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DAI Is Moving Beyond Ether, But DeFi Isn’t Decentralized Just Yet

DAI Is Moving Beyond Ether, But DeFi Isn’t Decentralized Just Yet

The Takeaway
MakerDAO, the flagship project of 2019's decentralized finance (DeFi) boom, launched the multi-collateral version of its DAI stablecoin on Monday.
Users can now "lock in" BAT as collateral for dollar-pegged loans. Previously, only ether could be used as collateral.
But despite the rapid growth of the sector and the diversification of assets involved, DeFi is still influenced by a handful of central players: Namely, Polychain Capital, a16z, 1confirmation, and unknown MKR whales.
With governance decisions largely controlled by those with the largest stakes to lose, some crypto veterans are pushing for a closer examination of the MakerDAO marketing directives.
MakerDAO may be diversifying the assets it works with, but it has a long way to go to decentralize the power to make key decisions.

On Monday, the cryptocurrency lending platform moved to multi-collateral stablecoin loans, marking a new era for the decentralized finance (DeFi) movement.

Previously, collateral for loans could only be committed in ether, but now MakeDAO also works with the Basic Attention Token (BAT) and also offers a DAI savings option. (The old version of the ether-backed DAI stablecoin is now called SAI, signifying “single-collateral.” For the sake of simplicity, this article will use the term “DAI” interchangeably because service providers may automatically convert it and community pages such as the MakerDAO GitHub are urging people to freely turn their SAI into DAI.)

But while users have more choices, a relatively small group of individuals govern the protocol.

More than 150 unique MKR token addresses voted in Monday’s transition proposal, one of the highest voter turnouts to date, MakerDAO president Steven Becker said. However, that vote included roughly 80,000 tokens estimated to cost $662 each and just five addresses represented more than 50 percent of voting tokens. In short, the votes cast by people with modest holdings were mostly a ceremonial nod of approval. 

“It was really important to showcase what governance [participants] have done in selecting BAT, in order to figure out what to do going forward with other collateral types,” Becker said in an interview Monday.

It’s unclear who the voters were that powered the BAT choice, but Becker said the attributes discussed in public calls included “liquidity in secondary markets” like Coinbase and other exchanges. The protocol itself is open source, but the people building accessible portals to it are generally working for such traditional firms.

The bottom line is the majority of people funding this movement, which they retain the power to influence, could fit into one room. In this sense, DeFi isn’t all that decentralized yet.

The current DeFi ecosystem is predominantly made up of “centralized products and services” with a better user experience than interacting directly with blockchain protocols, said veteran crypto investor Meltem Demirors.

“We are hopeful that over time, disintermediation will become possible,” Demirors said, adding that “market forces” and regulations have forced “intermediation and centralization by service providers.”

Rather than getting hung up on prompt decentralization, DeFi companies should focus on transparently disclosing their roles in the ecosystem and the fees they charge, she said.

Those roles are often intertwining. For example, ethereum creator Vitalik Buterin funded the early development of exchange tool Uniswap, founder Hayden Adams told CoinDesk in May. Then Paradigm, including Coinbase co-founder Fred Erhsam, led the first venture round for Uniswap. 

Paradigm also participated in the recent Compound raise, and this fund was just one of several from the Series A that hailed from the same group funding MakerDAO, like Andreessen Horowitz’s a16z crypto fund. Polychain Capital, headed by Coinbase alumnus Olaf Carlson-Wee, and Coinbase Ventures both also invested in the DeFi startup Dharma Labs. Following the raise, Dharma Labs switched to leveraging Compound’s protocol. 

Further, contrary to what the term DeFi might imply, MakerDAO can “terminate or suspend” access to DAI, and the Compound lending pools are actually custodial. This may be a compliance measure, to avoid usage that violates economic sanctions. After all, the people working for companies like the Maker Foundation and Coinbase interact with the technology in measurable ways, even if they do not claim ownership of it.

Back in 2018, four years after MakerDAO started, Demirors described Coinbase as one of the entities using “fancy financial engineering” to offer the illusion of growth.

While there are many unknown DeFi users, those who benefit the most from it appear to be those who have influence in the system. 

Even Compound founder Robert Leshner said so far “teams in crypto that have stockpiles of DAI and crypto” are the most frequent protocol users.

Blockchain consultant Maya Ze

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