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PureDai: Returning to the ideological roots of Dai This post is a follow-up to yesterday’s post outlining the two different directions of NewStable and PureDai that will come with Endgame (forum link: forum.makerdao.com/t/reconciling-…). To give the community a better understanding of the potential of PureDai this explainer will outline some of the ideas and principles of how PureDai could be designed and implemented. Importantly, these are just preliminary thoughts and ideas, and as with everything in Endgame many parts of it will be changed and more knowledge becomes available and more contributors have provided their input. The basic design described here is mostly based on Rai, but it will be important to also study systems such as LUSDv2 and others to find more opportunities to make it more useful. Even though this is not a final specification and everything is subject to change, it is still useful to paint a picture of the possibilities of PureDai, and be more concrete about how and why it will be created, since there is so much interest in it. What is PureDai? The goal of PureDai is to deliver an idealized vision of Dai which has been desired by many Maker community OGs and broader ethereum cypherpunk visionaries and idealists. The changes ushered in by Endgame, as well as the specific development requirements of NewStable, mean it is now possible to deliver this vision with zero compromise. The result is PureDai. Zero compromise is the only proper way to approach decentralization as a maxim. Unless a stablecoin is going to go all the way and have no governance and only allow extremely decentralized collateral to back its stablecoin, ideological appeals to decentralization that ignore legal and real world realities are just theatrics, and actually make the system weaker rather than stronger. However if you go all the way, and accept what it takes to build a truly pure decentralized stablecoin, a sweet spot exists where combining all of the extreme decentralization measures without compromise actually produces an exceptionally resilient, reliable and simple stablecoin product that has many legitimate and interesting use cases. The main features of PureDai are as follows: * Free-floating target price * Only very decentralized, thoroughly proven collateral (ETH, STETH) * Maximally decentralized oracles * Minimal governance, no budgets, no contributors * Permanently located on Ethereum Mainnet (L2’s, bridges maintained by the community) * Simple tokenomics to promote stablecoin supply-side growth The name PureDai is a placeholder, and it will be replaced with a high quality new brand and aesthetic that will be optimized to appeal to users that value extreme resilience, based on input from the community and future users. Free floating target price The most important feature is that PureDai must be able to enable a free-floating peg, as it cannot guarantee to maintain a peg with the USD long term, because there will not be access to large scale RWA in order to bring down the price in case of significantly more, persistent demand than supply. As such the possibility of a negative “target rate”, which results in the peg (“target price”) going down over time is necessary to ensure that the price can be kept stable. This is the mechanism that RAI, HAI and other similar decentralization-first stablecoins employ. In fact, these projects were inspired by Dai, because the original intention for the first several years of the Maker project was that Dai would be free-floating using this mechanism. Existing Dai users will never be affected by the free-floating price of PureDai, as Dai will remain pegged to the dollar, but they will have the option to upgrade their Dai to PureDai if they like the extreme levels of resilience and decentralization it achieves by making no compromises on its design tradeoffs. Advanced stablecoins such as LUSD are experimenting with methods that attempt to achieve a rough peg to USD that doesn't require a free-floating traget price, while still enabling scalability. If it proves to work at large scale then PureDai may follow their lead and launch with a system that attempts to maintain a rough USD peg by leveraging some of the innovation of these advanced stablecoins. In all cases switching to free floating peg must always be a possibility and should be the default long term expectation of users. Only very decentralized, thoroughly proven collateral (initially ETH, STETH) The key to PureDai’s resilience will be its purely-decentralized, censorship- and seizure resistant collateral. Almost all crypto collateral has some kind of human component or reliance on legal or other real world infrastructure. However, ETH stands out as the ultimate decentralized collateral that is also programmable, and with Lido Staked ETH we have a very proven DAO and decentralized infrastructure for taking advantage of ETH staking, which makes it possible to also generate yield with ETH for better efficiency and economics. The minimal governance of