Interview with Chao Pan from MakerDAO: DeFi is like Money Legos, Anyone can build what they need

Original Chinese Post:

We had a nice chat with Chao at Unitimes WeChat communities on 6th November. Chao shared his view on DeFi, talked about MakerDAO’s multi-collateral Dai, and how average users can engage in DeFi.

Chao Pan is China Lead at MakerDAO. Maker is a Decentralized Autonomous Organization (DAO) that manages the Dai Stablecoin System on the Ethereum blockchain.

Hi, Chao. There has been a lot of discussion about Decentralized Finance, known as DeFi, which is considered as one of the most exciting development prospects for blockchains. However, people have not yet concluded a unified answer on what DeFi is. What is your definition?

That’s a good question. Actually, DeFi is a board and not rigorous concept without a clear or commonly acknowledged definition. In my opinion, DeFi is non-custodian open-source financial protocols and permissionless products. Just like Money Legos, anyone can use DeFi to make new financial products based on what they need. The key premise is that assets are in the users’ own hands, so any unauthorized third party is not capable of accessing users’ assets.

DeFi money legos

As DeFi’s popularity continues growing, a lot of projects have flooded in. Are there any low quality projects?

Indeed, yes, it’s also because of lacking of strict definition. To determine whether a project is “true” DeFi, please refer to the criteria I mentioned above — non-custodian, open source and permissionless.

It is said that DeFi is the new Fintech, what do you think?

DeFi is a kind of financial innovation. In this case, DeFi can be seen as part of the generalized Fintech. But there are key differences between the purpose end and technology of these two areas. Fintech uses centralized database with technology such as machine learning to make more accurate predictions and collect user data. DeFi is built on distributed ledgers, giving users full control of their own assets and data.

Comparison with Fintech and Open Banking

I’ve written an article about this. You can check it out here.

Maker is actually a very early project. It is a star project that has almost grown up with Ethereum. Can you give us a more accurate description of the MakerDAO project and its vision?

Yes, born in 2015, at the same time as Ethereum, MakerDAO is a very early project.

MakerDAO's goal is to create the world's first unbiased currency - Dai. Both traditional currency and fiat-based custody stable coins require third-party banking institutions to issue their liabilities, while everyone can act as Dai's issuer, as long as you have assets within Dai's collateral framework. These assets are beyond the boundaries of sovereignty and are fairly distributed around the world, such as Ethereum. Dai is also permissionless. Just remembering a combination of a dozen words (mnemonic), you're ready to generate a wallet address, open a financial account, and transfer your assets from a small village in southwest China to another small town in South America without any restrictions. Bitcoin can do the same, but its value can be very volatile.

Dai managed to make it stable, and more importantly, Dai is a programmable currency. Many DeFi applications we see now can be seamlessly developed on Dai's protocol - the Money Legos. This means that the Maker protocol not only can benefit average users, but generate new local business opportunities. It can be said that Dai realized Bitcoin's original vision - a peer-to-peer electronic cash, as well as open and scalable.

Dai’s new logo

MakerDAO’s multi-collateral Dai is coming soon, what are the advantages compared to the current version?

Put it simply, the most obvious advantage is that in multi-collateral Dai, you can also use other assets among ETH to generate Dai. This will increase Dai’s circulation, bring liquidity, and derivative possibilities to other assets. See more details here.

For users, one of the killer features of multi-collateral Dai is the Dai Savings Rate (DSR). You can view it as a demand deposit account for the cryptocurrency without any counterparty risk. See more details here.

In addition, multi-collateral Dai can directly use Dai to pay the stability fee without holding MKR. Multi-collateral Dai’s liquidation mechanism has also improved and will use a auction mechanism instead of a fixed discount to sell collaterals. This is good for price discovery and it reduces the risk of under-collateralization due to sudden crash or attack on collateral prices.

Did Maker have any difficulties while accessing real-world assets to a diversified Dai? If so, what were they?

Due to the immutability of the blockchain and the inherent financial nature of the smart contracts, developing blockchain is more like developing hardware, or even close to rocket engineering. Every step needs to be precise and secure, so we did a lot of testing and auditing to ensure that the transition phase of multi-collateral is safe. See more details here.

The biggest challenge in synthesizing real-world assets is not the logics on the blockchain, but the finding of credible institutions offchain. Our strategy is to work with traditional institutions who will address the issue of compliance and custody of offline assets, while Maker expertises on onchain business logic and code.

Are there any synthetic assets that are more relevant to average people?

Stable coins. Multi-collateral Dai can support all the stable coins issued on Ethereum.

At present, people from the US and China remain to be Dai’s main users. To expand the market, it’s necessary to access more users into Dai community, especially those who are in developing countries and do not have a bank account yet. Will Maker offer more support and services for them? And how will you do that?

We will. Latin American countries also share a large part of Dai customer base, especially those countries with high inflation, whose local residents actually use Dai as a store of value. MakerDAO’s protocol can be used by various parties for different needs, such as the Dai suppliers and customers.

For instance, in the US and Europe, a lot of people are Dai suppliers who collateralize their assets to borrow Dai and use it for short-term liquidity or leverage. People in Latin America and other countries suffering from local inflation, on the other hand, are mostly Dai demanders who are buying Dai generated from US and Europe as a store of value. China plays a mixed role, where we see people both generating Dai for liquidity and buy Dai for accessing to US dollar exposures.

This shows a great advantage of DeFi — connecting a frictionless global money market. As mentioned above, the goal of MakerDAO is to create the world’s first unbiased currency.

