to build a similar trading system through its Oasis decentralized finance hub. I think MakerDao’s hope is that the Multi-Collateral Dai (DAI) could function as a Bancor (BNT) for fiat currencies.
Interestingly, the Single Collateral Dai participates in Bancor’s Liquidity Network. Hence, MakerDao is trying to tap Bancor. Thus, I think the Single Collateral Dai is a good stablecoin but I cannot see how it is better than competing stabelcoins such as Tether (USDT).
What Value does the Multi-Collateral Dai (DAI) have?
Determining the Multi-Collateral Dai’s value is tough because I cannot tell what currencies MakerDao links it to.
However, CoinMarketCap listed the Multi-Collateral Dai (DAI) as the 53rd most valuable cryptocurrency on 31 January 2020. In detail, CoinMarketCap gave the DAI a Market Capitalization of $106.583 million, a 24-Market Volume of $18,178, and a Coin Price of $1.00 on that day.
In comparison, CoinBase gave the DAI a Market Capitalization of $106.3 million, a 24- Market Volume of $18.3 million, and a Coin Price of $1.00 on the same day. Interestingly, CoinBase lists the Multi-Collateral Dai’s all-time high CoinPrice at $1.37.
In conclusion, I think the DAI and SAI are good cryptocurrencies. However, MakerDao is making questionable claims about both altcoins. Thus, speculators need to be leery of the DAI and SAI, because there is no evidence MakerDao can reduce their volatility.
Originally published at https://marketmadhouse.com on January 31, 2020.