MakerDAO co-founder Rune Christensen plans to sell up to $3.5 billion in USDC for Ethereum — a move that could result in its DAI stablecoin losing its dollar peg.
DAI is 32% backed by Circle’s USDC stablecoin, according to data from Daistats. That is the equivalent of about $3.5 billion. It is the single-largest collateral asset backing DAI.
But Christensen wants a portion of that collateral “uprooted” from the DeFi lender’s $10.8 billion crypto treasury. He prefers it is converted into ethereum.
Tornado Cash contagion
The founder is worried about the risk of contagion from this week’s sanctioning of crypto mixing service Tornado Cash, according to posts from MakerDAO’s Discord channel.
“I have been doing more research into the consequences of the Tornado Cash sanction and, unfortunately, it is a lot more serious than I first thought,” Christensen said.
“It is obviously suicide to ‘yolo’ it all, but the risk/reward of partial uprooting may be acceptable. The market may finally start to reward decentralization to the point where these risks are acceptable because USDC is no longer the no-brainer it used to be,” he added.
MakerDAO’s MKR token fell 4% to $1,068 after the news. The asset is down more than 50% year-to-date.
The U.S. Treasury Department sanctioned Tornado Cash on Aug. 8, alleging the privacy tool laundered more than $7 billion worth of crypto assets since 2019. The measures mean that all U.S. citizens and entities are banned from using Tornado Cash.
Following the ban, Centre, the consortium behind USDC, blacklisted 38 wallet addresses and froze the $75,000 in USDC they held. The consortium, set up by Circle and Coinbase, has now banned 81 wallet addresses since the launch of USDC in September 2018.
The blacklisting of Tornado Cash wallets brought the decentralization of MakerDAO’s DAI stablecoin into focus.
Criticized as “wrapped USDC,” observers are concerned about DAI’s dependence on USDC, a centralized asset prone to government and corporate whims.
“Dear MakerDAO community, you should start unwinding your USDC collateral immediately, converting it into stables that are more censorship-resistant,” tweeted Erik Voorhees, founder of crypto exchange ShapeShift.
“You have some time to do it, but you need to get started.”
Preparing for DAI to potentially depeg
DAI is an overcollateralized stablecoin, meaning users looking to hold the token would have to provide assets from a range of cryptocurrencies into the MakerDAO protocol as collateral in order to maintain DAI’s peg to the dollar.
Unlike Tether’s USDT or Circle’s USDC, both controlled from a central point, DAI is considered to offer an unprecedented degree of decentralization because of a lack of central authority controlling its issuance.
DAI’s peg to the dollar is maintained by what is known as Peg Stability Module (PSM), which allows users to swap stablecoins such as USDC on a one-to-one basis in exchange for DAI.
With a third of the collateral backing DAI comprising USDC, selling that means tampering with the stability peg mechanism. But without arbitrage to maintain the dollar parity, DAI would ultimately depeg, rising above $1.
Rune Christensen, the MakerDAO founder, believes the plan is worth the risk:
“I think we should seriously consider preparing to depeg from USD. It is almost inevitable that it will happen and it is only realistic to do with huge amounts of preparation.”
He added that “there’s now a demonstrated way to instantly and unconstitutionally nuke any smart contract of all centralized stables at will, with no lead time to take preemptive actions. Countries tend to ban crypto when their economic conditions start tanking.”
Christensen criticized
Vitalik Buterin, the co-founder of Ethereum, criticized Christensen’s plan to convert MakerDAO’s $3.5 billion into ETH.
“This seems like a risky and terrible idea. If ETH drops a lot, value of collateral would go way down but CDPs would not get liquidated, so the whole system would risk becoming a fractional reserve,” he said on Twitter.
“I think no single type of non-ETH collateral should be allowed to exceed 20% of the total. Maybe even limit to max 20% in any single jurisdiction. And if you can’t do that, put a limit on DAI’s growth (eg. by adding a negative interest rate) until you can.”
Errr this seems like a risky and terrible idea. If ETH drops a lot, value of collateral would go way down but CDPs would not get liquidated, so the whole system would risk becoming a fractional reserve.
— vitalik.eth (@VitalikButerin) August 11, 2022
There is more than $7.6 billion DAI in circulation, making it the fourth-largest stablecoin by market capitalization.
Christensen would still need to put his plan to a community vote.
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