We are also helping and educating areas such as Africa, and they have local spontaneous organizations and users as well. Besides, Dai is a donation fund accepted by the UNICEF.

As the largest onchain asset pool, what contribution does Oasis make to the liquidity of the DeFi ecosystem? What are the new features of Oasis.Trade?

The Oasis protocol is the first DEX on the Ethereum that is completely on chain without any fees, and it plays a key role for Dai’s liquidity. As you said, Oasis is the world’s largest on-chain exchange. This new version not only includes new trading pairs: BAT, REP and ZRX, but also integrates the features of Dai Ssavings Rrate and Dai borrowing. See more details here.

The goal of Oasis Trade is to create a one-stop DeFi hub, just like in Alipay where you can transfer, deposit, borrow and manage your money. With Oasis, you can also trade in various global assets.

For average users, the entry threshold and cost of DeFi products are relatively high. Will MakerDAO pay more attention on how to optimize user experience?

The threshold for blockchain products is undisputably high. This is a complex issue involving private key management and other things. There are many wallet applications optimizing user experience in this area, such as smart contracts wallet.

In fact, for users who know how to use the blockchain wallet, MakerDAO’s product is non-brainer — just one click you can complete the process of collateralizing assets and borrowing Dai. This is 10× more efficient than traditional financial applications. Here you don’t have to submit documents, upload data, verify your mobile phone number, or even download another APP to create a cash loan (Dai) for yourself. This is truly incredible.

Even Usain Bolt can’t catch us and @MakerDAO !

On the other hand, we also place great emphasis on product localization, such as local wallet collaboration, integration of traditional exchanges. We had a fully localized Chinese version product in the first place. See more details here.

What opportunities do you see in the current DeFi market? Or what is the opportunity for taking part in the MakerDAO ecosystem?

Currently, one neglected market is data collection & analysis platform for on-chain lending data. With the rise of DeFi, there are many economically meaningful onchain transaction data, but few companies standardize this data to establish an identity system and a notification system.

For the average user, the easiest way to take part is buying some Dai, then deposit it into DeFi products and get 5% -10% annualized return. Since the onchain assets are transparent and over-collateralized, there is almost zero-default risk.

Which path do you think DeFi will move to?

Assets! Assets! Assets!

To achieve the massive adoption of DeFi, firstly we need to have more assets onchain besides Ether. We have seen many banks, including Santander in Spain and Industrial Bank in France, piloting and issuing bonds on Ethereum, which is a very good signal and a nice beginning.

Some people say that DeFi will make Ethereum no longer fork, and the “forked governance” will cease to exist, thus coming up with the concept of “post-forking era” . What do you think of this idea?

I basically agree with this. DeFi means that Ethereum has evolved from an era of barter exchange to an economy with a money market. For example, when an economy first appeared, there was no cost for people to move to a new village. They took their cattles to another place and went on cultivating another land. But with the emergence of infrastructures, the coupling of monetary markets and financial systems, residents and enterprises have to give up local currency and business relationships if they want to leave their homes. This is a huge cost. Money itself represents a strong network effect and cross-generation debt relationships.

Most of DeFi’s projects are built on the chains like Ethereum, so the technical breakthrough of DeFi products will also be constrained by the performance of existing blockchains. What do you expect to improve in the aspects of underlying public chain to support further development of DeFi?

Honestly, I don’t think that the performance issues of Ethereum limits the development of DeFi. The performance of the current Ethereum is actually enough for DeFi. Slow speed is Ethereum’s feature, not a bug. Important large-value transactions can be carried out on the main chain with security guaranteed, while micropayments can be completed in the state channels or sidechains.

Taking Dai as an example, large transactions can be chosen to execute on the Ethereum main chain (POW Consensus), while micropayments can use the xDai sidechain (POA Consensus) for speed and convenience. This is a layered solution similar to RTGS and Deferred Net Settlement(DNS) in the traditional system. As an implication for the design of the underlying public chain, the system must support a hierarchical structure.

Eth 2.0 is expected to go live early next year. What changes do you think Eth 2.0 will bring to the DeFi ecosystem? You’ve been pessimistic about Libra, why?

In my opinion, one of the biggest changes in Eth 2.0 is that Ether will be changed from interest-free assets into interest-bearing assets, which is significant for DeFi, and there will be Ether bond markets.

Libra has many problems, including contradictory economic models, lack of expertise on money market, and messed-up regulatory strategies. I’d like to talk about the economic model a little bit. Libra wants to solve the global payment system, however, creating a new unit of account makes it very difficult for local payment businesses to accept it as they need to bear both exchange risk and currency risk. In addition, according to its economic whitepaper, the assets in the Libra reserve (a basket of assets) will be cash and short-term bonds of major countries, while Libra itself will be interest-free. But most of the assets of these major countries now have negative interest rates, In other words, the business model of Libra design is losing money. It is nonsensical that a profitable institution is adopting a business mode that loses money, unless Mr. Zuckberg has the magic to change gravity.

For governments, from your point of view, how should governments get involved into the DeFi ecosystem?

The only way the governments can regulate DeFi is through a cooperative, cross-border banner as the backed asset is cross-jurisdictions. “If you can’t kill it, join it.”

What do you or the MakerDao team think of the digital currency DCEP to be released in China?

Although there are rumors says CBDC is coming soon, but I believe there is still a long way to go, the underlying risk is unknown and the benefit is marginal.

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