While ethereum’s price recently dropped by 25% from $160 to $120, dai didn’t move much for the first time since it launched a year ago.
The algorithmically dollar pegged token usually sees a decrease in its market cap (pictured above) in line with a decrease in eth’s price, but not this time.
That perhaps suggests the collateralizers – who perhaps can better be called the eth depositors – are becoming more sophisticated.
As a very new thing launched at the height of the December 2017 euphoria, ethereans necessarily needed some time to get their head around this unique collateralization system.
Is it just a margin, is it a loan, is it a hedging tool, is it a bank? Where are the arbitrage points? Can I profit from just the peth/weth difference? Is it safe? What is its real use?
Some ethereans say people just lock eth, get dai, buy more eth with it, lock that eth, in a loop. The stats, however, show something interesting:
We couldn’t get rid of those blue bars, but we can see dai transaction numbers have increased and quite considerably. At the same time dai’s velocity has decreased considerably, that being how much the same dai moves around.
From that, different people can draw different conclusions, but it does appear probable that the primary current use of dai is to hold it.
That would explain why dai’s market cap hasn’t really moved despite eth’s price fall in what appears to be the very first instance of such behavior.
People are basically kind of selling their eth, without actually selling it, rather than doubling down or trippling down through margins.
As a simple example, if you lock $300 worth of eth and draw out $100, eth’s price would have to fall quite a bit for you to be left with just $100. Until it does so, you kind of have $400 in total. If eth’s price increases, instead, then you have $400 plus whatever % increase.
That’s conceptually or in the abstract. What you actually really have, until you close the position, is $100. That $100 is yours whatever happens, with whatever here obviously meaning as long as dai still exists.
If you want to sell eth therefore for whatever reason, you would get more dollars if you do a plain sale and the price goes down, but you would conceptually lose if you sell and price goes up.
By locking it in dai, you may lose a certain % if price goes down, with just what percentage depending on how much you deposit and so on. You may gain, however, a certain percentage if price goes up.
One could, therefore, take a calculated bet that a bit less dollars for eth is worth it if price goes down because it might go up and they get more dollars for eth.
One can imagine however, in an abstract ideal world of no bugs and no reasonable uncertainty of your locked eth vanishing contrary to the intended rules, that one could put down so much collateral to the point it isn’t reasonably foreseeable they’ll get called.
We’re no where near that world, but if we were it might make sense to unlock some liquidity from the eth you’re going to hold anyway rather than making no use of it. You can then invest that liquidity into whatever.
It is probable that some of the above is what is currently happening with dai. Ethereans have now smartened up and have realized that you can get called, so they might be using it now more as a tool rather than as a leveraging turbo.
At the beginning there was only dai, but now there’s an entire small but fascinating natively digital financial ecosystem.
Close to 2 million eth is currently locked in these dapps with dai accounting for the vast majority of it because it is the oldest.
Compound comes second, seemingly making a comeback after a funds safu bug setback. The interesting newcomer is basically dai, but with more tokens options and with interest for your collateralized deposit.
This space has just begun and the potential innovation here can vaguely be foreseen. It’s all open and free with the only requirement being some thinking mind, so what kids will come up with we don’t know, but an easy one is dai, but for gold or stocks or oil or house prices.
Technically such dai should be pretty easy. You kind of point your oracles to the price of gold rather than the dollar. Something like oil, however, is less stable and something like an Apple stock or a Musk tweet can have more volatility than eth.
Volatility on top of volatility might make the “game” a lot more fun. If all this eth is being locked in this new finance, however, how does little Jimmy get his hands on this silly scarce digital code string?
That’s not even considering some will be locked into staking. On the other hand, an eth substitute is as easy as changing a comma somewhere and walla, eth classic squared. But the comma won’t be able to walla the mindshare.
One can easily imagine an Owen Jones 2.0 waving the crypto commie flag some years down the line if all this eth is locked away in digitally native finance with the unwashed masses unable to touch it.
The beauty of eth, however, is that the unwashed masses and the washed ones are ethereum. The many and the few. The commies and the nazis. The natives and the immigrants. The free and the unfree. Every single one of them is or can be “ethereum.”
It is in fact the most direct democracy imaginable very much in action. Reasonable debate can well conclude perhaps a 2% new issuance rate is necessary. That staking maybe should be complemented by something, and so on.
We can’t know what experience has not yet taught us. Especially where it concerns this very new area of natively digital finance which in many ways appears to be conceptually fascinating as far as the many foreseeable potential methods to upgrade and open the financial system are concerned.
The algorithmically dollar pegged token […]