Ethereum founder Vitalik Buterin has historically discouraged the storage of material value in ether (ETH), as it is by nature, an expendable gas created to manage network resources. Therefore, there is significant demand for stable stores-of-value operable within the Ethereum ecosystem. The most popular ‘stable coins’ today focus on pegging their token value to the dollar (USD) and design centralized systems to minimize volatility.
Currently largest by USD market cap, Tether (USDT) utilizes a dubious off-chain custody approach that relies on centralized trust to create a stable coin which is released into circulation via centralized exchanges. Despite USDT’s dominance, this approach has been met with discontent and mistrust in the market. In the long term, TFL Holdings believes the decentralized alternative MakerDAO will emerge as the dominant stable coin in the Ethereum ecosystem for highly-liquid dApp commerce.
For a decentralized stable coin to function, a large on-chain collateral source must exist to back the liquid stable coin supply. As an ERC-20 token, MakerDAO currently utilizes ether (ETH) as its collateral source. A suboptimal solution due to ether’s relatively-high volatility versus other collateral sources. However, the project plans to release a multi-collateral DAI which will ultimately support other on-chain collateral sources.
Due to physical gold bullion’s dominant position as a stable store-of-value in global trade, a decentralized platform capable of digitizing gold ownership on the Ethereum blockchain has a high probability of capturing ‘store-of-value’ market share in the emerging global dApp ecosystem. One byproduct of a project emerging as a dominant store-of-value on Ethereum will be its use as a ‘collateral coin’ in dApps which facilitate long-term contracts such as MakerDAO’s CDP.
Based on this thinking, TFL Holdings believes DGX market cap will outpace DAI market cap in the long term. Due to ‘haircuts’ native to CDP lending structure, for every one DAI created utilizing DGX, a greater amount of DGX will have to be locked as collateral. In addition, DGX’s utilization as a collateral coin will extend its utility beyond financing stable coin systems such as MakerDAO, ensuring its dominant market capitalization.
However, TFL Holdings believes DAI will turnover faster than DGX resulting in higher daily volumes. In short, DAI will be the highly-liquid, short-term ‘stable coin’ utilized in daily trade. But DGX will emerge as the long-term collateral token with dominant market cap.
Tyler Logsdon is a CPA and Registered Securities Representative located in Newport Beach, California. He is actively employed in the blockchain industry.
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