PureDai would be able to offboard STETH, and potentially onboard other liquid staking ETH tokens that followed the high standard of PureDai collateral, if it ever became necessary. PureDai will be launched with a lending platform that has all must-have features for DeFi lending and borrowing, to maximize the amount of PureDai that will be generated. Maximally decentralized oracles Unfortunately, even with all of the mechanics described it is still not possible to create a stablecoin that is 100% independent from anything external, but we can get very close. The one requirement that other designs such as RAI and LUSD also need is that they still require a stable reference asset - currently in most cases USD. We can leverage the resilience of NewStable to make a decentralized oracle system that is as strong as possible. To create the decentralized oracle, PureDai will need to maintain liquidity in three AMM pools: * ETH/PureDai * STETH/PureDai * NewStable/PureDai A portion of the surplus income of the PureDai protocol will be funneled to these 3 AMM pools, to ensure they always scale in size with the system over time. The ETH and STETH AMMs are used to produce a time-weighted oracle price that determines the price of the collateral in the system for liquidation calculations. The NewStable/PureDai AMM is used to determine the target rate by figuring whether the day market price is above or below the target price. If NewStable fails or becomes too risky as a reference asset, the minimized governance of PureDai would be able to switch to a different oracle provider or a different Stablecoin to use in the AMM. PureDai Governance Token tokenomics PureDai will have its own new governance token (PureDai Governance Token) with the following main characteristics * Genesis supply of 2 billion PureDai Governance Token * Gensis supply distributed to NewStable farmers on Ethereum Mainnet over 5 years * Permanent emissions to PureDai vaults users to subsidize PureDai generation * Surplus from PureDai is used to accumulate the PureDai Governance Token with a Smart Burn Engine * PureDai Governance Token acts as a backstop in case of bad debt in PureDai The genesis supply of 2 billion PureDai Governance Token will be distributed to NewStable users on Ethereum Mainnet, in a manner similar to how SubDAO token farming will work. The rate will be 400 million tokens per year for 5 years (subject to change). PureDai will not be a SubDAO though, as its own governance infrastructure will be fully independent from Maker, and there will be no permanent token emissions that benefit Maker. The PureDai Governance Token genesis emissions to NewStable help align the incentives of Maker in building and release PureDai, and also ensures that the ownership of PureDai Governance Tokens will be very broadly distributed with little barrier to entry, with no special interests group like MKR lockstakers or contributors. Having an additional valuable token with a clear purpose is a great boost to the growth and income potential of NewStable and Maker. The fact that Maker will benefit from developing and releasing a best-in-class pure decentralized Stablecoin is a strong incentive to make sure it will actually happen and it will be built whole-heartedly drawing on all the experience, processes and resources that Maker will have gained from launching multiple SubDAOs to deliver the best possible DeFi project of its particular niche. Successfully launching a fully independent and autonomous PureDai will not just be going through the motions. Permanent Emissions to PureDai Vaults One mechanic to experiment with is inspired by the tokenomics of Maker Endgame. By providing permanent emissions to PureDai borrowers that use PureDai vaults to expand the PureDai supply, it may be possible to support a greater level of PureDai demand and growth without requiring a negative target rate. The solution would mean that there would be two options for all PureDai vaults, one option where the user just pay normal stability fees, and then a second option where they pay higher stability fees, but in return receive PureDai Governance Tokens. The yearly emissions for this could be in the range of 1-3% of total supply, but would have to be researched and modeled extensively, and also be based on observations from the Endgame Tokenomics. PureDai Governance Token Burn Engine and Backstop Just like with Maker, PureDai would also use surplus to accumulate, market make and burn PureDai Governance Tokens. In case of bad debt arising from failed liquidation auctions exceeding the amount of PureDai accumulated in the PureDai Surplus Buffer, new PureDai Governance Tokens will be emitted to attempt to recapitalize the system, also just the same mechanism that exists in Maker today. Interaction with Maker SubDAOs Pure Decentralized Stablecoins that only use ETH and similar assets as collateral depend heavily on an efficient market to interact with them and arbitrage their inefficiencies. The SubDAO ecosystem will be well positioned to be users and build things on top of