MakerDAO's debacle is shaking up DeFi
Editor's Note: This article comes fromLongHash Blockchain Information (ID: Kyle Torpey), Author: Nick Chong, reproduced by Odaily with authorization.
Editor's Note: This article comes from
LongHash Blockchain Information (ID: Kyle Torpey)
, Author: Nick Chong, reproduced by Odaily with authorization.
Less than two months after the 3.12 "Black Thursday" crash, the prices of Bitcoin and Ethereum have recovered significantly. However, decentralized finance—or "DeFi"—shows a different look, and is still deeply affected by the aftermath of the 3.12 plunge.
The plunge, in particular, exposed the vulnerability of MakerDAO and its stablecoin DAI, while also highlighting MakerDAO's outsized influence in the DeFi economy. Defipulse.com points out that 54% of assets in DeFi applications are locked on MakerDAO, and its stablecoin DAI is integrated into almost every DeFi application in existence.
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A Deeper Look at DAI's "Black Thursday" Crash
Demand for stablecoins, cryptocurrencies pegged to "stable" assets like the U.S. dollar, surged during the March 12-13 market crash due to high market volatility. Correspondingly, stablecoins have seen a fairly high premium. In particular, the market price of DAI has skyrocketed, threatening the health of the DeFi ecosystem.
USDT hit $1.05 on Kraken and PAX hit $1.02 on Bittrex, according to data from TradingView.com on March 12. In the face of falling currency prices, investors have tried every means to preserve their wealth, even if the premium of stablecoins means capital losses.
However, no USD stablecoin has a premium comparable to DAI. DAI is a decentralized stablecoin not backed by cash reserves, the value of which is controlled by DeFi protocol MakerDAO.
As the chart below shows, on the day of the market crash, the price of the DAI/USDC pair on Coinbase Pro hit $1.06 — 6% higher than the typical 1:1 ratio — while buy-side volume surged. Citing data from Coinbase, an ethereum data scientist reported that the pair briefly touched $1.12 intraday.
On Kraken, the price of DAI reached $1.10. This trend is even more striking on decentralized exchanges, which are relatively illiquid relative to centralized exchanges, with DAI trading above $1.12. According to the author's observation, DAI had a 22% premium on the decentralized exchange on the day of the crash.
This is also corroborated by data from CoinGecko, which shows that the weighted average price of DAI briefly touched $1.20 on March 12, which means that DAI was trading above $1.2 on some exchanges that day.
As is the case with USDC, USDT, and other stablecoins, investors are buying DAI as a hedge against a crypto market crash. But there’s another reason for the growing demand for the stablecoin: Investors need DAI to terminate loans — also known as Collateralized Debt Positions (CDPs)/Vaults — created through MakerDAO.
LongHash has previously reported that on March 12, following the historic plunge in ETH prices, CDPs entered the automatic liquidation process. According to first-hand accounts posted on the MakerDAO subreddit, the problem was that the owners of some of the liquidated loans never got any ETH back.
It should be pointed out again that the liquidation process of CDP will theoretically spend about 13% of the collateral assets, not 100%. The problem of zero return of CDP collateral is a drawback caused by the combination of the following two points - 1) the deviation between the ETH price given by the oracle machine and the actual market price; 2) network congestion. The above two points caused the loan liquidator (known as "Keeper" on MakerDAO) to fail to properly sell collateral assets.
CDP holders on the brink of liquidation rushed to exchanges as many DeFi users lost assets worth millions. They do this to buy DAI to close out their positions, albeit at a high premium. Getting back 83% (assuming DAI was trading at $1.20 at the time) was an obvious choice compared to losing all of your collateral outright.
Increased demand for DAI, combined with a decrease in the amount of DAI in circulation in the market, has an impact on its price. The reason for the reduction in circulation is that investors want to increase their stablecoins as the volatility of BTC and ETH increases.
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premium persists
As the chart above shows, even after the initial shock has passed, the DAI premium to the dollar has remained around 1% to 4% for seven weeks after the crash.
This premium is so striking that Cyrus Younessi, a member of MakerDAO's venture team, commented on May 1 that "the price of Dai is too high," he borrowed from Elon Musk. (Elon Musk)'s previous comments on Tesla's stock price.
The premium is more dangerous for decentralized DAI than USDC, USDT or other centralized stablecoins. Centralized stablecoins are more likely to stay close to $1 because arbitrageurs can deposit dollars, acquire new stablecoins, and then sell the stablecoins at a premium on the market, driving down the premium. But in the case of DAI, due to the requirement for mortgage assets, the entry threshold for arbitrageurs will be higher.
