MakerDAO (MKR) just had a $300 million stress test
The DAI stablecoin holds firm at its US$1 peg, even as hundreds of millions of dollars move on the linked MKR chain.
OPINION: This is one of the few occasions where US$300 million is nothing much to worry about.
According to CoinMarketCap, Maker (MKR) broke its all-time high, hitting a new peak of US$1,773 today. After that, it dropped down to US$1,300 in the next 10 minutes. Over the next few hours, its price recovered to near US$1,700 again.
The 10-minute drop saw US$300 million wiped off its market cap.
With most other coins this might seem like someone dropping their stash and then buying it back at a discount, but in the case of MKR it's a bit more like a stress test.
The $300 million stress test
Maker isn't like most coins. MKR is the counterpart to Dai, a paired stablecoin. It sits between Ethereum and Dai.
- MKR – The coin whose price went wild.
- DAI – A stablecoin, whose price always stays around US$1. Unlike USDT Tethers, a Dai is actually backed by ETH, along with the utility token MKR. Tethers are more like a simple electronic IOU.
Basically, MKR functions as a cushion for Dai, absorbing price hits on its behalf to keep it paired with the US dollar, and therefore make it potentially more useful as an actual purchasing coin.
It does this through a complicated-by-necessity system that ties Ethereum (ETH) to Maker to Dai with smart contracts. These smart contracts automatically work their magic to adjust prices along the chain, with the end result of Dai staying pegged to the US dollar.
In a nutshell
ETH is held as collateral to bring liquidity to the system. Smart contracts automatically track the prices of ETH and Dai, and automatically liquidate ETH as needed to keep the value of Dai balanced at $1.
MKR is the management currency of this system. It's like the middle layer which absorbs the price shocks to make sure Dai remains unaffected. MKR acts as a spillover, its owners serve as buyers of last resort, and it's otherwise an essential organisational and financial layer for the entire mechanism.
Today's sharp down and up is the result of a whole lot of MKR being automatically sold for ETH, in order to pump more ETH into the reserves. This happened because two other things happened at the same time.
- ETH price dropped by around US$50
- Dai trading volume substantially increased. In particular, about US$300,000 of Dai was moved a couple of hours previously, with its own corresponding smaller tick in MKR volume.
Neither of these by themselves triggered the substantial MKR event. Instead, it's like both Dai and ETH having a busy day, which pushed MKR over its predefined thresholds at the time of the sharp drop.
And it seems to have worked. Even as hundreds of millions were being shifted elsewhere, there was no discernable blip in Dai prices.
Note: This is a guess at what happened based on the corresponding ETH and Dai occurrences, and the author's understanding of how MKR and Dai work. Other scenarios are possible: it may be that an MKR holder took a $300 million bath in their money.
- SEC crackdown on Binance, Kraken – What it means for Aussie investors
- Sam Bankman-Fried found guilty – what it means for Australian FTX victims
- Bitcoin’s price soars over 10% on ETF rumours – here’s why
- New regulations for Aussie crypto exchanges: What it means for investors
- Sam Bankman-Fried’s FTX trial starts tomorrow – what it means for FTX customers