MKR Whale Emerging from Auction Adds Urgency to Delegated Voting

Also, DeFi10 fund update, EOS DeFi platform.

Hello Defiers and happy Friday! Here’s what’s going on in DeFi:

  • MakerDAO auction concludes successfully, with Paradigm buying up most of the MKR sold
  • DeFi10 portfolio is recovering after market crash, beating Bitcoin YTD and other risk assets
  • EOS partners with Bancor to launch DeFi platform

📢 Help me scale up The Defiant team by donating to my Gitcoin Grant or recommending that friends do! This funding round ends in just five days so now is your chance! 1 Dai is currently being matched by 80 Dai, so it doesn’t take much to make a big contribution :)

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Bigger MKR Whale After Auction Shows Update is Needed

All’s well that ends well? Things are returning to normal in decentralized finance.

Value locked in open finance platform is rebounding, the system’s main stablecoin Dai is returning to its $1 peg, while MakerDAO’s deposit and borrowing rates are set to start climbing again after the system’s governance cut them to zero and near zero to boost Dai liquidity.

💡To summarize: On the week of March 9 ether dropped more than 30% in one hour, causing an unprecedented number of loans in the Maker system taken out against ether, to become undercollateralized. Liquidators meant to buy the remaining collateral with Dai couldn’t get the job done because the network was congested and Dai liquidity had dried up. One of these liquidators took the lack of competition as an opportunity to buy more than $4 million in ether for 0 Dai.

That led to Maker becoming undercapitalized and, because of the way the system is designed, holders of MKR (Maker’s governance token) would have to take the loss: There was an auction of MKR, diluting current holders, to raise the Dai required to heal its bad debt.

MakerDAO Survives

All in all, it seems like DeFi’s “central bank” overcame its biggest test yet. The issuer of Dai and biggest lender in DeFi, this week raised about $5.3 million in Dai in its MKR auction, enough money to cover the underwater loans. Dune Analytics shows 20,980 MKR was sold for an average price of almost $305 —that compares with MKR trading at over $500 before the whole meltdown.

But even as things are returning to normal, they’re not the same as before. At least two differences stemming from the crisis are worth exploring further: USDC has been approved as the third type of collateral, and venture fund Paradigm Capital came out of the auction as a bigger MKR whale than it already was.

USDC Added

USDC was added as collateral, in addition to Dai and BAT. This was controversial as some in the community oppose adding a centralized asset —USDC relies on banks holding dollars backing the token— which increases risk of censorship. Others believe MakerDAO should continue adding all kinds of assets as collateral, including fiat-backed stablecoins, to increase liquidity and diversification.

In MakerDAO’s post mortem, the Foundation argued in favor of adding more centralized assets, as over-reliance on ether made the system more vulnerable amid the sell-off.

“A diverse collateral portfolio would have reduced the impact of severe market events on the system. The Maker Foundation believes it is critical to prioritize the inclusion of real-world and centralized crypto assets as collateral to provide material diversification benefits to the system. Centralized assets do not make the Protocol itself centralized.”

Paradigm Whale

Venture fund Paradigm bought 68% of MKR sold at the auction, or about 14,200 MKR, adding to the stash of MKR it already held after investing in the project last year. An address which has been previously associated with the fund holds 15,353 MKR. With total supply at 1 million, that means Paradigm may hold about 3% of total MKR.

Long-time Maker supporter a16z owns about 6% of MKR, and Dragonfly Capital, which invested together with Paradigm in the project last year, also owns a decent chunk as the funding round announcement said Paradigm and Dragonfly together own 5.5% of MKR. The Maker Foundation holds almost 12% of MKR in a multisig contract.

With MKR tokens concentrated in a few hands, and already a low percentage of MKR holders participating in governance, it’s worth asking how decentralized this system is. This is more than just a philosophical question as concentrated holdings among a few friendly whales raises the risk of collusion, which smaller, disorganized holders would have trouble fighting.

There are backstops, like the time delay before big changes in the system are executed, and a system shutdown for extreme cases. But a more sustainable solution will probably be a system with delegated voting, which is in the works. That way smaller holders will be able to group together and be represented in governance decisions. It’s it’s arguably positive that knowledgeable investors are participating in governance and there’s no reason to think current MKR whales will want to harm the system for their own benefit, but the system should be designed so that investors don’t have to trust that’s true.


DeFi10 Fund Recovering from March Bloodbath

A quick update on my DeFi10 fund, where I invested 100 Dai in 10 different decentralized finance applications: The portfolio made up of interest-gaining tokens, liquidity pools, yield aggregators, an automated strategy, and lottery tickets, was doing great before the recent market crash. It was up 4.5% in just two months, between Jan. 9 when I made the initial investments, and March 11.

With the March 12 crash, the fund went from being up more than most asset classes, to being down 3.9%. The two ether-based investments in the portfolio, the Uniswap liquidity pools, explain the volatility.

I’m happy to report that it has been gradually recovering and is down 1.1%, compared with the S&P 500 down 23% year-to-date, WTI crude oil down 5%, and Bitcoin down 5.3%. Hopefully it will be at least be able to break even in the following weeks.

Detailed table here:


EOS Launches Platform to Boost its DeFi Ecosystem

EOS block producer, EOS Nation, has partnered with automated liquidity provider Bancor to launch a platform to boost the network’s DeFi ecosystem. The platform, called xNation, will enable anyone to launch and fund liquidity pools for any EOS token, and receive the fees generated by the pool in proportion to the amount that was funded. Liquidity pools allow users to trade tokens through on-chain transactions, without needing an order book. The platform aims to increase liquidity and trading volume, while generating an additional source of income for token deposits, the release says. [Correct from previous version which said Bancor partnered with EOS instead of EOS Nation]


Chinese Netizens Use Ethereum To Avoid China’s COVID-19 Censorship: Forbes

Forbes article quotes tweet by South Central Morning Post journalist Sarah Zhang posted about how her interview with Dr. Ai Fen, a subject of attempted Chinese state censorship, was relayed and posted on the Ethereum blockchain.

Corporate America Knows the Bailout Is Baked In: Nic Carter

Nic Carter, partner of Castle Island Ventures and co-founder of Coin Metrics, writes: “A stimulus consisting solely of payouts to individuals or households would be far more direct, and much fairer, than the obscure and arbitrary handouts the state has devised instead. Instead, the stimulus is directed towards keeping corporations intact rather than having them suffer messy liquidations or restructurings.”

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The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money.

About the author: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.