The disruptive power of cryptocurrencies and BLOCKCHAIN technology as its backbone is widely expanding over last years: the size of BITCOIN BLOCKCHAIN, the first decentralized cryptocurrency and remains the most expensive worldwide, was projected to 184 gigabytes as of the second half of 2018, with a market-cap valuated to hit 57.28 billion U.S dollar this year.
The possibility of joining in an extremely high returns offered by this market has resulted in huge inflow of investors from all industries around the world, in addition to the phenomenon of Initial Coin Offerings, which places finance within the reach of everyone, whether interested investors or project developers, and attracted a plethora of speculators, and with this level of focus, comes the lack of control and market unpredictability.
However, the value of a BITCOIN, or any other cryptocurrencies often witnesses a large fluctuations, rising up or falling down by as much as 30% in a single day and at odd times rising over 400% in a month.
Crypto investors face a crucial problem: High volatility of the market.
Imagine betting 1 BITCOIN in January 2017 (when its value were about 700 U.S. dollar) expiring a year later. Suddenly, you’re paying out 19000 U.S. dollar in January 2018, which is about 2600% more than you planned a year ago, even worse, you invest in 1 BITCOIN the same year and by december 2018, with the crash of the crypto-market, you release that your investment only worth about 3000 U.S one year later.
The crypto market is very risky, due to the strong correlation between major cryptocurrencies’ prices, therefore, even the least movement can gravely affect on its value, and today, investors have no reliable means to hedge the value of their portfolios against market fluctuations while staying in the crypto space, hence, comes the need for a currency to manage investors’ risk without the need to convert back and forth to fiat triggering taxable events each time, and can be a safe “haven” in fiat currency terms, as a medium of exchange that would survive against a situation of significant market stress.
There are two groups interested in a stable token: traders are interested in the “crypto” side that is added to the fiats. They want to trade different currencies, keep transaction fees low and take advantage of the liquid side of crypto, that is, the use of public key / private key rather than a classic bank account. Blockchain developers are also interested, as users will pay fees in exchange of services provided by their dapps, they would like to keep the cost stable, or more or less under acceptable volatility.
Although asset-backed crypto-currencies was previously presented as a way to hedge against market volatility that would make investors both excited and feel safe, most of them are not really cryptocurrencies, nor are even decentralized, they are simply a digital representation of either fiat currencies or valuable commodities and are using the network in order to automate their process, as backing an asset would require to trust an authority to reserve funds, which is fundamentally centralized around a bank accounts, and is at odds with the decentralized mission of BLOCKCHAIN.
MakerDAO, a decentralized autonomous organization within the ETHEREUM BLOCKCHAIN, believes that the long-term solution must be algorithmic, where cryptocurrencies shall derive their stability through : Security, Scarcity, Incentives, Consensus, Utility, Anti-censorship, Decentralization and Ledger Immutability, and are working to reduce the volatility of its token, which is designed specifically to hold its peg with the U.S. dollar, through monitoring market dynamics, based on collateral debt position process, incentivized external actors, and autonomous feedback mechanisms, they ought to build a platform that maintains the purchasing power of its own token and enables its users to take full advantage of cryptocurrency without worrying about market volatility.
The mechanics that manages the monetary supply of the token (so that everything works well) are fully decentralized and remain on-chain, rather than depending on any external custodian.