As most reading this probably know, DAO stands for Decentralized Autonomous Organization and DeFi stands for Decentralized Finance. MakerDAO can be considered a prototypical DAO project that also belongs in the realm of DeFi. More specifically, MakerDAO is a decentralized derivative financial system built on Ethereum that is positioned as an automated collateralized loan platform. A provider of stablecoin DAI, MakerDAO launched its mainnet in December 2017 and is currently the project with the largest share of the DeFi market.
In this article, we will make a thorough comparison between MakerDAO and POFID, or “Privacy-Oriented Financial Instrument Distribution Framework & DAO” in full. POFID is positioned as a blockchain-based infrastructure project that provides tools for decentralized governance of assets on the chain. Regarding the origin of POFID, according to current information, the project was conceived of by a group of European programmers and blockchain enthusiasts as a way to issue digital assets that are easier to circulate. The idea was to put real assets on the chain under custody, and use these assets as loan collateral, as well as for private payment and settlement of international trade. Prior to this, this group considered using MakerDAO, but found MakerDAO limited in that it only supports Ethereum and some ERC20 tokens as collateral, and there were some notable loopholes in DAI’s stability mechanism. More importantly, they wanted to have a support mechanism for the private transaction of assets, so finally gave up on MakerDAO and decided to develop their own architecture. After extensively searching for a suitable underlying technology, they finally discovered the SERO public chain, and developed POFID on this public chain as a sort of “privacy-focused Ethereum”.
After more than a year of secret research and development, POFID released its version 1.0 as open source on GitHub, in addition to a very detailed white paper. Your author has always been a user and fan of MakerDAO, but for the purpose of this article, I tried the POFID platform and its client Novac (this word comes from the ancient Serbo-Croatian for money) and below I compare these two platforms.
At present, MakerDAO supports four assets as collateral, including: ETH, BAT, WBTC and USDC. It should be noted that the latter three tokens are all ERC20 tokens issued on Ethereum Among them, it is worth mentioning that USDC is a stable currency anchored to the U.S. dollar issued by blockchain financial service institution Circle.
Except for the auditable U.S. dollar provided by Circle used as asset backing for USDC, the other digital assets, including ETH, are not supported by physical assets, but all have large market volumes and were added to MakerDAO’s list of supported pledge assets through its platform governance voting system. I have been expecting MakerDAO to support other assets bound to entities as collateral, such as gold or other assets with low volatility, but the sad reality is that, from a technical point of view, this is currently not possible as MakerDAO still does not support NFT assets (non-homogeneous assets) defined by ERC721, or the ERC1155 and ERC998 standards that NFT assets were later extended to.
At present, most of the tokens issued on ETH are of the ERC20 standard, that is, a standard where only one token name symbol can be used to describe an asset type. This contrasts with the ERC721 standard, which supports the description of assets in contracts with custom data structures and the numbering of assets. In reality, everything from gold to game props can be expressed in smart contracts with the ERC721 standard, but this standard still only supports one asset type. The ERC1155 standard was further expanded to support an unlimited number of replaceable and non-replaceable tokens in smart contracts, so that smart contracts can carry out different classifications and combinations of assets with unified accounting. The ERC998 standard is more powerful still, and can be nested within and packaged with different NFT assets.
It can be said that basically any real asset can be effectively described with these ERC standards. If MakerDAO could support these types of assets as pledges, then technically speaking, MakerDAO could be used as a very powerful on-chain asset custody tool, and have the opportunity to revolutionize current business lending scenarios, which mainly involve leveraged currency speculation. It’s a pity that MakerDAO has not made any steps to move in this direction yet.
Unlike ETH, when the beta version of the SERO public chain mainnet went live in January 2019, it already provided support for two different asset standards, in this case named Ticket and Package. Ticket can be understood as an anonymous ERC721 + ERC1155 standard, which can describe a combination of non-homogenized assets. The contract’s specific asset portfolio corresponding to Ticket cannot be viewed by anyone, but its existence and ownership within the contract can be observed. This is significantly different from the ERC721 standard, which makes all non-homogeneous assets visible to the public.
Package also supports arbitrary combinations and nested Ticket assets. Since the assets combined by Package also have privacy protection, when there is a Package in the contract account, no asset information in the contract will be revealed, making it completely different from standards like ERC998.
Although the SERO development team has created these two on-chain asset standards, it seems to me that they are not aware of the significance of, or at least have not taken to applying, this great achievement in combination with real assets.
