Why MakerDAO’s daily activity spike isn’t necessarily a positive sign

Contextualizing the raw data

For anyone other than Bitcoin Maximalists, MakerDAO is probably the best example of how blockchain can be used to create previously impossible products (and organisations).

Of course, aside from the answer ‘Because We Can’, the deeper philosophical question of Why? is best left to the debating rooms, salons, coffee houses and bars of crypto debate. Certainly it’s beyond the scope of this article.

What is interesting to consider, however, is how the raw data of what’s happening for a dapp isn’t always the complete picture.

For example, in the case of tracking daily unique wallet activity on MakerDAO’s smart contracts, the long term trend is strongly upwards.

Even ignoring massive spikes such as those that occurred in May 2018 and June 2019, this is clear when we consider averaged data such as the trailing 30 day and 90 days trends.

These show MakerDAO’s daily wallet activity rising, respectively from 700 and 600 to breaking the 1,000 level in early June. Indeed, the 30 day trend then accelerates to 1,500 in early July.

So good news then for MakerDAO. It’s an innovative product that gaining more users. Well, maybe.

Reading the small print

At this point, we need to take a step back and think about what MakerDAO actually is.

Without getting into too much detail, it’s a financial product that let’s users take an asset (currently ETH), lock it into a timed loan contract, and receive another asset (currently the stablecoin DAI) in response.

In other words, users are using their ETH as collateral to get DAI, hence the technical term collateralized debt position (or CDP).

So, unlike many dapps in which ETH is just consumed, MakerDAO is a product which users (and their ETH) enter and exit. Hence our raw active wallet data is counting users inputting ETH to get DAI, as well as those paying back their loans to reclaim their ETH.

To truly understand what’s going on, then, we need to consider whether this activity is inbound or outbound.

By looking at the amount of ETH held in MakerDAO CDPs (via another data source), we can see this peaked in March/April 2019 at over 2 million (around 2% of all free ETH). But, by time of writing, this had dropped to 1.4 million.

This tells us that the current level of increased activity around MakerDAO hasn’t been driven by new users but by existing users closing out their loans.

Again, to understand why, we need to look outside the raw data and consider why people use MakerDAO in the first place.

As with most things involving the product, there are a lot of nuances but the core reason is users have been collateralizing their ETH to get DAI to buy more ETH; i.e. MakerDAO has been way of leveraging ETH in the assumption the USD price will rise.

Obviously, when the price of ETH isn’t rising, and doesn’t look like it’s going to rise anytime soon, there’s less reason to use MakerDAO, hence users are liquidating their positions.

(As an aside, some existing users will likely also be having to add more ETH collateral to maintain their existing loans.)

In this context, increasing activity through MakerDAO’s smart contracts isn’t telling us the product is becoming more popular. In one real sense, it’s becoming less popular. Although, on the other hand, as the price of DAI remains close to $1, the more positive take is that despite this, MakerDAO continues to operate successfully, bringing “stability to the blockchain”.