Maker DAO has been the talk of the town lately. While DAI continues to make a strong case for crypto-collateralized assets, MKR managed its own momentous upward swing, leaping from ~$326.81 to $674.96 (as of publication) over the past 35 days.
We at Santiment recently launched a new tool called Social Trends; it lets you search for any term or phrase and trace its mentions over time on crypto-specific social media (100s of Telegram groups, crypto subreddits, discord channels, private trader chats etc.)
A few days back, I tried searching for combined mentions of ‘Maker’, ‘MakerDAO’, ‘DAI’ and ‘stablecoin’:
Seems like the community was onto something here – as you can see, the social chatter around these terms skyrocketed in days leading up to the MKR rally.
But let’s leave the crowd sentiment for another time. In this article, we’ll use our on-chain data to dive head-first into the MakerDAO network, search for distinctive market patterns and explore the strenuous correlation between MKR and DAI.
Before that, a ‘brief’ explanation of how Maker works (those familiar with the project can skip to the next section):
What is Maker?
Maker’s main product is DAI, a type of decentralized collateralized stablecoin. Whew, that was a mouthful. Let’s break it down:
What is a stablecoin?
Stablecoins are tokens that exhibit little to no volatility. They aim to address those use cases where speculative tokens tend to fall short.
For example, you wouldn’t want to take out a loan in coins whose price fluctuates 5-20% on a daily basis (BTC, ETH, etc).
Or, if you live in a country like Argentina or Nigeria where annual inflation rates for native currencies can exceed 15%, a non-volatile, widely-accessible digital token could prove a viable alternative.
In short, any scenario that warrants a stable currency is a potential argument for stablecoins.
How do stablecoins stay…stable?
So how do you ensure your token doesn’t fluctuate? Without going into too much detail, we can split stablecoins into 3 groups based on their primary stabilization mechanism:
- Fiat collateralized – here, every unit of stablecoin is backed by a corresponding unit of fiat currency. These are considered ‘centralized’ stablecoins, because they rely on the liquidity and security of legacy financial systems (banks) for stability. Tether is a best-known example of this approach.
- Crypto collateralized – instead of fiat, these projects use crypto as collateral. This is how DAI (Maker’s stablecoin) works – leveraging ethereum as its collateral.
- Non-collateralized – these tokens are not backed by any reserves (fiat or otherwise). Rather, the token supply is controlled via a complex algorithm. Basecoin is a good example.
Circling it all back, DAI is a decentralized (no banks), collateralized (backed by ETH) stablecoin. Easy-peasy.
How does DAI work?
The entire Maker ecosystem is built on smart contracts called CDPs – collateralized debt positions.
Say you want to create some DAI. First, you send a certain amount of ether to the CDP. In return, you receive DAI relative to the amount of ETH you’ve stored. To get your ETH back, you’ll need to repay the amount of DAI that you received.
You don’t lose your ether, but you also no longer control it – it’s stuck in the CDP until you pay back the DAI.
Here’s the problem: the underlying collateral – ethereum – is a volatile coin. What if its price begins to drop? What if collateralized ETH is suddenly worth less than the DAI that it’s supposed to be backing?
To deal with this issue, the amount of ETH you ‘pledge’ needs to be higher than the value of DAI you get in return (this is called a ‘collateralization ratio’). That way, if ETH price drops over a certain threshold, the system automatically begins liquidating CDPs and auctioning off the ether inside before the value of the ether is less than the amount of DAI it’s backing.
What is MKR?
Unlike DAI, MKR is a speculative token, which grants its holders certain privileges – as well as obligations – to the MakerDAO system. MKR holders have specific governance rights over CDPs (they set the above-mentioned ETH-to-DAI collateralization ratio), and are rewarded with fees for helping maintain the system.
In return, however, they act as buyers of last resort – if the collateral in the CDPs isn’t enough to cover the amount of DAI in existence (because the price of ETH dropped too quickly for the system to react), new MKR is created and sold onto the open market to raise additional collateral to back DAI and maintain its stability.
This provides an added incentive for MKR holders to responsibly regulate the CDP parameters.
There’s a lot more to this, and it would take a whole article to explain – I suggest reading Maker for Dummies for an excellent, easy-to-read overview of the Maker system.
Without further adieu, let’s jump into the data:
Let’s begin with a basic overview of the MKR network:
- Lifetime total of MKR transactions: 83264
- Lifetime total of addresses that ever touched MKR: 7513
- # of current MKR holders: 5235
If we further break down those 7513 addresses by the # of completed MKR transactions, we get the following spread:
- 1 trx: 1758 addresses (23.4%)
- 2 trx: 2102 addresses (28.0%)
- 3 – 5 trx: 1513 addresses (20.1%)
- 5 – 10 trx: 1124 addresses (15.0%)
- >= 10 trs: 1016 addresses (13.5%)
Of the lot, by far the most ‘popular’ address is 0x14fbca95be7e99c15cc2996c6c9d841e54b79425, belonging to Oasis – a decentralized ERC20 exchange that’s part of the MakerDAO infrastructure. Interestingly enough, the Oasis address accounts for 36 728 MKR transaction, or 44% of all transactions!
