MakerDAO’s stablecoin Dai, isn’t exactly stable. This is a problem for the asset, which, like all stablecoins, is engineered to maintain a constant price. (To put it simply, collateralized stablecoins are backed by fiat currency, precious metals, or digital assets, allowing people to convert more volatile crypto easily in and out of a more stable alternative without withdrawing it into fiat.)

Dai hovers around its $1 peg, but lately its price has been a bit low for comfort, forcing those in the Maker community (people who hold MKR tokens) to take action.

Since February, MKR holders have agreed on three different raises of Dai’s “stability fees,” which are essentially interest rates people have to pay for borrowing Dai. First came two separate fee hikes of 0.5 percent. When those didn’t work, the community enacted an additional 2.5 percent increase. That didn’t quite stabilize Dai either, so the MakerDAO community is currently debating adding another two percent to the coin’s borrowing rate.

“What’s been happening is that there’s been a lot more demand to borrow Dai recently than to hold Dai,” MakerDAO CEO Rune Christensen tells us. “As a result, the soft peg that Dai has to $1 U.S. dollar became really soft.” Since Dai’s price was floating below $1, holders didn’t want to liquidate their holdings of the stablecoin, because they’d be losing money. By implementing higher interest rates, borrowing Dai would become more expensive, incentivizing people to borrow less and own more. In other words, Christensen hoped that by “pushing down the supply,” it would balance out with the demand.

The increased stability fees “didn’t actually succeed in pushing down the supply,” says Christensen, “but it did extend the growth.” Demand started catching up to supply, and Christensen felt that MakerDAO’s governance model was “validated.” But the fourth vote on raising Dai’s borrowing fees is still pending.

We caught up with Christensen last Thursday so he could make sense of MakerDAO’s complex governance system, the generation of Dai, and the maintenance of the stablecoin’s elusive $1 peg.

After all those votes and fee hikes, Dai’s not back at its $1 peg?
It’s never exactly at $1. You can always buy it for slightly above $1 and sell it for slightly below. But it’s much closer to $1 now.

Why did MakerDAO choose the U.S. dollar as a peg to begin with?
We chose the U.S. dollar because it’s the most widely used currency.

There seem to be of a lot of moving parts in the MakerDAO ecosystem. What is its primary focus?
The main focus of MakerDAO is the creation of the Dai stablecoin. The Dai stablecoin is a decentralized cryptocurrency that is stable at $1. Stablecoins in general [represent] when blockchain finally becomes functional for regular people… because no longer do you have to accept this extra cost of volatility and uncertainty that you otherwise have to do with regular cryptocurrency. Our entire system is based on how to create a stablecoin without sacrificing decentralization. How do we combine the power of traditional finance and stability with the advantages of the blockchain?

As for this whole governance dynamic that’s happening right now, all the parameters of the system that keep Dai stable are controlled by the MKR token holders. Where Dai is for regular people, MKR—which is not a stablecoin—is for financial specialists who want to govern the system.

What is MKR’s volatility based on?
The value of MKR goes up when the system remains stable, because overtime there is a premium that’s paid by people taking loans from the system. MKR holders ultimately have a very strong incentive to focus on prudent governance about creating long-term stability because once multi-level Dai launches [more on that below], it will have this bailout feature where if there’s bad debt in the system, MKR is inflated to pay for that.

That nicely aligns the interests of MKR holders with the Dai holders. [MKR holders] have no incentive to try and gamble and make quick, easy money, because if they inject lift into the system, that will be directly priced into the MKR token. It will increase the probability that the MKR token will be diluted. Nobody wants their token diluted.

So the reason why people buy MKR tokens is so that they can make decisions about Dai?
That’s the purpose of investment, to properly stabilize Dai. But the reason why people assume [MKR’s] value will increase over time is because MKR gains value when the system is used, specifically by the CDP [collateralized debt positions] holders. The CDP holders pay an interest over time on the loans that go to the MKR holders. The more CDP holders there are, and the longer the system remains stable, the more money will go to MKR holders.

This money is used for what we call “buy and burn”—the act of purchasing MKR tokens and then burning them from the supply, which decreases the supply of MRK over time and makes the remaining MKR more valuable.

So there are Dai holders, MKR holders, and also CDP holders? What exactly are CDP holders holding?
The on-chain mechanism that backs visibility of Dai is called the CDP engine. It’s essentially smart contracts that hold collateral, like valuable assets, and then log the collateral behind debt. Doing that generates Dai, and that’s how Dai is created and enters the circulation. What this really means is it’s a system for collateralized lending.

