BitBay (BAY) vs. Maker (DAI) — The Ultimate Breakdown
This article is written for comparison purposes. This is NOT investment advise. For a comprehensive description of the mechanics each stability system, please check out these links:
BitBay (BAY):
https://medium.com/bitbay-blog/bitbay-dynamic-peg-faq-8cd257da63fd
Maker (DAI):
While many decentralized stablecoin projects remain in the “whitepaper” phase, both BAY and DAI have established extensive code and have maintained fully operational platforms for a significant period of time.
Since 2015, BAY has proven itself as an effective form of both deposits and payment within BitBay’s decentralized marketplace. It runs on a proprietary blockchain, and subsequently considered a “coin”. The BitBay team is in the final stages of testing its Dynamic Peg, which will soon be released upon exchange integration.
With the Dynamic Peg, BAY is not fixed to any one price, like many other “stablecoins”.
Meanwhile, DAI has been trading live since December 2017, and the Maker team has been active since 2015. DAI is a “token” traded on the Ethereum blockchain. MKR is a secondary token, which acts as a tool for governance over the entire system. Soon to be released is “Multi-collateral DAI”, which aims to better diversify from its current collateral of ETH.
The mechanism behind DAI aims to achieve perfect parity with 1 USD.
The Differences
Collateralization
From the outside, the most apparent difference between BAY and DAI is collateralization.
BAY relies on a unique “non-collateralized” model, which is not designed to adhere to a fixed price. Through “direct democratic” voting, stakers of BAY can collectively adjust the liquidity of BAY’s supply, which directly affects its “Liquid BAY” price. With a dynamic supply liquidity controlled by network participants, BAY only needs volume to back its price.
Meanwhile, DAI relies on a “crypto-collateralized” model. At the time of writing, the collateralization ratio for DAI is 150%. This overcollateralization of ETH to DAI ensures that DAI can maintain its price peg of USD $1, even if the collateral decreases in value (up to a certain point). However, with the great benefit of insurance that overcollateralization brings, comes two significant drawbacks, in price enforceability during a collateral bull cycle and scalability. (We will cover these below)
Enforceability
The ability of a stablecoin to enforce a direction in price is absolutely critical to its success. There are dozens of currency pegs throughout history which lacked this ability, and have disastrous results to prove it.
BAY
Due to its lack of collateral, a fixed supply rate, dynamic liquidity, BAY can vote to quickly enforce any price, in nearly every market condition. That being said, it has a slightly stronger ability to enforce a price during negative market cycles. This downside strength is attributed to several incentive mechanisms which are native to both the Dynamic Peg and the BitBay platform.
The first mechanism is BitBay’s Double Deposit Escrow (DDE). DDE enables the facilitation of peer-to-peer contracts in BitBay’s decentralized marketplace. As the user-base for BitBay’s decentralized marketplace increases, so does the demand for liquid BAY needed within its Double Deposit Escrow contracts. As both buyers and sellers lock Liquid BAY into contracts for the duration of their deal, the amount of available Liquid BAY within the global supply is reduced. This helps put positive price pressure on Liquid BAY’s exchange rate during a market downturn.
Another BAY incentive mechanism (native to the Dynamic Peg) is its variable stake reward system, which encourages HODLing. Each reward is based on the different array of liquidity within a wallet.
The stake reward incentive structure is as follows:
- Liquid = 5 BAY
- Reserve = 10 BAY
- Frozen Reserve = 20 BAY
- Frozen Liquid = 40 BAY
Those who freeze liquidity will receive a higher reward for staked blocks, which helps to preserve liquidity during negative price movement, saving it for future market reversals.
DAI
Contrary to popular belief, DAI’s price enforceability has recently shown to become weak during positive market movement of ETH. As the price of ETH increases, so does the value locked into each CDP. This is commonly said to strengthen DAI’s peg. However, with the increased price of collateral, comes the incentive to open new CDPs. This directly inflates the DAI supply. So a bull market for DAI’s collateral presents a strong weakness. In this type of scenario, DAI has limited tools to combat a total peg collapse. A variable annual “stability fee” is used to help curb this inflation. However, this mechanism has recently seen mixed results. (see more below)
Alternatively, if the price of the ETH decreases during a strong bear cycle, the overcollateralization model can present a significant weakness. There are a few tools in place to compensate for this.
The first of these tools is the using of MKR to purchase and burn DAI. With this system, MKR “Keepers” scan for subpremium CDPs which are nearing the minimum safety ratio, and essentially purchase and close the CDP before they become too risky. This incentivises MKR holders to maintain a healthy debt environment, and minimize unhealthy CDPs.
The second of these tools is the mandatory liquidation of CDP’s at a breach of the minimum safety ratio (currently 150%). This safety ratio represents the absolute minimum a CDP can be collateralized without being mandatorily liquidated.
The third (and final) tool to prevent a system collapse is a “Global Settlement” or emergency shutdown. This tool can be used in any market condition. In this scenario, a small group of MKR holders elect to shutdown the system, and close all CDPs, and return all collateral to CDP owners at full value. Since this tool has not yet been used, it is difficult to say how effective it would be.
Fees
BAY requires zero fees to use, and the BitBay platform is free to use and available to anyone. However, it is worth noting that a user must own some BAY to stake a vote.
