Why is DeFi Important?
When we look at the benefits of web3 protocols like Ethereum, many have come to note the permissionless nature of smart contracts provide a strong foundation for new financial primitives to arise.
With the growing movement of decentralized finance (DeFi), lending protocols like Maker have created global access to stable value in the form of Dai - the world’s first decentralized stablecoin.
To better understand the magnitude of this system, anyone in the world can borrow stable value through a suite of supported collateral. With systems like Akiva, we aim to help traders secure a fixed return on that stable value in a peer to peer fashion.
Specifically in marginalized economies, systems like Maker provide a safe-haven to hedge against hyperinflation. When paired with tools like Akiva, this safe-haven can provide additional assurance in the form of passive interest thanks to the Dai Savings Rate.
While the DSR is lucky to fluctuate in coming years, Akiva provides an intuitive solution to lock in a fixed rate - giving traders, financial institutions and trading desks alike access to a decentralized fixed income instrument.
Why Does This Matter?
As smart contracts continue to challenge the notion of automation within legacy financial systems, it’s highly likely that many forms of counterparty risk will gradually diminish.
Paired with optimized transaction costs and enhanced transaction speeds, DeFi protocols provide a suite of trading, lending and savings opportunities accessible to a global audience.
Built on the core tenants of decentralization, the maintenance and governance of these systems - like Maker - rests in the hands of its users, ultimately making for a battle tested protocol in which factors like interest rates, collateral types and profit-sharing are decided by the community.
By incorporating elements of composability - or the ability to integrate other primitives into various layers of similar products - we can envision an ecosystem in which companies collaborate to offer products and services unique to the digital era.
Over time, we expect individuals to become more comfortable with self-sovereignty - effectively acting as their own bank while noncustodial solutions like Akiva aid in the way one can earn a fixed return on that value.
As a permissionless lending protocol, Maker allows users to collateralize debt positions called Vaults. As collateral is deposited into a Vault, it can be used to take out a loan in the form of a stablecoin called Dai.
The amount of Dai which can be borrowed must always be overcollateralized by a minimum of 150% worth of collateral. This means if a user provides $150 worth of collateral like Ether, the maximum amount of Dai which can be borrowed at any time is 100 Dai (equal to $100).
With the 150% collateralization figure in mind, it’s important to note that liquidation occurs the moment a Vault’s collateralization ratio falls below 150%, meaning it’s wise to ensure a Vault is sufficiently collateralized above or around 200%. This provides a buffer in the event that the value of the underlying collateral fluctuates on any given day.
Importantly, the current cash-collateral model is only the beginning of something bigger. Adding other collaterals, notably real estate, business invoices, and other real-world assets will allow much wider applications and will not require a high collateralization ratio, bringing it just above 100%.
Borrowed capital incurs debt in the form of a Stability Fee - all of which must be paid back when the Vault is closed. When the Vault is closed and the borrowed capital is returned, users may withdraw all of the collateral which was posted into the Vault.
For more information on Maker and its inner workings, we recommend reviewing this guide.
Akiva chose to leverage the Maker protocol as it provides a strong foundation for global access to lending in an entirely permissionless fashion. Seeing as Dai has garnered a solid foothold within the wider Ethereum ecosystem, we expect its growth to continue for the foreseeable future, regardless of external events that affect central governments.
Maker is governed by its community through MKR tokens, thus making the protocol receptive to future changes that its users see fit.
With important protocol features such as fees, interest rates and debt ceiling put up to a vote by MKR holders, Akiva stands to vocalize our opinions on what not only makes sense for the protocol - but for our users as well.
In summary, we wish to aid in the future development of Maker, and see our protocol as a value-added layer in the adoption of Dai and it’s subsequent liquidity.
As it stands today, Maker supports a limited number of Ethereum-based assets to create Dai. With dozens of projects pushing the envelope on how legacy assets may be tokenized and represented onchain, it’s likely that protocols like Maker can scale far beyond the existing cryptocurrency ecosystem - eventually garnering support from trusted real-world assets as a means to unlock stable value on a global scale.
In the interim, we’re working closely with some of the largest owners of Dai to help establish a secure, trusted system to offer fixed income opportunities with enhanced flexibility and dynamic market making.
To learn more about the potential for DeFi - specifically within Ethereum - we recommend checking out this resource from a well-respected publication called Bankless.