Try Quests to earn cryptoDAI on the Market (May 13)
This analysis is a review on the shifts in the amount of DAI on the market over the past year, and what might have caused them.
DAI is a stablecoin based on the ERC-20 token of Ethereum. Although its value is anchored to the dollar, its issuance is decentralized thanks to the collateralization of its guarantees.
Its origins go back to the MakerDAO in 2014 aiming at the creation of a DAO to support a stable currency within Ethereum.
In 2017 the efforts paid off with the creation and start-up of the first version of DAI, known at that time as SAI. Its control was based on smart contracts and not on the fiat currencies of a bank and its variables were decided by a DAO where holders of Maker (MKR) tokens could participate.
Its main goal was to create a secure means of storing value. Bitcoin and Ethereum suffer from volatility immersed in the growth of the sector. This is not a problem of economic systems that seek to profit from this. But within a platform of loans, savings or money transfers it is not desired.
Thanks to a collateral guarantee system, DAI can offer parity with respect to the dollar using high volatility cryptocurrencies. In this way, they can carry out fixed and stable value operations on other platforms with the security of guaranteed deposits. Regardless of whether cryptocurrencies go up or down, the value will always be the same and there are guarantees to avoid loss of value.
Nevertheless, to see the comparison between them we have substracted the amount of minted DAI with the amount of burned DAI. This difference shows us that more than 70% of the days in 2021 had more DAI minted than burned. Remarkable dates are May 19th, 2021 when the entire market crashed, where we can see that there were over 400M more DAI burned than minted. This was because people wanted to pay back their DAI, as a massive increase in volatility might affect both the collateralized assets price and the stablecoins price (barely nothing in this case). When this happens, the way of pegging DAI back to the dollar is by increasing the interest rates. That's why users tend to pay back their DAI, in order to avoid this situation. On the other hand, in October 27th and November 5th we can see a difference of 300M in favor of the amount of DAI minted. This scenarios happen as the DAO creates incentives to generate DAI when the stability fee is reduced. This generates new DAI and increases the total supply, lowering the price. MakerDAO might also decrease the demand for DAI by lowering the DAI savings rate, which means investors will look elsewhere to earn interest.
But, are these events related to Maker directly? Let's compare them with their volume. We are going to be using the last chart that shows the difference between minted DAI and burned DAI, and overlay it with the volume of MKR in USD. It could have been possible to use the volume in MKR tokens, but if we don't have the price, it would be harder to spot a relation.
Finally, to compare DAI with the crypto ecosystem as a whole, we are going to compare it with ETH's price. This makes sense because the market follows BTC's price movement, and ETH being the second coin in market cap, it follows BTC's trend very closely.
As we know, MakerDAO uses cryptocurrency collateralization to maintain its anchor, rather than a vault with fiat currency reserves. It can be a little disconcerting that cryptocurrencies, known for their volatility, can act as a backing for a stablecoin. Simply put, the cryptocurrencies a user deposits to create DAI are worth much more than the stablecoin they receive. This provides margin for downward movements in the price of the cryptocurrencies that act as collateral.
For years, MakerDAO has used overcollateralization to maintain a reasonably secure anchor. Since smart contracts control the DAI generation process, it works efficiently and without human interference. When you want to borrow stablecoin DAI, you lock cryptocurrency in a CDP smart contract. This CDP will establish a liquidation rate, for example 1.75x, which means that you will have to contribute 175 USD of ETH for 100 USD of DAI. A user can add more if they wish, in order to reduce risk. If the collateral amount goes below 175% (1.75x), you will incur a penalty fee. Eventually, the user risks liquidation if they fail to pay the DAI with the additional interest rate (the stability fee).
To analyze the situation, we are going to obtain the amount of DAI on the market over the past year (2021). To do so, we will use the ethereum.udm_events table to obtain the number of minted DAI and the number of DAI burned. The way it works is that everytime someone uses their assets as collateral, DAI is minted. When they pay back their DAI to claim their deposit, the DAI tokens get burned.
In the first chart we can see that the amount of DAI minted overall follows a similar tendency to the amount of DAI burned. The second chart is a normalization of the first one, which shows us a more detailed perspective of the amounts compared one to another. We can see that for most days in 2021, there were more DAI minted than burnt.
We can see that in most cases were there is a DAI mint-burn difference spike, the MKR volume seems pretty normal. The only time there appears to correlate is on May 19th, when there was a huge amount of burned DAI, but that might just be a coincidence considering the non-linearity on the rest of the timeline. On May 3rd and August 25th there was a huge increase in MKR volume reaching $800M, but that didn't seem to affect the amount of DAI on the market. We can conclude by afirming that there is no apparent relationship between the amount of DAI on the market and MKR volume.
The price of ETH fluctuated a lot in 2021, starting the year at $1000 and reaching an ATH of over $4800. One of the main reasons of this increase is due to the hype of the NFTs during 2021. As NFTs started pumping, people started to use the Ethereum network to buy them. If we take a closer look at ETH's price spikes in the chart, we can affirm that there is no apparent big correlation with the amount of DAI in the market. It is true that when we see an increase in DAI mints or burns usually there has been some kind of market action, but there are some cases where this amount might be influenced by external news, not correlating at all with the overall market price.