A New Alternative to Dai?
Exploring MetaCoin and it's role within DeFi
Welcome back to another week of Token Tuesdays!
This week we explore the specification release of a MakerDAO & Dai alternative - MetaCoin. Founded by SpankChain CEO Ameen Sol and the MolochDAO camp, MetaCoin aims to be a governance-minimized, single collateral, permissionless stablecoin.
This is an interesting release as Dai has largely dominated the market in terms of crypto-native permissionless stablecoins. The introduction of MetaCoin will create a new dynamic in the stablecoin market that we hope pushes the DeFi sector forward.
As a side note - we’re at EthDenver this week. If you’re around and would like to chat about anything crypto, feel free to DM us on Twitter. We’re always excited to engage with our readers.
We hope you enjoy this week’s article!
-Lucas and Cooper
It looks like Dai’s has some competition. Up until this week, Dai has pretty much been the only permissionless stablecoin in the DeFi ecosystem. While other popular stablecoins like USDC and Tether have garnered a significant amount of traction, they’re not permissionless. Both USDC and Tether rely on a centralized counterparty to custody US dollars while users are required to complete KYC verification to mint new tokens (if they’re even allowed to in the first place).
Dai has been in a league of its own with its permissionless characteristics. Maker has essentially created an open, programmable central bank where anyone can be stakeholders and govern the overarching system. By posting a trustless asset like Ether as collateral, anyone in the world with an internet connection can create Dai. The open nature of Maker combined by a stablecoin collateralized by largely trustless assets creates a powerful dynamic of money attributes.
However, while Maker has created a popular system for a permissionless stable asset, it does have its shortcomings. And the market is starting to realize this.
Some of the biggest critiques of the Maker system are its centralized points of failure with governance, the price oracle, and introducing collateralization with non-trustless assets through Multi-Collateral Dai. With that said, governance is one of the bigger issues right now.
As outlined in this article, it is entirely possible for wealthy, but malicious actors to collapse the Maker system by stealing all of the Ether locked in the system through a governance loophole. The malicious attackers could also steal all of the liquidity within ETH/DAI pairs (like on Uniswap) by printing quadrillions in Dai and purchasing the entire liquid supply in a single transaction.
There’s currently 4 actors who could pull off this heist right now- the Maker Foundation, a16z, Polychain, and DragonFly Capital. Maker’s entire systems must trust these four custodians to not break the system. If this loophole was executed, MKR and DAI would become worthless and the entire system worth hundreds of millions in public capital would collapse. The only reason this hasn’t happened yet is because all of these actors want Maker to succeed and have a significant amount of capital invested in the system. Nonetheless, it does re-introduces this notion of trust in DeFi’s prominent permissionless stablecoin.
One of the other major critique includes the introduction of non-trustless assets in Multi-Collateral Dai. Non-trustless assets create potential counterparty risks for off-chain assets like real estate or equities as well as the ability to collateralize with relatively illiquid and centralized utility tokens (like BAT).
The aggregate of these risks has ultimately driven the community to explore the possibility for new alternatives within the realm of permissionless stablecoins.
MolochDAO Summoner and SpankChain Founder, Ameen Solamanirecently released the specification for a new, governance-minimized, decentralized stablecoin called MetaCoin. Given the above issues, Ameen has taken it into his own hands to release a streamlined version of Maker’s permissionless stablecoin by leveraging the composability of new DeFi products that weren’t available when Maker was initially building Dai.
Here’s a brief summary on the design choices for MetaCoin:
A governance and Rewards Token (META)
A stablecoin (COIN)
A Token Curated Registry (TCR) of fiat-backed stablecoins
Uniswap Oracle for the TCR stablecoins
Algorithmically-set Interest Rates
The two biggest changes in MetaCoin’s design are Uniswap price oracles and the role of governance in setting the interest rates. With Maker, price oracles are selected by governance and submitted with price updates every 6 hours.
With MetaCoin, the governance system does not select the price oracles and instead selects the basket of fiat-backed stablecoins where Uniswap’s volume-weighted average price determines the reference price for ETHUSD.
In terms of governance and interest rates, MetaCoin eliminates manual intervention of stability fees from governance decisions and instead uses a PID controller to algorithmically determine the proper interest rate so that 1 COIN = $1 USD. This is a drastic change from Maker where MKR holders are able to vote on the stability fee in order to best target 1 DAI = $1. In Maker, raising the stability fee is supposed to decrease demand and disincentivize new minting.
