Guests: Sam Macpherson, MakerDAO Core Developer; Tadeo, Spark Protocol Developer Relations Engineer
Author: Sunny, TechFlow
“I think the entire financial system will eventually run on the blockchain, and there will be no more defaults in traditional finance; it will just be finance, and all transactions will be cleared on the blockchain. So, I don’t know how long it will take, but in my opinion, it’s an inevitable future.” --Sam Macpherson, MakerDAO core developer
Background of the conversation
At the Token2049 conference held in Singapore this year, MakerDAO founder Rune Christensen presented the "Ultimate Plan". The plan aims to solve the scalability problems and inefficiencies within MakerDAO. The "Ultimate Plan" proposes a shift in the role of Maker Core. Instead of Maker Core directly pursuing various small projects and growth plans, it will shift to a role more like a "wholesale creditor". In this new role, Maker Core will provide loans or support to other sub-DAOs (sub-decentralized autonomous organizations), which will operate independently. These sub-DAOs are described as mini versions of MakerDAO, each focusing on different growth plans and projects. These sub-DAOs will be isolated and independent of each other.
Spark Protocol is a child DAO that is being formed to build a DAI-focused lending protocol that has been integrated with MakerDAO. Sam Macpherson is the founder and CEO of Spark Protocol and was previously a core engineer at MakerDAO. Tadeo is a developer relations engineer in Spark. From the end of 2022 to date, Spark Protocol's total value locked (TVL) has exceeded $1 billion. At the Istanbul Ethereum Developer Conference that ended last month, SparkFi sponsored ETHGlobal Istanbul with a prize of 20,000 DAI to reward the winning builder who made a project in the SparkLend category. The Spark team aims to build a decentralized lending engine with the goal of providing the users of Dai with the functionality and capabilities of a modern lending platform, as the existing MakerDAO core contract is considered somewhat outdated.
During the interview with Sam and Tadeo, we learned that Spark does not require third-party liquidity, which is different from other DeFi lending protocols, the impact of U.S. debt on the chain on the Web3 market, and whether stablecoins are the killer application of Web3.
Sam firmly believes that real world assets (RWAs) will trigger the next full market average. The current interest rates in traditional finance are so high that they basically suck all the liquidity out of decentralized finance (defi). So the first step is to bring these interest rates on-chain, so the interest rates of decentralized finance and traditional finance will continue to approach until they match. Only by internalizing the interest rates into decentralized finance can decentralized finance flourish again. And, all this is already happening.
The following is Shenchao’s summary and conclusion of this interview:
Knowledge Collection
MakerDAO:
MakerDAO is a decentralized autonomous organization that runs on the Ethereum 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, which are called 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 DAI issued by MakerDAO has become one of the top stablecoins in terms of market value.
DAI’s overcollateralization model:
Dai is described as an "overcollateralized" 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 create. This overcollateralization acts as a safety mechanism to maintain the stability of the stablecoin.
Importantly, the collateral backing 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 Bitcoin. In addition, cash-like assets are also 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 (such as 150% or 200%). This means that you can mint Dai with collateral assets equal to the amount of Dai you create. 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 in DeFi for total value locked.
Secondary Lending Markets: The interview mentioned secondary lending markets such as Compound and Aave, which allow users to borrow and lend various cryptocurrencies, including stablecoins such as DAI, USDC, or Tether (USDT).
Intermediary Need: In these secondary lending markets, intermediaries or middlemen (lenders) are needed to provide liquidity. These lenders need to have a certain amount of asset reserves (such as DAI, USDC) and seek to make a profit by lending these 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 individual lenders with profit motives, liquidity is provided directly by MakerDAO.
Minting DAI: MakerDAO can mint DAI tokens directly onto Spark’s lending platform. When a user wants to borrow DAI, they actually borrow directly from MakerDAO, similar to how MakerDAO’s internal vault system works.
Predictable borrowing rates: One of the main advantages of Spark is that users can borrow at predictable interest rates set by MakerDAO. In contrast, in other secondary markets, interest rates can be highly volatile and depend on the availability of liquidity. Sometimes interest rates can spike to very high levels, creating uncertainty for borrowers.
Governance Process: Spark’s predictable interest rates are maintained through a clearly defined governance process. Users are notified weeks in advance of any upcoming interest rate changes. This advance notice allows users to plan and adjust their positions accordingly.
Lowest Interest Rates: Due to the massive liquidity on MakerDAO (“unparalleled liquidity” as Sam points out), interest rates on Spark are expected to be 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 (around zero) to users who held USDC. This meant that users were content to keep their USDC on the blockchain (on-chain) for various purposes, such as trading Ethereum (ETH).
Changes: Over the past two years, traditional banks have begun paying their customers higher interest rates (5% in this case). This change in interest rates makes it more expensive to hold USDC on DeFi chains, as users are now unable to earn potential interest income by transferring USDC to their bank accounts.
User behavior changes: Due to this change in interest rates, users are more likely to consider moving their USDC out of DeFi and into their bank accounts. This action removes liquidity (funds) from the DeFi ecosystem and may affect DeFi projects and markets.
Tokenization of Treasury Bonds: To address this question, some people mention the “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 begin to offer higher lending rates and other service rates. The effect of this is to increase the base interest rate in the DeFi ecosystem.
Interest rate comparison: Sam mentioned that DeFi's lending rate, which used to be close to 0%, is now generally between 3% and 4%. This means that DeFi's lending rate has become competitive with the risk-free rate provided by the Treasury.
The next killer app for mass adoption
Web3 needs a killer app: Sam and Tadeo acknowledge the importance of having a compelling and widely adopted application (a “killer app”) that can drive adoption and usage of blockchain and cryptocurrency technology among everyday retail users. However, they admit that they do not 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 main use case for retail users is seen as speculative investment, where individuals buy and hold cryptocurrencies in the hope that their value will grow over time. However, Sam believes that this will change in the future as blockchain technology’s scalability solutions become more widespread.
Potential of stablecoins: 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 fund transfers.
Challenges of Stablecoins: Despite the potential of stablecoins, speakers mentioned that there are still challenges to be addressed. They expressed the hope that stablecoins can be improved to make them more practical and user-friendly for daily transactions, such as buying coffee.
Both Sam and Tadeo believe that speculative investing and using stablecoins for cross-border payments are currently two prominent retail use cases, but there is room for improvement and innovation in making cryptocurrencies easier to trade in everyday life.
Conclusion
Finally, when asked whether more and more engineers are choosing to join Web3, Tadeo pointed out an interesting phenomenon, namely the correlation index between developer commits and Ethereum prices. As prices rise and fall, the number of commits also rises and falls (the decline in the last month may be due to holidays). Therefore, as RWA drives the arrival of the next bull market, I believe that more and more developers will join the industry to promote the development of infrastructure.
Source: https://cryptometheus.com/project/ETH
Note: Protocol Security
Sam acknowledges the existence of inherent smart contract risks within the DeFi space. However, they emphasize that they take extensive precautions to minimize these risks. This includes subjecting their smart contracts 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.