Dai requires a variable “Stability Fee”, (in addition to typical ETH transaction fees). This stability fee is subject to change based on consensus of MKR token holders, and accrues annually for all open CDPs. This fee is used as a lever to control the lifespan of open CDPs. At the time of writing, the annual fee rate is at 19.5%, which continually accrues on the CDP over time and encourages CDP closure. The effectiveness of this fee is in part due to the current market conditions of ETH.
Complexity
In general, any stability system is going to have its fair share of complexity. When comparing BAY to DAI, however, the complexity lies in very different areas. For BAY, the structural mechanism of freezing and unfreezing coins is quite simple. There is 1 blockchain, 1 coin, and 5 voting options. Generally speaking, with less structural complexity, there is much less to break. However, with BAY’s “coin-holder direct democracy”, there is a certain complexity of human nature that is worth noting. The motive behind voting could prove to be a complex nut to crack and ever-changing. The majority consensus is always the determining factor and the voting never ends. After every 200 blocks (3.5 hours on average) a new vote session begins.
When it comes to DAI, most of its complexity lies within its collateralized structure. There are 3 tokens involved (ETH, MKR, DAI), each with their own economic variables that collectively affect the overall integrity and efficiency of the system. This, in addition to both stability fees and a set goal of maintaining exact parity with the US Dollar, makes it an extremely complex and fragile system. Such complexity creates a very difficult balancing act, in which a model of decentralized governance must constantly maneuver within. To some, this can be seen as a major vulnerability, which leads us into the next section.
Vulnerability differences
When it comes to BAY, there is one large vulnerability which is quite common among non-collateralized stablecoin models: transaction volume. Since BAY doesn’t have any collateral backing its price, and stakers vote on the level of supply liquidity, there must be enough volume present to provide adequate liquidity to execute orders under the current supply rate. While this can be a major problem for a majority of non-collateralized stablecoins, BAY has a highly effective weapon to help bring real volume to the table: The BitBay Marketplace and DDE contracts. While these contracts are primarily designed to conduct business without a middleman (or a fee), they also elegantly serve the purpose of creating genuine transaction volume to support the Dynamic Peg.
In short, the Dynamic Peg provides stability to accept BAY as a both a medium of exchange and store of value for the p2p marketplace/contracts. At the same time, the contracts create volume for the Dynamic Peg, which creates a simple, robust, and symbiotic relationship for the entire system.
Due to its structural complexity, DAI has several known vulnerabilities. The first being the reliance on the price of its underlying collateral, ETH. As the price of ETH fluctuates, different mechanisms come into play to either encourage or discourage the opening/closing of CDP’s. However these mechanisms have their limits and are still in the experimental phase. The stability fee, for example has been increased 33 fold over the last 3 months, to encourage the closing of CDPs during ETH’s recent increase in price. Unfortunately, those who have used their CDPs as leverage to purchase more ETH have realized that it is more profitable to leverage into ETH no matter what the stability fee has been. This steady opening of CDPs has led to a large increase in DAI supply, which has led to a lengthy breaking of DAI’s parity with 1 USD. If the price of ETH were to continue to increase more drastically and for a longer period of time, the entire system might have to resort to a global settlement / emergency shutdown.
A second vulnerability of DAI strictly has to do with its base model of overcollateralization. In order for it to scale and experience “the network effect” users must lock up a minimum of 150% collateral to use the system. This can essentially be seen as a -50% handicap when it comes to adoption.
For example: In order for DAI to reach a $100 Billion Dollar market cap, there must be a minimum of 150 Billion Dollars locked up in CDP’s.
Meanwhile BAY only need’s $100 Billion Dollars to reach the same level of adoption.
Purely reliant on market conditions of the underlying collateral, DAI’s collateralization rate has been known to fluctuate wildly. The current rate (at this time of writing) is at 517%.
This upfront cost / barrier to entry might just be DAI’s Achilles heel.
Lending/Leverage Options
When it comes to lending, BAY’s Dynamic Peg creates a variety of unique, permissionless p2p lending capabilities.
One example is the ability to create peer-to-peer zero-interest loans. With this model, anyone can lend premium liquidity in return for Frozen Reserve BAY. The lender receives “interest” from frozen coin stake rewards, without the borrower paying for it!
***Note: The Dynamic Peg liquidity rates may change before the unfreezing of lenders’ Frozen Reserve BAY. This difference can be covered by the borrower within the contract.
Another option with Bitbay is a peer-to-peer leverage contract. When combined with the stability of the Dynamic Peg, BitBay’s double deposit escrow can be used to facilitate a leveraged loan between two parties, without the need for a third party involvement. In comparison to DAI’s “self-enforced leverage”, this method can offer much more flexibility, as both the collateralization rate, type of collateral can be fully customized.
For DAI, it’s inherent use case has proven to be a self-lending platform. Its root mechanism of overcollateralization in return for another asset has shown to be quite the effective leverage tool for those who want to increase their long position of ETH. With multi-collateral DAI around the corner, this leverage could, in theory, be used to acquire more of any integrated asset.
Summary
At the end of the day, BAY and DAI are two completely different animals. While they are both striving to achieve some sort of stability in the market, they are built with largely different use cases in mind. BAY can be seen as “direct democratic” means of enforcing a stable value, to be used as both a medium of exchange and a store of value for its p2p marketplace users. Meanwhile DAI can currently be seen as a medium of exchange for those who are looking for permissionless leverage.
