On September 25, CCN reported that prominent venture capital firm Andreessen Horowitz invested $15 million in a stablecoin network called Maker.
Stablecoin is a cryptocurrency whose value remains stable by being hedged to the price of reserve currencies like the US dollar. Hence, Dai, the stablecoin of the Maker ecosystem, will always represent $1, regardless of the value of Bitcoin and Ethereum (ETH).
Last month, Andreessen Horowitz (A16Z) acquired 7 percent of the total supply of MKR, worth more than $15 million. In return, the firm received a 6 percent control over the network’s decision-making power.
Yield Return and Buy Back Program
The investment of A16Z in MKR is conceptually similar to putting dollar savings in a US-based bank. Upon placing a certain amount of money in a bank like Goldman Sachs or JPMorgan, an individual receives a monthly or yearly return based on the program offered by the bank.
With money obtained from its clients, the bank then loans the capital out to trusted businesses and individual investors with high interest to pay out its clients that provided the bank with an initial capital.
The 6 percent control over the Maker network acquired by A16Z allows the firm to see consistent yield return, a type of income returned on an investment through interest or annual percentage rate based on the investment’s market value, due to the unique structure of the Maker blockchain network.
Dai is a stablecoin that exists on top of the Ethereum network that is operated by Maker. The Maker blockchain platform also includes a major component called Maker (MKR), which loans out Dai to investors that put up Ethereum as collateral.
Investors send Ethereum into an escrow account embedded into a smart contract and in return receive Dai, which represents the value of the US dollar. Then, MKR coin holders receive an interest rate on the loan, as debtors payout MKR holders.
When the holders of Dai are required to pay back the amount of US dollars it borrowed from MKR holders, the holders pay interest to the Maker network. The network then burns MKR coins and essentially buys MKR with the interest, reducing the supply of MKR and pushing the price of the cryptocurrency up.
In the long-term, Andreessen Horowitz benefits from two sources of profit: yield income from loans and increasing price of MKR affected by the buyback program of Maker.
Merit of the Dai
Katie Haun, the general partner at Andreessen Horowitz, explained that Dai and the Maker blockchain network are balanced, which allows the value of Dai to be set at $1 at all times.
“A set of autonomous smart contracts coordinates and runs the Maker system, which means that anyone with an internet connection and collateral can create Dai without the need for trusted intermediaries. To ensure the system remains solvent, a network of market makers is incentivized to liquidate loans that risk becoming undercollateralized, thereby removing excess Dai from circulation and keeping the balance of Dai to collateral in check.”
However, Dai could be in danger of losing its value in flash crashes, a period in which the price of a major cryptocurrency drops by a large margin within a short period of time, possibly within minutes, which is highly unlikely.
Featured image from Shutterstock.
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