PureDai, to ensure it has plenty of legitimate usecases and to take advantage of the arbitrage opportunities that occur in such a system. Spark in particular is likely to play a major role in PureDais growth and efficiency, as it has access to large amounts of ETH from the Spark Protocol that can be used to generate PureDai if high levels of demand/supply imbalance makes it a cheap way to access credit. Next Steps PureDai may launch after the 3 first SubDAOs have launched, but the exact sequence and timing is likely to change. The launch will likely be several years out. Until the launch of PureDai it will be very helpful for the community to provide input on the forum about key features and characteristics of other cutting edge pure decentralized stablecoins, and especially observations about how their mechanics perform in the wild after being launched, so then when PureDai is launched it can have the best and most cutting edge design possible. Link to this post on the forum: forum.makerdao.com/t/puredai-retu…

Reconciling the two opposing paths for Decentralized Stablecoins From the moment Dai started scaling, it has been straddling two worlds. One world is the culture of pure decentralization as introduced with Bitcoin. The other is the desire to fulfill the original purpose of Dai, by delivering utility and value to real people at scale. Unfortunately these two worlds are fundamentally in friction with each other, as noted by the Stablecoin Trilemma, which states that achieving a dollar peg, maintaining pure decentralization, and scaling to large sizes simultaneously is not feasible. There are two main options for solving the Stablecoin Trilemma: 1. Prioritize Utility and Scale by choosing dollar peg + real world asset collateral, which requires integration with traditional finance (TradFi) and alignment with real world entities. Because utility and scalability are so fundamental for growth, it is almost impossible to find a major DeFi project that hasn’t made this tradeoff, or relies on stablecoins that have made this tradeoff. Decentralization is important everywhere it offers the best path towards practical resilience. 2. Take the path of pure decentralization and demand complete independence from centralized control and strict reliance on decentralized collateral. While conventional wisdom says that it is a lot harder to achieve significant growth when optimizing for decentralization above all else, the Maker community has always believed that there is potential in this approach, and that a natural legitimate userbase exists for this kind of stablecoin. Endgame is an opportunity for the Maker community to execute decisively on realizing the full vision of both of these competing directions, without compromise, by doing them separately. This post describes changes to accomplish this. That will be introduced through a future proposal to edit the Maker Atlas, to be confirmed by a governance vote by MKR holders. The transition to the dual stablecoin solution should be a gradual, deliberate process over several years. Eventually, most Dai use cases will be succeeded by NewStable, which will focus on mass market adoption and regulatorily compliant Real-World Asset (RWA) backing, with decentralization used as a powerful tool to ensure transparency, resilience, and checks and balances. To complement NewStable, a second, purely decentralized stablecoin, called PureDai, will also be made available as an option for users who prefer the vision of pure decentralization. Holders of Dai will be able to upgrade to either of these options. The ability to upgrade from Dai to NewStable at a 1:1 basis will begin in the short term, while the option to upgrade from Dai to PureDai will follow at a later date. Dai will continue to function as today, and if in doubt Dai users can simply keep holding their Dai. NewStable NewStable will be the main successor to Dai focused on growth, yield and resilience. As noted in previous Endgame posts, NewStable is a code name that will be dropped once the new branding is unveiled later this year. NewStable follows the trajectory Dai has taken and will focus on utility and adoption, with all of its features tailored towards this goal. NewStable will be a decentralized stablecoin that uses decentralization as a means to achieve practical ends, by making its governance and infrastructure as resilient and transparent as possible. NewStable will take over the RWA- and tradfi integrations of Dai, deepening and improving them, and making them more resilient over time through its resilient and decentralized governance processes and transparent infrastructure. NewStable will remain attached to Maker and gain the tokenomics, growth focus and governance features of Endgame. Future freeze function To ensure NewStable can safely reach global scale, it will eventually be upgraded to have a freeze function similar to the industry standard of other major RWA-backed stablecoins. The freeze function will not be implemented in NewStable at launch, but the token will have upgradeability so that it