MakerDao (DAI) Considers Depegging Native Stable Coin Collateral from USDC Backing With Partial ETH Decentralization Post TC Blacklisting

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DAI Depeg Convo

Imagine staking a majority of your finances into let’s say … DAI … and waking up one morning to find out for some or other odd reason, YOU CANNOT ACCESS YOUR FUNDS! What!?!?

Yes. A potentially true-life financial drama series coming to a cinema near you if you don’t watch out. I know, again, WHAT!?!?

USD-pegged coins seem to be circling the icy hilltops of frozen account addresses lately. Yep. That’s exactly what happened to Tornado Cash recently. And serious enough to initiate some serious discussions about making huge changes at MakerDAO.

Forwarned is forearmed, they say. That would most certainly apply in this instance. They have reason to be concerned. Very concerned.

Maker DAO Founder Says Sanctions More Serious Than First Thought

MakerDAO founder Rune Christensen has urged members of the decentralized autonomous organization (DAO) to “seriously consider” preparing for the depeg of its Dai (DAI) stablecoin from the United States dollar.

The founder’s comments came in light of the recently announced sanctions on crypto mixer Tornado Cash, noting to MakerDAO’s Discord channel on Thursday that the sanctions are “unfortunately more serious than I first thought,” adding that they should prepare to depeg its native stablecoin DAI from the USD to avoid any risk’s, relating to Circle’s recent freezing of sanctioned USD Coin (USDC) addresses:

“I think we should seriously consider preparing to depeg from USD. It is almost inevitable it will happen and it is only realistic to do with huge amounts of preparation.”

What Went Down With Tornado Cash And Circle

On Monday, the U.S. Office of Foreign Asset Control (OFAC) officially barred residents from using the Tornado Cash protocol, while placing 44 USDC addresses linked with the platform on its list of Specially Designated Nationals.

Following the move, USDC issuers Circle froze $75,000 worth of the stablecoin linked to the 44 sanctioned addresses.

Around 50.1% of MakerDAO’s DAI is collateralized by USDC, according to Dai Stats. Christensen has raised concerns over the asset’s heavy reliance on a centralized asset in USDC, as Circle has shown that it will act in accordance with United States law in the case of Tornado Cash.

DAI is currently the fourth largest USD-pegged stablecoin in crypto with its current market cap of $7 billion, and the figure places it as the fifteen largest asset overall.

Ditching USDC backing

Following the call, core developer bantg suggested that MakerDAO was considering converting all its USDC from its peg stability module into $3.5 billion in Ether (ETH), which would result in more than 50% of DAI being backed by ETH, a massive jump from the 7.3% currently.

The proposed idea drew criticism from the community, comparing MakerDAO to the beleaguered Terra project, which aggressively bought Bitcoin (BTC) to back its TerraUSD Classic (USTC) stablecoin before the project ultimately imploded.

Ethereum co-founder Vitalik Buterin also chimed in stating:

“Errr this seems like a risky and terrible idea. If ETH drops a lot, the value of the collateral would go way down but CDPs would not get liquidated, so the whole system would risk becoming a fractional reserve.”

However, Christensen later clarified that what he actually “wrote in the maker governance discord was that yoloing all the stablecoin collateral into ETH would be a bad idea.”

Though he confirmed that a “partial yolo” could still be a good idea, noting:

“I think slowly DCA’ing some collateral into ETH is an option that can be considered depending on the severity of the blacklisting risk, which I personally think is much higher after the TC blacklist… it would exchange blacklist risk for depeg and haircut risk.”

Originally Published Here


Chris Munch

Chris Munch is a professional cryptocurrency and blockchain writer with a background in software businesses, and has been involved in marketing within the cryptocurrency space. With a passion for innovation, Chris brings a unique and insightful perspective to the world of crypto and blockchain. Chris has a deep understanding of the economic, psychological, marketing and financial forces that drive the crypto market, and has made a number of accurate calls of major shifts in market trends. He is constantly researching and studying the latest trends and technologies, ensuring that he is always up-to-date on the latest developments in the industry. Chris’ writing is characterized by his ability to explain complex concepts in a clear and concise manner, making it accessible to a wide audience of readers.