MAKER Will Soon Increase MKR Token Supply

March 21, 2020 4:24 PM UTC

Most tokens have come to be through ICOs and a few are accessible only through mining. MAKER DAO is an exception to both these channels as the now leading DeFi protocol came to be through a different means.

MAKER’s MKR tokens were preminded and subsequently sold via bids on the project forum, orders on LedgerX, and finally through a MKR marketplace. This gave the team considerable power over who gets the tokens, and at what price. For example, the VC fund Polychain received MKR tokens at a steep discount from market levels on the claims that the fund would attract a strong network in the traditional financial ecosystem. 3 years after the deal, it’s tough to see what benefits Polychain brought to MAKER. Meanwhile, the VC has walked away with millions in profit.

As MAKER was pre-mined, many may be led to believe that the token has a fixed supply. The reality is a bit different.

Inflation is Built into MAKER’s Protocol

MAKER allows users to deposit assets as collateral to claim DAI or SAI, which are decentralized stablecoins that try to maintain the value of $1. The assets used as collateral are hyper liquid, hyper volatile cryprocurrencies.

Following last week’s price collapse in every major coin, MAKER faced a first-ever dilemma in which the amount of DAI issued exceeded the amount in collateral. The reason for this is that MAKER has made its protocol exceedingly complicated and has made little to no effort in making the larger cryprocurrency audience aware of the system in layman terms. This is how MAKER lost $4M.

When the price of assets fell, MAKER’s protocol conducted an auction of some collateralized assets. The purpose of this is to enable auctioners to buy underpriced collateral so that they may sell them at a profit, while enable the protocol to have sufficient funds to cover the issued stablecoins. Instead, due to MAKER making its system overly obscure to the public, only 1 person participated in the auction and claimed the collateral for free as there was no one to outbid his/her offer.

Subsequently, MAKER sold $4M of user deposits for $0.

That money has to come back not for the sake of the users whose money MAKER’s negligence, by making the system so inaccessible, has lost, but to ensure the DAI/SAI stablecoins that have been issued are not greater in circulation than the value of assets that backs them. Now, MAKER shall print new MKR tokens to sell to auctioners for DAI/SAI. The paid stablecoins will be removed from the market at the expense of MKR’s token supply increasing.

Such an event is occuring for the first time in the protocol’s history. However, DeFi has never been as popular as it is right now. In fact, it is dwarfed by the size of semi-decentralized finance as lending based on other stablecoins is valued in the billions, not mere millions, as is the case with MAKER’s stablecoins. If the protocol somehow manages to push its adoption based on feeding a delusional narrative to the naive, it could very likely face more problems, potentially including further increases of the MKR token supply.

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