POFID on the other hand provides support for both these asset standards in its pledge contracts, meaning that any real-world asset can be accurately described in a POFID contract. Therefore, from the perspective of current technological implementation, it can be observed that POFID supports far more abundant and complex asset types than MakerDAO, which also means that POFID can achieve far more diverse implementations and scenarios than MakerDAO.
Imagine this business scenario: a user who is longing Ethereum pledges ETH in MakerDAO, borrowing 10,000 DAI, and then goes on to buy more ETH. He needs to do KYC, because ETH currently does not support anonymous transactions. As a result, it is very easy to tell that the user’s DAI comes from his pledge on MakerDAO. Even the amount of ETH he pledged and amount of DAI he borrowed at the time can be determined. I don’t think this can be considered a leak of the user’s personal assets or privacy — this is just a feature of the technological limitations we currently face.
Considering things from another perspective. DAI, as a stable currency, has obvious payment attributes, but, like USDT, is completely public for all to see. Although from the perspective of stability, I am more optimistic about DAI, from the perspective of privacy, DAI has a long way to go before realizing widespread adoption.
If MakerDAO is ever to support more non-homogeneous asset pledges, then the issue of privacy will become more and more important. It can even be said that this issue is the primary stumbling block hindering MakerDAO’s support of NFT assets. In reality, non-homogeneous assets, like real estate, diamonds and bonds, generally have very private attributes. Even accounting for the possibility that Ethereum might one day realize the anonymity of its native token and other ERC20 asset transfers through contracts or side chains, there is still no sign that Ethereum will provide the sort of support for the anonymity of customized data like in ERC721 contracts. So, if MakerDAO wants to meet the needs of everyday, real-world businesses, this problem cannot be avoided — almost no business is willing to risk leaking information about their personal assets to complete an on-chain loan or transaction.
Obviously, this was an important consideration for the programmers behind POFID, and it is also the reason they chose the little-known SERO blockchain as the public chain underlying the project. A completely open source project, SERO has proved to be as reliable as Ethereum. The POFID project pays little attention to the fame or user base of its the underlying public chain, rather giving more consideration is whether or not the underlying technology can support the needs of the project to the greatest extent possible. From the perspective of the privacy protection of account assets and contract assets, SERO achieves all that is needed. Furthermore, from the perspective of privacy and security, the zero-knowledge proof technology adopted by SERO is more reliable than MimbleWimble, ring sign or other token-mixing technologies.
Stability Guarantee and Clearing Mechanism
MakerDAO adopts a dual token model made up of its stable currency DAI and its equity/governance token MKR. Through this dual token mechanism, MakerDAO enables the operation of an entirely decentralized collateralized loan system.
When users redeem their pledged Ethereum, they need to pay MKR as a stability fee. In this case, their MKR tokens are burned. As more and more people use DAI, there will be more and more stability fees, and more and more MKR will be burned, resulting in ever more valuable MKR tokens. In this sense, MKR can be regarded as a deflationary system, and MKR holders can benefit from the widespread use of DAI.
There is a situation that will cause the system to issue additional MKR: if the price of collateral plummets in a short period of time and falls below the liquidation ratio. When this happens, the loan assets cannot support the circulation of DAI and the system will confiscate them and conduct an auction to repay the previously lent DAI. (For the system, every DAI issued means one DAI in debt.) So, the system begins to issue additional MKR and sell it to buy DAI. Then, the system sells the collateralized assets in an open auction, and uses the raised DAI to repurchase and burn the MKR.
In such a scenario, the holders of MKR become the ultimate bearer of the burden of the system. Holders of MKR enjoy the benefits of system growth but at the same time bear the risk of system collapse.
During a market slump, first of all, the collateral behind DAI is over-collateralization, which means that you may only get 60 dollars’ worth of DAI if you stake $100 of ETH, forming a “cushion” in the middle. The system stipulates that when ETH falls to $80, more ETH must be staked or assets will be liquidated. If liquidation occurs, the staker will also need to pay a fine, which will be returned to the PETH pool and the corresponding PETH will be destroyed. If it falls below $60, this may trigger global liquidation, in which case the operation and creation of collateralized debt positions will be prohibited, and holders of DAI and CDP will receive convertible net assets.
Overall, MakerDAO is still a healthy lending platform. However, on March 12, 2020, due to the global outbreak of COVID-19, a series of black swan events in the cryptocurrency market were triggered, and the entire market effectively collapsed.
