Guests: Sam Macpherson, Core Developer of MakerDAO; Tadeo, Developer Relations Engineer at Spark Protocol

Author: Sunny, DeepTech TechFlow

"I believe that the entire financial system will eventually run on the blockchain, and there will no longer be traditional financial defaults; it will just be finance, and all transactions will be settled on the blockchain. So, I don't know how long this will take, but in my view, this is an inevitable future."

--Sam Macpherson, Core Developer of MakerDAO

Background Introduction to the Dialogue

At this year's Token2049 conference in Singapore, MakerDAO founder Rune Christensen proposed the "Ultimate Plan." The plan aims to address the scalability and efficiency issues within MakerDAO. The "Ultimate Plan" proposes a transformation of the role of the Maker core. Instead of directly pursuing various small projects and growth plans, the Maker core will transform into a role more similar to a "wholesale creditor." In this new role, the Maker core will provide loans or support to other sub-DAOs (decentralized autonomous organizations), which will operate independently. These sub-DAOs are described as mini versions of MakerDAO, with each sub-DAO focusing on different growth plans and projects. These sub-DAOs will be isolated and operate independently from each other.

Spark Protocol is one of the emerging sub-DAOs aimed at establishing a lending protocol focused on DAI and has already integrated with MakerDAO. Sam Macpherson is the founder and CEO of Spark Protocol, and previously served as a core engineer at MakerDAO. Tadeo is a developer relations engineer at Spark. From the end of 2022 to the present, the total value locked (TVL) in Spark Protocol has exceeded $1 billion. At the recent Ethereum developer conference in Istanbul, SparkFi sponsored ETHGlobal Istanbul with a prize of 20,000 DAI to reward winning builders creating projects in the SparkLend category. The Spark team aims to build a decentralized lending engine that provides modern lending platform features and capabilities for DAI users, as the existing MakerDAO core contracts are considered somewhat outdated.

During the interview with Sam and Tadeo, we learned that Spark does not require third-party liquidity unlike other DeFi lending protocols, the impact of US bonds on the Web3 market, and whether stablecoins are a killer application for Web3.

Sam firmly believes that real-world assets (RWAs) will trigger the next full market average level. Currently, traditional financial rates are so high that they essentially suck all liquidity out of decentralized finance (DeFi). So the first step is to bring these rates onto the chain, so decentralized finance and traditional finance rates will continue to converge until they match. Only by internalizing rates into decentralized finance can decentralized finance thrive again. And all of this is already happening.

Here is a summary and conclusion of this interview by DeepTech:

Knowledge Collection

MakerDAO:

MakerDAO is a decentralized autonomous organization running on the Ethereum blockchain. It is known for its stablecoin DAI, which is backed by collateral assets. MakerDAO allows users to generate DAI by locking collateral in smart contracts, known as collateralized debt positions (CDPs).

Users can interact with MakerDAO through Web3 wallets and other distributed applications (such as Lido and Aave v3).

The stablecoin DAI issued by MakerDAO has become one of the leading stablecoins by market capitalization.

Excess collateral model of DAI:

Dai is described as an "excess collateral" stablecoin. This means that to create and maintain DAI, users need to deposit collateral assets (cryptocurrencies or other forms of value) worth more than the value of the DAI they create. This excess collateral serves as a security mechanism to maintain the stability of the stablecoin.

Importantly, the collateral supporting DAI includes native cryptocurrency assets (such as ETH) and other assets, such as "sticky assets" (possibly referring to stable assets within the MakerDAO ecosystem) and Bitcoin. Additionally, it includes cash-like assets, which could be stable assets or fiat currency.

The excess collateral ratio of DAI is precisely 0 or equal to 1, unlike other stablecoins that require a higher collateral ratio (e.g., 150% or 200%). This means that you can generate DAI using collateral assets equivalent to the amount of DAI you create. This is a unique feature of DAI.

MakerDAO's native DeFi protocol: Spark

Since the launch of the modern lending engine within the MakerDAO ecosystem, Spark has experienced significant growth, making it one of the top 20 protocols by total value locked in DeFi.

Secondary lending markets: The interview mentioned secondary lending markets, such as Compound and Aave, which allow users to borrow various cryptocurrencies, including stablecoins like DAI, USDC, or Tether (USDT).

Need for intermediaries: In these secondary lending markets, intermediaries or lenders are needed to provide liquidity. These lenders need to have a certain reserve of assets (such as DAI, USDC) and seek to profit by lending these assets to borrowers.

Maker's role in Spark: The innovation introduced by Spark is that MakerDAO itself can act as a lender on this platform. In other words, instead of relying on individual lenders with profit motives, MakerDAO directly provides liquidity.