can later be implemented by governance vote. Dai will remain as it is today with no possibility of adding a freeze function due to the technical immutability of its ERC-20 implementation. The future freeze function is generally expected to follow rule of law from jurisdictions where Maker needs a high level of certainty that the legal system will enforce recourse against RWA collateral. This will result in a much greater level of security, stability and reliability of using large scale RWA collateral for NewStable as it scales to global mass market adoption. The timeline for when the freeze function is implemented will likely be many months or even years, depending on the growth trajectory of NewStable. The future freeze function will be implemented in a way that leverages the decentralized governance and transparent processes of MakerDAO, to ensure it will be a risk-minimized process with checks and balances. A follow up post that details how the advantages of decentralized governance and infrastructure can be tapped into will be published later this week. Dai after NewStable Launch Dai users will be able to upgrade to NewStable during Launch Season as planned, however they can also choose to stay with Dai. Dai will remain as it is today with no possibility of adding a freeze function due to the technical immutability of its ERC-20 implementation. Dai will remain pegged to USD and will be upgradeable to NewStable any time the user wishes. It will also be possible to instantly reverse the process and convert any amount of NewStable to Dai. Dai will be used as a liquidity and integrations backend for NewStable, as NewStable apps and frontends can leverage the instant 1:1 Dai/NewStable conversion to provide better UX. After an initial transition period (the current estimate is at least 1 year), DSR will begin to be phased out by gradually ramping the rate down over time. Eventually, yield will only be available on NewStable. PureDai Dai users in the future will have the option of upgrading their Dai to PureDai, which is a return to the ideological roots of Dai. PureDai will feature only purely decentralized collateral such as ETH and stETH, free-floating peg like Rai, maximally decentralized oracles and no governance or budgets. PureDai will be available after a few years, and will be released in its final, immutable form. From the moment it is released it will require no further upgrades or changes, and will be completely independent from Maker. The launch of PureDai will have similarities with the launch of the Initial SubDAOs, and will leverage tools and experience to help make it as successful as possible, but PureDai will be fundamentally different from a SubDAO as it will have no permanent connection to Maker once launched. Once PureDai is released, Dai users will be able to easily upgrade to it from the Maker frontends. PureDai will be deployed only on Ethereum mainnet, but L2’s and bridges may choose to support transporting it to other blockchains. PureDai will feature a new brand that is optimized for communicating the specific, unique value proposition of PureDai. Until the rebrand is unveiled in advance of the launch of the finished PureDai system, PureDai is used as a temporary placeholder name. A follow-up post that goes into detail about the preliminary specification of PureDai will be posted later this week. What happens to Dai in the long term? After the launch of PureDai, Dai users will have two complementary choices available to them: They can upgrade to NewStable and take advantage of its USD peg and yield features, or they can upgrade to PureDai to gain the advantages of its fully decentralized collateral. Eventually, after multiple years, it is expected that Dai will be fully deprecated as all users and integrations migrate to either NewStable or PureDai. The timeline for when this happens will depend on how quickly the ecosystem adopts NewStable and PureDai. What happens to MKR? As communicated in earlier Endgame Posts, MKR will stay around and be attached to MakerDAO as it rebrands and Launch Season begins. MKR holders will have the option to upgrade to NewGovToken at a ratio of 1:24,000. It will also be possible to convert NewGovToken to MKR, reversing the process. MKR holders can choose to keep holding their MKR, as the new features of NewGovToken also apply to MKR. It will be possible to use the LockStake Engine directly with MKR without having to upgrade to NewGovToken. Upcoming explainers * Thursday there will be a follow-up post containing a deep dive on PureDai, with its current specification. The specification is relatively simple, and of course will be subject to change, but will still provide a good overview of the principles at this stage. * Friday there will be a follow-up post providing more context about the principles and ideas for how decentralized governance and the advanced governance capabilities of Maker Endgame can be leveraged to make a more transparent and more fair stablecoin freeze function process. Link to forum post: forum.makerdao.com/t/reconciling-…