MakerDAO, as one of the core projects in the wider DeFi ecosystem, experienced this serious incident under extreme market conditions, resulting in a system debt of 4 million U.S. dollars. In unavoidable circumstances, the system launched a debt auction and released MKR token. Auctions were conducted to make up for the debt losses of the entire system, and these losses were borne by all MKR holders.
According to Murphy’s law, when a disaster has a theoretical possibility of occurrence, no matter how small that probability is, it will eventually happen. MakerDAO’s clearing mechanism design is too simple and relies too much on on-chain operations, resulting in an inevitable debt crisis.
By contrast, POFID has made some optimizations in its clearing mechanism. From these improvements, it can be inferred that the design of POFID’s clearing mechanism was likely inspired by the extreme market situation of March 12, 2020.
Regardless of the specific settings of the initial pledge rate and other parameters, the main improvement in mechanism lies in the fact that when an asset depreciates and the pledge rate reaches its liquidation ratio, the use of loaned assets (DAI in the case of MakerDAO, and a diverse set of on-chain assets, or OCAs, in the case of POFID) are used to conduct the auction mechanism of pledged assets in the Pledge Vault, or PV for short (called “CDP” in MakerDAO). This mechanism uses a first-come, first-serve auction of the ownership of assets in the PV.
In order to ensure the stability of OCAs, a safety net is also provided from the initial pledge rate to the liquidation rate, requiring Banker (called Keeper in MakerDAO) to increase pledged assets. But, after reaching the liquidation rate, the auction method is implemented to attract bids for controls of the PV — bidders obtain control of the entire PV by supplementing the PV so that its assets reach the initial margin rate (premium bid). In the future when any PV appreciation is beneficial to a bidder, he can buy out the PV at a constant price to form a huge risk-free profit.
In this mechanism, the contract calculates the actual asset allocation quota of the PV, in the end making the assets obtained by the winner of the auction equal to the return value of the asset redemption obtained when he immediately repays the OCA and his total investment (the bidding price plus the repayment OCA). As a user who completes the bidding, the buyer effectively obtains a future option for this PV asset.
The bidding mechanism is actually a competitive acquisition of control options for all PVs, with a high return space under extremely controllable risks, thus providing a competitive guarantee for the stability of OCAs.
If the bidding mechanism still cannot obtain a quotation, then the PV assets marked as disposable by the POFID DAO clearing organization (LGC Clearing Governance Committee) will be disposed of by the LGC in accordance with the minimum protection mechanism set out by the PV. Under this setup, the stability of the OCAs marked by the LGC has one last guarantee.
The LGC will sell POFID platform coins in exchange for OCAs to burn on the POFID platform, and swap out the assets in the PV to ensure that all OCAs circulating on the market can still guarantee the asset pledge rate remains above the liquidation rate.
Judging from the March 12 incident, the congestion seen in the Ethereum network has caused great uncertainty to MakerDAO’s auction mechanism, and each auction with a pledge rate of less than 100% actually causes a deficit of assets behind DAI. This requires the sale of MKR to purchase back and burning of DAI to maintain DAI’s stability. This all means that the stability of DAI is very dependent on MKR. The POFID mechanism makes it simple and logical to maintain stability of the initial pledge rate through only one transaction, even in extreme markets.
Of course, when all is said and done, whether or not these optimizations can withstand the test of the market and guarantee the stability of the POFID stablecoin still needs to be seen, but, at least on paper, this mechanism seems a large step up from that of MakerDAO.
As I mentioned above, if you do not consider the reputation of the underlying public chain and the current popularity of the project, I think that POFID is hands down more competitive and advanced to MakerDAO when considered from the perspective of technical capabilities and governance mechanism design.
As a DeFi tool, POFID has better scalability, especially in its diversity and scalability of real asset support. In terms of stability and liquidation mechanism, POFID is very likely to fill MakerDAO’s biggest pitfalls. In particular, its performance under extreme market conditions is likely to be significantly better. But perhaps the important consideration is POFID’s guarantee of stability of global assets and its strong privacy mechanism.
Unless we are talking about market reputation or a way to hype the need for Ethereum, looking at things objectively, POFID is a better choice in almost every way. Its implementation is likely to bring opportunities for the rise of the SERO public chain and its widespread adoption is something your humble author anticipates with great excitement.