Minting DAI: MakerDAO can directly mint DAI tokens onto Spark's lending platform. When users want to borrow DAI, they are essentially borrowing directly from MakerDAO, similar to how the internal collateral system of MakerDAO operates.

Predictable borrowing rates: One of the main advantages of Spark is that users can borrow at predictable rates set by MakerDAO. In contrast, in other secondary markets, rates may fluctuate significantly and depend on the availability of liquidity. At times, rates may soar to very high levels, causing uncertainty for borrowers.

Governance process: The predictable rates on Spark are maintained through a clearly defined governance process. Users are notified of any upcoming rate changes several weeks in advance. This advance notice allows users to plan and adjust their positions accordingly.

Lowest rates: Due to MakerDAO's significant liquidity (referred to by Sam as "unparalleled liquidity"), rates on Spark are expected to be the lowest in the entire market. This makes borrowing more cost-effective for users.

Origins and Development of RWAs

Historical background: Two years ago, traditional banks and money market funds offered very low interest rates (approximately zero) to users holding USDC. This meant that users were content to keep their USDC on the blockchain (on-chain) for various purposes, such as trading Ethereum (ETH).

Change: Over the past two years, traditional banks began offering higher interest rates to customers (in this example, 5%). This change in interest rates made it more expensive to hold USDC on-chain in DeFi, as users could no longer earn potential interest income by transferring USDC to their bank accounts.

Shift in user behavior: Due to this change in interest rates, users are more inclined to consider moving their USDC out of DeFi and transferring it to their bank accounts. This action has withdrawn liquidity (funds) from the DeFi ecosystem, potentially impacting DeFi projects and markets.

Tokenization of Treasury bonds: To address this issue, there has been mention of "tokenization of Treasury bonds." This refers to the process of converting US Treasury bonds into digital tokens that can be used in the DeFi ecosystem. Users can use these tokenized Treasury bonds as collateral for lending and other DeFi activities.

Impact on DeFi Interest Rates: By tokenizing the Treasury rates (interest rates on Treasury bonds) and introducing them into DeFi, users can now earn interest on their tokenized Treasury bonds while participating in DeFi activities. As more users use these tokenized assets as collateral, DeFi platforms begin to offer higher borrowing rates and other service rates. The effect of this is to raise the base rates in the DeFi ecosystem.

Rate Comparison: Sam mentioned that DeFi borrowing rates, which were close to 0% in the past, are now typically between 3% and 4%. This means that DeFi borrowing rates have become competitive with the risk-free rates offered by the Treasury.

Next Killer Application for Mass Adoption

Web3 Needs a Killer Application: Sam and Tadeo acknowledge the importance of having a compelling and widely adopted application (a "killer application") that can drive the adoption and use of blockchain and cryptocurrency technology among everyday retail users. However, they admit that they do not have a specific idea for such an application but emphasize the importance of building the underlying infrastructure.

Current Retail Use Cases: Currently in the cryptocurrency space, the main use case for retail users is seen as speculative investment, where individuals buy and hold cryptocurrencies in the hope that their value will increase over time. However, Sam believes that this situation will change in the future as scalability solutions for blockchain technology become more widespread.

Potential of Stablecoins: Tadeo points out that stablecoins have demonstrated potential as a retail use case. Stablecoins are digital assets designed to maintain a stable value, making them suitable for everyday transactions. They are considered a product superior to traditional fiat currencies, especially for cross-border payments, primarily due to the inefficiency of systems like SWIFT and the high costs of international fund transfers.

Challenges of Stablecoins: Despite the potential of stablecoins, the speakers mentioned that there are still challenges to be addressed. They expressed the hope for improvements to make stablecoins more practical and user-friendly for everyday transactions, such as purchasing coffee.

Sam and Tadeo both believe that speculative investment and using stablecoins for cross-border payments are currently prominent retail use cases, but there is room for improvement and innovation in making cryptocurrencies more conducive to everyday transactions.

Conclusion

Finally, when asked if more and more engineers are choosing to join Web3, Tadeo pointed out an interesting phenomenon, which is the correlation between developer commits and the Ethereum price index. As the price rises and falls, the number of commits also rises and falls (recently not rising but falling, possibly due to the holiday season). Therefore, with RWAs driving the arrival of the next bull market, it is believed that more and more developers will join the industry to drive infrastructure development.

Source: https://cryptometheus.com/project/ETH

Note: Protocol Security

Sam acknowledges the inherent smart contract risks within the DeFi space. However, they emphasize that extensive precautions have been taken to minimize these risks. This includes subjecting their smart contracts to multiple audits by independent auditors and conducting internal reviews to ensure a deep understanding of the code. The goal is to provide the highest level of security for user funds and adhere to best practices in smart contract development.

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