The most active non-exchange address is 0x0016bd4cb70bd98ca07a341da66450b5d22a55aa, with an additional 29360 transactions (35% of total # of transactions). This address has been involved in a wide variety of trxs involving MKR, DAI and WrappedETH. As of the writing of this article we’re still unsure who’s behind it; it’s most likely that it too, like Oasis, belongs to the project’s overall infrastructure.
Finally, it’s worth noting that the overall number of trxs including MKR remains encouraging, and has been on an upward swing until very recently:
The mean value of the transferred MKR amount across all transfers is 66.2 MKR, while the median value clocks in at 0.5 MKR.
The two biggest transfers in the history of MKR happened on November 25th, 2017, both in a span of 1hr :
- $668,148,367 – minting new MKR (notice the second event in the event log).
- $668,028,843 – coming from an address that looks like it either belongs to an exchange or is part of the project’s infrastructure.
Both transfers share the same token destination.
We were fairly surprised by the volatile relationship between the mean and median trx volume. Here’s both values presented over time:
As you can see, the connection between the two remains pretty unstable. There’s a few reasons why we think this could be:
- A small number of daily transactions, paired with significant value discrepancy. For example, say there were a total of 3 transactions on Monday: 4 MKR, 8 MKR and 10000 MKR. The mean trx value would be 3337.3 MKR, while the median value would be 8 MKR. This theory is also consistent with available data – last month there were just around 600trx/day.
- General market volatility. While stablecoins are (relatively) immune to it, MKR is still a speculative coin, marred by sudden price changes and unexpected market shifts. This could very well influence both the daily mean and median trx values.
The mean-median relationship isn’t the only anomaly we’ve come across in MKR’s data.
Visualizing the whole MKR network also provided some fascinating (read: weird) results:
Most of these transaction clusters or ‘points of concentration’ indicate exchange addresses. But what’s really atypical is just how dense the center of the network seems to be. For comparison, here’s our own (Santiment) network graph:
This is what most projects’ network graphs will look like (again, the clusters represent exchanges) – a stark difference to MKR. So what does this mean?
We’re not entirely sure yet. It would take significant effort to try and collect all these addresses, and break down the central cluster to its most basic components. If you’d like us to cover that in one of our upcoming posts, let us know in the comments below!
Comparing DAI and MKR Network Stats
Although each serves a distinct purpose, both MKR and DAI are still parts of the same system. As MKR is used to pay the CDP Stability Fee (CDP = collateralized debt position, Maker’s core smart contract), it stands to reason that juxtaposing the two tokens can help us measure the overall speculative interest in the project.
When it comes to Daily Active Addresses (# of unique addresses that participated in transactions on a given day), the correlation is unsurprisingly clear:
Here’s that same graph showing long-term correlation (smoothed with 15 days):
The Network Growth graph (# of new addresses being created on the network each day) further validates the MKR-DAI interdependence:
A more interesting outcome, however, ensues when observing the Token Age Consumed graph. This metric shows the amount of movement of tokens between different addresses, and can be very useful to spot large amounts of tokens suddenly moving after being idle for long periods of time.
Here’s what that combined graph for MKR and DAI looks like:
As you can see, MKR typically tends to lag a bit, following a significant spike in DAI. We’ve yet to fully explain this sort of delayed correlation – if you have any ideas, let us know in the comments!
Similarly intriguing correlation hides in combined exchange flows for both tokens:
The above graphs validate one of our initial hypotheses about MakerDAO, although it by no means presents definitive proof. But before we get to that, a few caveats:
- The first half of the graphs is overtly noisy – something typical for most crypto projects early in their lifecycles. For clarity, it’s worth focusing most of our analysis on the later portions of the graphs.
- It should also be noted that the above graphs show the quantity, not the value of tokens entering and leaving the exchange. From a dollar standpoint, a small spike in the inflow of MKR to the exchange is graphically equal to a massive spike in the inflow of DAI (since 1 MKR = ~$675, whereas 1 DAI = $1.)
That said, we believe the above graphs indicate that the bulk of the DAI isn’t currently being purchased via CDPs – but rather on exchanges.
This stands to reason, as the lack of an intuitive UI for smart contracts still presents a significant barrier to entry for the less tech-savvy market participants. For many, the easiest way to acquire DAI remains circumventing the CDPs entirely, and turning to the exchanges instead.
This hypothesis is also consistent with the presented trx volumes. What it means for the widespread adoption of the proposed MakerDAO system, remains to be seen.
What are your thoughts on the MakerDAO ecosystem? Got any ideas about network events and MKR-DAI correlations that we couldn’t figure out? Join the discussion over at our Discourse!