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The Ledger: Why Crypto’s Newest Venture Capitalist Bet Millions on an Ethereum ‘Stablecoin’

Andreessen Horowitz, the prominent Silicon Valley venture capital firm, revealed Monday that it invested $15 million in “MakerDAO,” a so-called stablecoin project built on the Ethereum blockchain. The deal is the first to be spearheaded by Kathryn Haun, a former digital currency task force leader for the U.S. Justice Department who now co-leads Andreessen Horowitz’s new “crypto” fund. (You can read about Haun’s journey to the private sector in this recently published profile, part of Fortune’s Most Powerful Women issue.)

Unlike a traditional equity investor, Andreessen Horowitz’s fund directly purchased a cryptocurrency minted by MakerDAO: a speculative instrument called Maker Coin, or MKR. Ownership of these coins entitles holders to a say in the governance of the project. The more MKR coins one holds, the more votes one wields. Since Andreessen Horowitz’s fund acquired 6% of a total 1 million MKR coins in circulation as part of the deal, it consequently grabbed 6% of the network’s decision-making power. (If you add an earlier MakerDAO investment out of another one of Andreessen Horowitz’s funds in December 2017, that brings the firm’s total stake to 7%.)

The question is how this might make Andreessen Horowitz money. Put simply: the firm is betting that its partial stewardship of the network, as dictated by its share of MKR coins, will yield returns. The economics behind this are a little complicated, but here’s an attempt at an explanation of how it might work in practice.

The whole point of MakerDAO is to create a system that stabilizes the price of another cryptocurrency it mints: Dai, a digital token presently pegged to the value of a U.S. dollar. The system maintains this price peg by requiring Dai-seekers to put up Ether as collateral. In other words, people send Ether into an escrow-like financial contract coded on the Ethereum blockchain and, in return, they receive some Dai. MKR coin holders, in turn, get to set this “collateralization ratio” (as well as pull some other financial levers). This is, at a basic level, how the two cryptocurrencies are related.

Now, let’s complete the circle. When Dai holders are called upon to pay back their loans, and thereby recoup their Ether, they pay interest. Those fees are put to use buying up and burning MKR coins, thereby increasing their scarcity and, as investors no doubt hope, their value. Think of it as a kind of corporate share buyback program; having fewer coins—or shares—in circulation, in theory, boosts the outstanding coins’—or shares’—price. If everything goes smoothly, the investors—Andreessen Horowitz and the rest—should see a return.

The biggest critics of this method contend that in a market free-fall, the floor could drop out from underneath the collateralized Ether. In a worst case scenario, this could beget systemic insolvency.

But MakerDAO has so far proven its resilience. As the price of Ether drops, the system automatically starts to publicly auction its collateralized Ether to the highest bidder, so as to keep its reserves afloat. What’s amazing is that even in the face of a staggering crypto market downturn—the price of Ethereum has dropped 80% since the debut of Dai in mid-December—the project’s stablecoin has lived up to its name, remaining incredibly stable. Haun, in one of our recent chats, cited this as a major factor instilling her with confidence in the system. (You can read more of her thoughts here.)

In the world of cryptocurrency, where volatility is the rule, no one can rule out the possibility of a devastating, wealth-obliterating flash crash. But the maintainers of and investors in MakerDAO seem satisfied with the balancing act the team has put into production. For a downturn to be truly cataclysmic, “the crash would have to be much more severe—a bigger crash and much quicker,” Rune Christensen, MakerDAO’s founder and CEO, told Fortune on a call. “Instead of being over the course of several months or weeks, it would have to be in the span of an hour.”

Haun, by her investment, signals she’s prepared to stomach the risk.

GOT TIPS?

