Libra is the “poor man’s MakerDAO” — but in a bad way

In a recent episode of Laura Shin’s Unchained podcast, venture capitalist Nick Tomaino referred to Libra, Facebook’s planned stablecoin, as “a poor man’s MakerDAO.”

I loooove this as a shorthand description. In fact, I definitely plan start to using it myself from now on as a writer. (Thanks, Nick!) But as a practical matter, I’d also say there may be some downsides to the reality that the phrase so aptly describes.

Some quick background for newbies: MakerDAO is a really popular Ethereum-based platform in which users can put up their ETH tokens as collateral to generate DAI, a stablecoin token pegged to the U.S. dollar. You do this by creating something called a collateralized debt position (CDP), which includes a “stability fee” on the DAI you generate, similar to an interest rate. The DAI must eventually be paid back, and your CDP can be liquidated (with an associated fee) if its leverage falls below 2:1, representing the ratio between ETH pledged as collateral and DAI outstanding. (Full disclosure: I have a small CDP myself, so I’ve been experimenting with all this stuff firsthand the last few months.)

From a user standpoint, the upside here is that MakerDAO’s CDPs can be used as an ultra-democratic, small-scale banking system, without the gatekeepers you would encounter trying to get a traditional bank loan. As long as you have ETH to pledge, you can generate DAI (which, again, are effectively the same as dollars) to do anything you want. In particular, many CDP holders use the DAI they generate to buy additional ETH, effectively making a leveraged investment in ETH.

It’s also worth noting that DAI tokens can be bought and sold freely in their own right. Thus DAI can be used by anyone as virtual dollars, whether the person has created a CDP or not.

And this is where the comparison with Libra comes in, as Libra really only replicates the “free circulation of DAI” part of the MarkerDAO formula. In fact, the great promise of Libra is in its potential massive circulation among users as a native payment tool on the Facebook social platform.

In terms of how stablecoins are generated in the first place, however, Libra has no equivalent to MakerDAO’s CDP. According to the Libra project whitepaper, Libra generation and stability will be managed centrally by a consortium of Facebook and its partner financial institutions.

By extension, this means Libra doesn’t offer the average Joe or Jane the profit opportunities that MakerDAO does via its CDPs. The generation of DAI on the supply side is participatory, which involves risks but also rewards that are open to anyone. This isn’t the case with Libra.

So, yeah, I guess one thing could be said to be the “poor man’s” version of the other here, in terms of targeting poor people as a market segment. Libra definitely does that. But MakerDAO is clearly better if you want to stop being poor.

Header image by Fabian Blank via Unsplash.