In The Week
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Spotlight 🔎
MakerDAO
MakerDAO has officially shut down Single Collateral Dai (SCD)
The MakerDAO community voted to shutdown the SCD system of Maker on Tuesday 12th May meaning multi-collateral Dai (MCD) will only be used going forward. Sai CDPs can no longer be created by users and Sai can no longer be minted into circulation.
The Formally Verified Take
Retiring the SCD system has been long anticipated by the MakerDAO community but enacting this was put on the side as the MakerDAO community were seemingly tied with issues related to emergency shutdowns, adjusting the delay governance module, being undercollateralised from black Thursday events, and adding centralised USDC as a collateral to enhance Dai liquidity. A lot of work.
However, SCD came back to the conversation when SCD was facing liquidity issues. Precisely because SCD was naturally being used less since the launch of MCD, the natural reduction in liquidity meant the protocol was at risk, with peg instability, and SCD liquidations proving to be inefficient. Now, SCD has stopped for good (with the Sai token living on in perpetuity) where one Sai will become fixed to $1 of ETH.
But like all of the above issues MakerDAO has been tested with, SCD also required a lot of manual work and ongoing off-chain governance discussions to enact (see roadmap below).
In order for SCD shutdown to occur, the passing of an executive vote created a special contract that would give itself special admin rights over the shutdown enabling Keepers to come in and Bite all Sai CDPs. This contract had to be called by any Sai holder but not until the 12th May.
A Keeper was then tasked with biting 1k CDP (99% of total positions on SCD) in batches of 100. What actually happened on the 12th May was the Keeper biting the CDPs was typically spending $40+ in transaction fees per batch naturally due to the work required on-chain. This relative high cost in fees threw many off including the MakerDAO team having to keep manually topping up the Keeper with more ETH to ensure full completion of shutdown. At best, it was manual. At worst, it was archaic.
The reason why this is an important point is because in the last 2 weeks the market in decentralised lending protocols has certainly heated up - MetaCartel Ventures announced their backing of MetaCoin and we also saw the announcement of stablecoin project Liquity. What do these two stablecoin projects have in common? They aim to build a resilient stablecoin project that can run entirely on-chain by utilising algorithmic controlled interest rates, minimising ongoing governance requirements in the process. This signifies a growing appetite in designing a more “purist” decentralised stablecoin protocol.
SCD being shutdown will allow MakerDAO developers to streamline their workflow going forward but there will be increasing pressure for MakerDAO to capture more of these “purist” flavours.
Bonus - On the 12th May, ~1k WBTC (which can be used as a collateral asset on Maker MCD) was minted, by crypto lending platform Nexo, just one day after a proposal started that explored the option of lowering the WBTC debt ceiling to 3m Dai from 10m Dai. It is possible that Nexo wanted to mint Dai to capitalise on a borrow rates spread between Nexo rates and Maker before debt ceiling would potentially pass.
Quick Takes ⚡️
Chainlink
Chainlink announced the launch of a verifiable random function (VRF). This VRF can generate randomness that is verifiable on-chain and used by smart contracts.
The goal of including VRFs is to advance what smart contracts on decentralised networks are capable of. For example, any applications that require unpredictable outcomes can source that randomness from oracles which can prove their input is completely fair. Critically, node operators are incentivised to provide as many security guarantees as possible as their fees increase when VRFs are used more.
Formally Verified Take
Allowing for verifiable randomness allows smart contracts to play a more significant role in Web 3 applications, such as gaming, operations, and security. The smart contract lottery PoolTogether which originally sourced its randomness centrally has already switched to Chainlink’s VRF.
The usefulness of randomness cannot be overstated. Beyond the use case in gaming where VRFs gives gamers verified unpredictability (e.g. loot drops), other use cases are spoken about less. VRFs can be applied to situations where Web 3 applications randomly assign resources or duties (think of DAOs). Moreover, Chainlink is not limited to Ethereum and VRFs will theoretically be utilised across different smart contract platforms fortifying the role of oracle nodes across the entire Web 3 ecosystem.
Zcash
Electric Coin Company (ECC) announced the launch of the Zcash Developers Alliance (ZDA).
The Alliance members including Consensys, Kyber, and Agoric, will aim to bring Zcash interoperability across select cryptocurrency projects. The outcome being that multiple chains can start benefiting from the privacy technology that underpins the Zcash protocol.
Formally Verified Take
The announcement made by ECC confirms the interoperability goals of Zcash that has been speculated on for some time. Users on other blockchains will be able to join Zcash’s anonymity set, which gets stronger at anonymising activity the more it is utilised. Some examples of Zcash interoperability include getting shielded staking for PoS chains like Cosmos and shielded assets backed by ZEC (perhaps re-defining the role of ZEC entirely).
Additionally, bringing privacy layers to other chains will no doubt re-raise the debate on privacy being a feature or product for protocols. The absolute key question will be whether chains that simply strap on privacy as an added layer will be effective enough at preserving user privacy than chains that build privacy at the base layer, such as Zcash itself. Specifically in relation to the above, how effectively can privacy be preserved if users move in and out of Zcash anonymity sets all of the time?
Kyber Network
Kyber crossed $1 billion worth of trades and almost 1 million transaction on-chain.
Kyber has seen a substantial increase in consistent volume on its protocol in recent weeks as it heads into its long anticipated Katalyst upgrade giving users the right to vote on protocol upgrades and earn network fees in the form of ETH.
Formally Verified Take
Kyber’s milestone achievement perhaps speaks to the growing usage of decentralised exchanges (DEXs) with March alone seeing a 44% increase in monthly trading volume compared to February. Lower slippage, better UX, and composability are just some of the drivers behind this growth.
With Kyber specifically, the value driver behind Kyber’s native token KNC is the fees from users trading on the protocol. With its future upgrade, KNC holders will now be rewarded directly in ETH. As fees go up, annualised earnings also go up whcih potentially drives up the value of KNC. What’s more is that there was evidence this week that annualised earnings for Kyber often translated to positive KNC price movement.
Bonus - There is now a MCD application to add Kyber’s token KNC as a MakerDAO collateral asset. The application argues KNC being a suitable collateral asset because of its deflationary characteristics and Kyber being deeply rooted within DeFi.
Reddit
Reddit introduced two new types of loot token (a token on the Ethereum blockchain that is earnable within a community.
These tokens are distributed in their /r/Cryptocurrency and /r/FortniteBR subreddits, and Reddit signaled their plan to pivot the company’s monetisation more towards crypto. This overall initiative is referred to as “Community Points” and builds on the early experiments from /r/Ethtrader donuts.
Formally Verified Take
Most takes on the Reddit news has often focussed on how this ‘finally brings digital assets mainstream’. While this certainly holds weight, there are perhaps two deeper takes to consider: (1) the use of digital assets in reddit are to incentivise community input - points can be earned, tipped, won, collected, and spent on unique items. Such a use case is where digital assets can really shine - incentivising contribution while also putting users fully in control. (2) Reddit, which has over 400 million users, will introduce a potentially heavy load on the Ethereum network. If the project is successful, it is the ultimate calling card for layer 2 scaling technology, such as state Channels, sidechains, and rollups.
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