Andreessen Horowitz, the well-known venture capital firm of Silicon Valley, revealed Monday that he had invested $ 15 million in "MakerDAO", a so-called stablecoin project based on the Ethereum blockchain. The agreement is the first to be led by Kathryn Haun, former leader of the US Department of Justice digital task force who is now co-leading the new "crypto" fund of Andreessen Horowitz. (You can read Haun's trip to the private sector in my recently published profile of her, part of Fortune The most powerful issue for women.)
Unlike a traditional stock investor, Andreessen Horowitz's fund directly bought a cryptocurrency coined by the project: a speculative tool called Maker Coin, or MKR. The ownership of these coins entitles the holders of the governance of the project. The more MKR coins are held, the more votes are exercised. As the Andreessen Horowitz fund acquired 6% of a total of 1 million MKR coins in circulation as part of the agreement, it therefore gained 6% of the decision-making power. (If you add a previous MakerDAO investment to another of Andreessen Horowitz's funds in December 2017, this brings the company's total investment to 7%.)
The question is how this could make Andreessen Horowitz's money. In short: the company bets that its partial administration of the network, as dictated by its share of MKR coins, will yield returns. The economy behind this is a bit complicated, but here is an attempt to explain how it could work in practice.
The main goal of MakerDAO is to create a system that sets the price of another cryptocurrency that diminishes: Come on, a digital token currently pegged to the value of a US dollar. The system maintains this price anchor, requiring Dai seekers to put on Ether as a guarantee. In other words, people send Ether into an escrow-type financial contract encoded on the Ethereum blockchain and, in return, receive a certain Dai. The holders of MKR coins, in turn, can set this "guarantee coefficient" (in addition to pulling some other leverage). This is, at the basic level, how the two cryptocurrencies are related.
Now, let's complete the circle. When Dai owners are required to repay their loans, and then recover their Aether, they pay interest. These taxes are used to buy and burn MKR coins, thus increasing their scarcity and, as investors doubtless hope, their value. Think of it as a kind of program to repurchase corporate actions; having fewer coins or shares in circulation, in theory, increases the exceptional price of coins or stocks. If everything goes smoothly, investors-Andreessen Horowitz and the others should see a return.
The biggest critics of this method argue that in a market in free fall, the floor could come out from under the collateralized ether. At worst, this could generate systemic insolvency.
But MakerDAO has so far demonstrated its ability to recover. When Ether's price decreases, the system automatically begins to publicly award its collateralized ET to the highest bidder in order to keep its reserves afloat. What is surprising is that, even in the face of an incredible crisis in the cryptic market, the price of Ethereum fell 80% from Dai's debut in mid-December – the project's stablecoin seemed height of its name, remaining incredibly stable. Haun, in one of our many conversations over the past few weeks, has cited this as an important factor that instills confidence in the system. (You can read more of his thoughts here.)
In the world of cryptocurrency, where volatility is the rule, no one can rule out the possibility of a devastating flash crash and that destroys wealth. But the maintainers and investors of MakerDAO seem satisfied with the balancing action that the team has put into production. Because a crisis is truly catastrophic, "the accident should be much more serious, a bigger accident and much faster," said Rune Christensen, founder and CEO of MakerDAO, Fortuna on a call. "Instead of being over several months or weeks, it should be in the span of an hour."
The investment signals of Haun are ready to bear the risk.