Investment

Maker gets backing from a16z Crypto, but the move raises questions

Quick Take

  • a16z Crypto has made a $15M bet on MakerDAO
  • The complex investment is designed to promote the project’s Dai stablecoin
  • Interest in stablecoins was already high and likely to grow

Sometimes the news is both exciting and raises eyebrows at the same time. This morning’s announcement that a16z Crypto has purchased $15M worth of the MakerDAO’s MKR token is a perfect example. The group calls it a strong endorsement for the MakerDAO’s Dai stablecoin — and it is — but the complex nature of how this all works brought an immediate skeptical response. Let’s break it down.

What happened and why we care

First, it’s important to understand exactly what happened and who is behind it. The a16z Crypto fund is a creation of the Silicon Valley powerhouse venture-capital firm Andreessen Horowitz. But as today’s announcement reminds folks, a16z Crypto isn’t the venture firm itself. As they explain it: “Please note that the a16z crypto fund is a separate legal entity managed by CNK Capital Management …  a16z crypto is legally independent and operationally separate from the Andreessen Horowitz family of fund[s].”

That said, it is a $300M fund. And it exists because the AH venture folk believe in blockchain and crypto (see here on Dfinity and back five years ago on Coinbase). Today’s investment is just 5% of the capital at a16z Crypto but it backs an audacious project to create and foster a stablecoin, that is a cryptocurrency free of censorship features common to fiat currencies but with a consistent value like them. (Our Block by Block primer on stablecoins ran last week if you wish to learn more.)

The mechanism as to what the a16z fund did, however, is a little confusing at first. Although this investment is in support of the Dai stablecoin, it did not involve buying said coin, which trades in a rather boring pattern as it’s supposed to.

So what a16z Crypto did, instead was buy up 6% of the total supply of MKR coins, apparently at around a 25% discount to their underlying price per Meltem Demirors on Twitter. What Maker plans to do is outlined clearly: “As part of this partnership, MakerDAO will receive operating capital through the next growth stage, 3 years of support for the MakerDAO community, and most importantly, full operational support from the 80+ person Andreessen Horowitz a16z team. Specifically, Dai Stablecoin adoption and regulatory support are two of the first priorities.”

Two coins diverge in the woods

So while Maker is promoting Dai, the stablecoin, it relies on MKR to make things go. And the complexity of MKR is a topic unto itself. As described back in 2015, MKR does three things (1) it’s used for governance of the protocol (2) it’s used to raise money in the even that the collateral backing Dai falls below an acceptable threshold to ensure stability and (3) it’s used to pay fees on that collateral. (The longer explanation is here and is worthy of a full read, but also beyond the scope of today’s news.)

What MKR is not, however, is an equity instrument in a traditional sense — though it sure looks like one today. That, and more, is what caught Demirors attention in her tweetstorm. Aside from noting the discount to MKR’s price, which isn’t uncommon when buying a large piece of any entity, Demirors was concerned about what this signaled for Maker.

“According to a blog post, the $15M will be used to fund the next 3 years of operating costs. i’m sure people think this is a great sign for the project – being able to recruit high quality capital. but, i think this is a massive failure in governance and project management,” she wrote. “No vote was conducted on this matter, despite governance being a core tenant of the project.”

Perhaps even more troublesome is that the 6% stake now in the hands of a16z Crypto appears to have simply been created out of thin air. It is possible it came from the 39% held by the Dai foundation, which ostensibly existed to fund development efforts. But whether it represents new tokens or a shift in control / ownership it did occur at the behest of the few not the many.

And while MKR is supposed to be created as needed for recapitalization under the aforementioned collateral shortfalls, it is not — under its original conception — meant to be created to raise funds for development.

What should concern folks is that the promise here is of transparent governance but this looks anything but. And given that the Dai stablecoin relies on MKR for its very stability some skepticism is warranted.

Interesting times

Still, the endorsement from a16z Crypto is important. Read the blog post from the folks there and you will see it is not some random flyer on a project they are lukewarm about. The goal is the promotion of this particular stablecoin and an underlying belief in the necessity of such instruments.

Back in December Preston Byrne posted his critique of the concept under “Stablecoins are doomed to fail” and by January he was taking a bit of a victory lap. We are eight months later and Dai has just received a major endorsement through today’s buy in to MKR and Maker by extension.

That folks tend to hold bitcoin rather than spend it has a lot to do with their belief the bitcoin will be worth more in the future. This has arguably slowed crypto’s growth as a medium of exchange, which is where stablecoins might help push the ecosystem forward. Questions aside about exactly how this happened, it is a strong statement behind both the technology and the folks at Maker.