What types of collateral?
Right now, in beta, we are running a single collateral—the Ethereum token. That’s just to test out the system. The real value comes once we launch the multiple level buyer system.

When will that launch, and what will it look like?
We don’t know exactly when because it’s very hard to predict the outcome of final security testing, but we definitely expect it will happen this year—relatively soon. What that will enable is collateral lending with any asset.

You can think of it as similar to mortgages. You pledge your house to the bank, the bank gives you a loan, then you have to pay down the loan over time plus an interest rate. When you pay the loan in full, the bank no longer has a claim to your house. Maker [will allow] you to do this but with any asset. It could be with Ethereum tokens, or some other token you have.

Could it also be your house?
It could also be a tokenized version of the deed to your house.

Have you heard any interest from people who actually want to use their house as collateral on the Maker system?
Yeah, many times. For people in the Ethereum ecosystem, it’s kind of like a wet dream.

On one hand, there’s the demand from individual users who want to get a cheaper loan from the blockchain. If they can cut out the bank as the middleman and are technically savvy enough to understand the blockchain, then there’s definitely people who are interested. But that’s not where the bulk of where we see the long-term demand coming from. The large-scale demand that can fuel a monetary system and back a stablecoin, that will come from the traditional financial system and institutional users. What they will do is compare the interest rates from one lending facility with what Maker can offer them.

What institutions is Maker working with so far?
We’re working with mostly startups that were previously using banks to back their assets. They’re looking to switch over to Dai once our system is scalable enough.

Coin Direct is a startup we’ve invested in. They’re making a wallet as well as an on and off ramp for Africa. Not only can you hold cryptocurrency as an African user, but now there’s a very convenient way to move in and out of Dai from the banking system in African countries.

Since we’re talking stablecoins, did you see the news about Tether not being fully backed by U.S. dollars? Do you have any thoughts on that?
I haven’t seen that news, unfortunately, but that’s an interesting development. There’s been a lot of uncertainty around Tether, of course, for many years. I would hope that the people who hold Tether are people who understand that Tether is money you can afford to lose.

I think stablecoins like USDC and other centralized stablecoins are much less likely to suddenly evaporate like this. I would imagine that that’s where people have put money that they cannot actually afford to lose, whereas Tether is more like play money.

So you trust USDC? You think it’s a solid stablecoin?
I definitely think it lives up to the highest standards you can really hold a centralized stablecoin to, which is fully regulated, fully audited, and issued by very respected institutions with good reputations. There is USDC. Then there is Gemini USD, which is a stablecoin issued in a similar setup, although it is not as prominent as USDC. USDC really is the most prominent of the highly legit, centralized stablecoins.

Do you hold any other stablecoins besides Dai?
No, I don’t. But I do think that stablecoins in general really benefit each other from a liquidity perspective. We haven’t seen it happening, but I hope that over time you will see more and more people trading something like USDC against Dai, because that will help liquidity of both systems.

MakerDAO currently uses the Ethereum blockchain, which has some scalability issues. Would you consider moving away from it at any point?
I don’t think the impact of new blockchains is going to be projects moving around. As we see more and more blockchains pop up, we also see better and better cross-blockchain communication tools and pegging systems and transfer systems. The way we view scalability and the multi-blockchain future at the Maker Foundation, is that we just want to make sure that whatever blockchain we are on, we need to be able to reach all the other blockchains.

You mentioned that there are more and more tools being developed that help with interoperability between blockchains. Are there any in particular that you’re excited about using?
The stuff I’m the most excited about is the stuff that actually works. In that category, we have, for instance, WBTC, wrapped bitcoin, which is a centralized solution that allows bitcoin to come onto the Ethereum blockchain. We also have—I’m not sure if it’s live yet—the EOS to Ethereum bridge. It’s being developed by Kyber Networks, which is also leading the charge on WBTC.

I think the EOS bridge is especially promising because it shows how much utility you create when you build a bridge correctly. Not only will the EOS bridge mean we can take EOS tokens onto Ethereum and, as a result, use them as collateral in the Maker system, but we can also transport Dai onto EOS. Once we’ve linked these two economies together, we can share in the stability and the liquidity of the entire system that encompasses both of these blockchains, rather than being siloed.

Photo courtesy MakerDAO.