Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Is the Dai Cryptocurrency a Good Investment?

The Dai (DAI) is a cryptocurrency built on the reputation of the world’s most successful currency – the United States Dollar. The idea behind the Dai or stablecoin is very simple – each Dai is supposedly worth one U.S. dollar.

Like the Bancor (BNT), Dai is a cryptocurrency designed to be a basket of currencies. The difference is that Bancor; is a basket of other altcoins, while Dai is a basket of fiat currency.

The ultimate goal of the Dai is to ensure liquidity through a link to a widely used fiat currency. A liquid currency is that one you can readily spend all over the place.

The best liquidity test is always: “can I take this currency down to the supermarket and buy food with it.” If the answer is no, then that instrument is not a truly liquid currency. The currency has no purchasing power.

The Liquidity Problem

Most cryptocurrencies do not pass that simple liquidity test. Dai and Bancor are efforts to create liquid altcoins.

Strangely, the Dai is part of Bancor’s “basket,” because it is part of that altcoin’s liquidity network. Therefore, it is possible to quickly convert Dai into other coins on that network.

Dai’s creators at Maker think they can solve the liquidity problem with the Dai Stablecoin System. The system is a decentralized Ethereum blockchain platform that is supposed to stabilize Dai against the greenback.

This means Dai is an ERC20 cryptocurrency that can be converted into any other Ether-compatible coin. This allows Dai to be quickly converted into Ethereum (ETH) and used on many of numerous Ethereum blockchain solutions that are coming online.

The big difference between Dai; and solutions like Ripple (XRP), is that it uses a decentralized platform to peg the cryptocurrency price to the dollar. The key to Dai’s stability is a special smart contract called a Collateralized Debt Position (CDP).

How the Maker System Maintains the Dai’s Purchasing Power

A CDP is a contract to buy a specific amount of dollars with Dai. If the Dai price falls too low or rises too high, the CDP gets sold. The hope is that this system will drive the Dai price back to $1.

The CDP transactions are credit swaps carried out by traders called Makers. The Makers are paid for transactions in Dai. The hope is that this will keep the Dai price as close to the dollar as possible.

The Maker Team is hoping that a currency market similar to the Forex can maintain the price of the Dai. This proposition is a questionable one, because markets are inherently unstable.

Markets are unstable because the participants in them are irrational human beings. Human beings panic, get greedy, fall for scams, and make decisions based on emotion or ideology. People can be lazy, shortsighted, ignorant, and dishonest.

All would it take to crash the Dai is a short bout of routine market insanity. Even a short bear market for the U.S. dollar might send the Dai into a death spiral.

There would be a lot of Demand for the Dai

There is a vast potential market for something like the Dai, even with its limitations.

Most of the world’s population lacks access to a stable, liquid currency like the dollar. The world’s two most populous countries; India and the People’s Republic of China, have very questionable currencies.

China is considered the world’s second largest economy, yet the Yuan was worth just 15¢ in USD on 2 July 2018. The Rupee was worth just 1.5¢ USD on the same day. China and India are large growing economies and they cannot provide their people with stable liquid currencies.

This leaves most of the world’s people, who live in smaller nations in far worse shape. Only a handful of small countries such as Switzerland have managed to create stable fiat currencies. The Swiss Franc is very close to the dollar, it was trading for $1.01 USD on July 2, 2018.

Residents of most small nations are not so lucky. Uruguay’s currency the peso was worth just 3.2¢ on July 2, 2018. Uruguay is a relatively stable, peaceful, free, and democratic country and it has a hard time providing a stable currency.

Most of the world’s people live in places like Uruguay, which creates a huge potential demand for liquid alternatives. The challenge for blockchain entrepreneurs like the Maker and Bancor teams will be reaching those people.

Can Smartphones Bring Dai to the world

Technology has provided a solution in the form of smartphones and digital wallets. Large numbers of people in developing nations are already using digital payment solutions through smartphones.

Over 26 million people in Africa used a digital payment solution called M-Pesa in 2017, techweez estimated. Those users deposited $6.869 billion in M-Pesa in 2017. That number was nearly double the $2.536 billion deposited in M-Pesa in 2013.

Those numbers are for just one digital payment solution, operating in a region with limited infrastructure. The region, M-Pesa operates in Africa, is notoriously unbanked only 12% of the population of Sub-Saharan African has a bank account.

Therefore, Dai would need to be offered through a smartphone app to reach the people most likely to use it. There are efforts to develop such apps including Rubius, NOAH Coin, and BitMinutes. NOAH Coin (NOAH) which is trying to facilitate remittance payments between Japan and the Philippines is the farthest along of those solutions.

A $573.286 billion market for Dai

Remittances; funds people working in developed nations send to folks back home in developing countries, are a logical use for Dai. The World Bank estimated the volume of personal remittances at $573.286 billion in 2017.

Dai can facilitate remittances because it would theoretically not lose any of its value during the currency conversion process. When a remittance is sent it has to be converted to or from the local currency at both ends of the process – that raises the cost.

The use of Dai would make a digital wallet or debit card for local payments based on cryptocurrency theoretically possible. The challenge will be getting local merchants to accept that solution, and governments to allow it.

Cryptocurrency and smartphone apps can potentially greatly reduce the cost of remittances. Lower costs can be achieved by eliminating the need for wire transfers, brick and mortar wire transfer offices, and expensive infrastructure.

Remittance fees can be very high in some parts of the world. The rate for sending a remittance to Sub-Saharan Africa in 1st Quarter 2017 was 9.81%, the World Bank calculated.

Noah has demonstrated that it is possible to send cryptocurrency remittances by partnering with PayRemit in Japan. Noah’s blockchain allows individuals to send remittances in its ERC20 altcoin via a cryptocurrency wallet.

The next logical step for the Maker Team is to build a cryptocurrency wallet, and partner with a remittance service. A truly smart move for the Dai Foundation would be partnering with NOAH.

Is Dai a Good Cryptocurrency?

So far Dai (DAI) has lived up to its reputation. A Dai token was worth 97.2¢; or nearly one dollar, on July 5, 2018. The currency seems to be maintaining its buying power.

That buying power gave Dai a Market Capitalization of $50.083 million and a 24-hour Market Volume of $319,714 on 5 July 2018. There was a Circulating Supply of 51.5 million DAI on the same day.

This makes Dai an interesting speculative investment with a lot of potentially. Unfortunately, its creators have not demonstrated that Dai can be used in the real world yet.

Another drawback is that Dai is only pegged to one currency the US dollar. A smarter solution would be a Bancor-type altcoin pegged to two or three large currencies such as the US Dollar, Pound, and Euro. A Euro-Dai pegged to the Euro would be a really intelligent alternative.

Watch the Dai but do not buy it yet. This cryptocurrency has a great idea with a lot of potential. The problem is that potential has not yet been translated into usable solutions, which makes Dai’s liquidity pointless.