These design choices have ultimately led to the creation of a human and governance-minimized permissionless stablecoin. Ether as a single collateral type and the use of Uniswap as a decentralized oracle creates a rather robust, trustless and permissionless stablecoin.
With that said, there’s a degree of trust added with the use of fiat-backed stablecoins as a basket for the price oracle to reference as the system must rely on those assets to maintain their peg over time. However, in order to successfully disrupt the MetaCoin system, all of these stablecoin operators would have to collude at the same time.
In Maker, the interest rate charged to DAI holders is used to buy and burn MKR, creating a dividend to token holders as the cash flows accrued by the system increases their percentage share of the network.
This economic model is fairly robust for the Maker system as the success of the underlying stablecoin drives value appreciation for the governance token. MetaCoin draws from this model with a few new economic design choices. Metacoin uses a spread on COIN savings rate and the interest charged to COIN minters. As an example, if there’s a 10% interest rate (i.e. stability fee), 9% will be distributed to COIN holders while the other 1% will be taken as a fee.
The difference here is that rather than using the accumulated interest to auction for MKR, the fee earnings will simply be used to purchase META on Uniswap for burning. In order to incentivize COIN/ETH liquidity on Uniswap, MetaCoin proposes to offer a fee split between:
META holders and COIN/ETH liquidity providers
Added inflation to META directed towards liquidity providers, or
Accept COIN/ETH liquidity shares as a collateral type for minting new COIN.
All of these options could be viable and it will be interesting to see which is implemented as the fee-splitting or the native inflation seems the most intuitive. The important part here is that MetaCoin is taking a page from Synthetix’s success and allocating a subsidy towards liquidity providers - something Maker has yet to do while also something the token struggles with (~28K in real volume according to Messari).
While Maker has a plethora of voting opportunities every week, MetaCoin aims to minimize human decisions over the system. As such, MetaCoin users can only vote on adding/removing stablecoins from the basket and shutting the system down. Importantly, META holders are not the only parties allowed to vote. Instead, MetaCoin aims to create a more inclusive voting distribution across a range of different ecosystem participants including:
COIN/ETH Liquidity Providers
All parties will have voting power proportional to their value exposure to the ecosystem at large. 1 COIN will equal 1 vote. This can translate across all parties as a user with $100 in liquidity on Uniswap (i.e. 100 COIN) will have 100 votes. Users with $1,000 in META will have 1,000 votes and so forth.
This inclusive mechanism should bring a more permissionless dynamic towards governance over the system as all parties will have a say in the fundamental aspects of the system including the basket of fiat-backed stablecoins as well as the need to conduct an emergency shutdown.
META’s initial token distribution will be split 50/50 among MolochDAO members and a separate DAO called SweatDAO. MolochDAO members will receive 50% of the initial token distribution proportional to their share on the amount of total ETH spent on grants within the Ethereum ecosystem. Rather than distributing META based on the amount of Moloch shares, the distribution towards amount spent on Ethereum-based grants will better align an early, dedicated community towards the Ethereum ecosystem at large.
The other 50% will be distributed to SweatDAO summoners based on the value of our contribution. On top of this, if fundraising is required, investors will be permitted to offer tribute to the SweatDAO and earn shares in order to capture a slice of the initial distribution.
The initial distribution is well-thought and is meant to align a strong set of incentives to an early community. The only point of criticism is that early founders like Ameen and existing MolochDAO members (who are likely also working on MetaCoin) will likely receive a double-serving of the initial distribution, creating a potential concentration in the token distribution in the very beginning.
We’d personally like to see an exploration of a more permissionless mechanism for prospective community members to contribute and earn a share of the initial distribution. It is currently unclear how inclusive SweatDAO will be.
Regardless, the ability to distribute META tokens to strongly aligned members will aid in establishing a core community to progress Metacoin token forward.
The past few years have been quite successful for Maker and the Dai stablecoin. Naturally, success tends to bring criticism. The concentration in governance combined with the looming governance loophole, centralization risks of price oracles, and the integration of non-trustless assets as a collateral type drove the exploration of more simplified stablecoins systems. The introduction of MetaCoin creates a governance-minimized, single collateralized stablecoin for the DeFi ecosystem at large. With that, MetaCoin leverages best practices from other projects (like subsidizing liquidity) and new infrastructure that has proliferated in the past few years.
Ultimately, MetaCoin will likely not uproot and replace Dai but will serve as a simplified alternative to the Maker system. In the coming months, we’ll be keen to keep an eye out on how MetaCoin fits into DeFi and how other projects will utilize its composability.
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