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

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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 anothercryptocurrency 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.


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