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Robert Hackett
@rhhackett
robert.hackett@fortune.com

THE LEDGER’S LATEST

Coinbase Wants to Be Too Big to Fail by Jeff John Roberts

From Crimefighter to ‘Crypto’: Meet the Woman in Charge of Venture Capital’s Biggest Gamble by Robert Hackett

Following Facebook, Google Will Allow Some Cryptocurrency Ads Again—But With Limits by David Meyer

Stripe Valuation Doubles to $20 Billion With No IPO in Sight by Jen Wieczner

DECENTRALIZED NEWS

To the Moon… Walmart orders leafy green suppliers to get on the blockchain. Coinbase picks up the pace for listings. Circle debuts a stablecoin. Swiss commodities trader Tiberius offers coin backed by seven metals. Bitcoin is about to rebound? Maybe? Really, maybe? Top exchange Binance plans on fiat-to-crypto trades. Japanese financial titan SBI tests “S Coin.” Bitmain sponsors the Houston Rockets. “Bitcoin” is now Scrabble-legal.

…Rekt. Bitmain IPO faces severe headwinds. As do the IPOs of rival Chinese miners. Circle delists eight cryptocurrencies from its exchange, including PotCoin. Exchanges’ trading volumes are dubious. Crypto innovators threaten to leave U.S. if regulation doesn’t get clarified. Money launderers moved an estimated $90 million in cryptocurrency over two years. Beware, the taxman cometh. And this gem: “Bitcoin is a confidence game that’s useful only to people who don’t want to get caught doing bad things.”

BALANCING THE LEDGER

We’ll be shooting our show Balancing The Ledger every other week for a little while. Instead of a video clip, here’s a shot of me interviewing Jeremy Allaire, CEO and cofounder of Circle, for a keynote chat at The Trading Show, a finance conference, in New York this week. I asked him about the company’s recent delisting of certain cryptocurrencies from its online exchange as well as its debut of USD Coin, a U.S. dollar-backed cryptocurrency designed to hold a fixed price. (Unfortunately, I could not locate video.)

BUBBLE-O-METER

Rollercoaster of love. How do news and regulatory announcements affect cryptocurrency markets? The Bank for International Settlements, or BIS, a financial organization owned by 60 central banks, determined that “favourable events,” like positive remarks from regulators, coincide on average with a 0.33% return within a two-hour window around the events. Within a longer 24-hour window, such events coincide on average with a 1.52% return.

“Unfavourable events,” on the other hand, coincide on average with 0.32% and 3.12% lower returns over these respective time frames.

Interestingly, prices tend to start moving hours before official news releases. Instead of suggesting foul play, BIS says this indicates news gets “released gradually and information flows via other channels.” Hmm…

MEMES AND MUMBLES

Who Wants To Be A Brickstringaire? On the Australian version of the gameshow Who Wants To Be A Millionaire?, the question writers tried to mislead a contestant with a false alternative to the technology underlying cryptocurrencies: (D) Brickstring. Damon Beres, a tech editor at Medium, tweeted out the below screenshot saying, “This is too much.”

Remember “Blockchain, not Bitcoin“? Well, I’ve got a new one for you: “Brickstring, not blockchain.”

FOMO NO MO’

Don’t miss out: Amber Baldet, CEO and cofounder of Clovyr, a startup that helps businesses dabble in new technologies such as blockchains, argues in a column for Quartz that a coalescence of trends is charting a worrisome trajectory for our Internet-enabled economy. The former JPMorgan Chase blockchain program lead says that the development and intersection of data monetization, blockchains, and machine learning will exacerbate so-called surveillance capitalism, wherein corporations make money by tracking people and selling their information. “Without thoughtful planning, these new systems might end up furthering the passive surveillance, corporate hegemony, and intrusive authoritarian regimes they were meant to thwart,” she writes.

This decade will be remembered for the rise of surveillance capitalism—yet as bad as it has become, the next decade will probably be worse. Machine learning is beginning to tie together our behavior with the ability to predict not just what we’ll buy, but for whom we’ll vote and even what we might someday invent. It’s all just the first step in training artificial intelligence, which is likely to be more disruptive to the job market than the industrial revolution.

Blockchain technology—cryptocurrencies’ underlying infrastructure—makes it possible to think of our data as a scarce digital asset that can be owned, rented, and sold in new ways. As our money becomes data, our data is becoming money. We might not be able to stop the rise of the machines, but we can at least create a more consensual system: a fair day’s wage for a fair day’s data.

We hope you enjoyed this edition of The Ledger. Find past editions here, and sign up for other Fortune newsletters here. Question, suggestion, or feedback? Drop us a line.