Since DAI is not backed by USD reserves, it is more volatile than reserve-backed stablecoins. However, it would be dangerous for the price of DAI to stay above $1 for a long time. Since DAI is the cornerstone of the DeFi economy, things that are not conducive to DAI will also pose a threat to the entire DeFi.
Just think about it: a new user wants to buy a DeFi-based stablecoin, will he/she buy USDT, which is almost equivalent to $1, or DAI, which is currently at a premium? The answer is that they are more likely to choose USDT, because buying a stablecoin with a price higher than the peg means you are almost certain to lose money on your investment due to a drop in the premium.
Even though MakerDAO’s decision makers — holders of the cryptocurrency Maker (MKR) — have taken urgent action to spur growth in the stablecoin’s supply to meet market demand by reducing the stability fee on CDP-collateralized assets to 0%, the premium remains did not disappear.
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Back to $1 anchor price
With the premium issue still at stake, holders of MKR (governance token) have started discussing a plan to bring the price of DAI back to $1.
Currently, discussions about fixing the price of DAI are taking place on MakerDAO's forums, with Parafi Capital, a decentralized finance-focused blockchain fund, leading the debate.
Parafi's partners wrote that when the stability fee is actually reduced to 0%, "given the current fee rate, MKR holders effectively have no other effective monetary policy levers to increase the supply of DAI."
They propose three options to reduce the premium:
The first solution is to try to add a new collateral asset type to the MakerDAO system, allowing users to pay for CDP collateral with cryptocurrencies other than ETH, BAT and USDC. This should stimulate additional demand for CDPs, increasing DAI's liquidity and then lowering prices. Parafi Capital is particularly supportive of Chainlink's LINK.
The second option proposed by the fund is that MKR holders have the ability to reduce the stability fee of ETH and USDC to 0%. Although Parafi warned that this approach alone "may not be enough" to boost liquidity.
On May 2, Matt Luongo — founder of crypto startup Thesis — proposed adding tBTC as a collateral asset type for MakerDAO. tBTC is the tokenized version of BTC on Ethereum, which is almost completely decentralized, so it may serve as a fast channel for many BTC holders to enter the DeFi field. Like LINK's proposal, Longo and his supporters believe that adding tBTC as a new collateral asset will bring additional liquidity to MakerDAO.
There has also been discussion of negative interest rates on DAI, which ironically is exactly the monetary policy that many central banks implement for their national fiat currencies. JP Koning, a CoinDesk columnist, wrote on April 20, “Theoretically, the next step in order to drive down the DAI premium is to lower the DAI interest rate to a negative value.”
The senior encryption researcher "Hasu" also felt the same way, proposing that fixing the price of DAI is as simple as lowering the stability fee, adjusting the interest, and "if necessary", the interest can even be adjusted to a negative value. The analyst even suggested that adding new collateral asset types wouldn’t necessarily be necessary to fix DAI’s price if the stability fee was negative.
Currently, there are technical limitations to achieving negative rates, and because of the decentralized nature of private keys, you can’t just take away someone’s DAI right now.
implement the solution
Since Parafi’s post about the DAI premium issue, MakerDAO’s governance community has taken some action.
On May 2, MakerDAO began supporting WBTC — a tokenized version of BTC in custody on Ethereum. Additionally, according to a tweet by “Maker DAI Bot,” the protocol has also lowered CDP’s USDC stability fee to 0%.
These solutions have been somewhat successful so far, with cryptocurrency investor Spencer Noon noting that the volume of MakerDAO CDPs has "returned to pre-Black Thursday levels," while the DAI market has started to recover. Gain liquidity again. The data from Daistats.com also shows that users have started to produce DAI with WBTC, and 39 tokens have been locked in the DeFi protocol.
“Peercoin, NXT, Mastercoin, Quark, Megacoin,secondary title
DAI's Continued Crash Threatens DeFi
While MKR holders are positioning to fix DAI's price, some of these strategies may backfire.
Both Primecoin and Feathercoin were considered top projects in 2014. But, looking back now, they were worthless. How would you feel if one of these tokens became the asset backing your digital dollar? "
His point is that the more tokens MakerDAO needs to keep DAI pegged to $1 at all times, the more likely it is that DAI will eventually collapse. Cochran likened the basket of cryptocurrencies backing DAI to "the junk bond crash of 2008," when assets added to the basket became increasingly risky, eventually triggering a market crash.
This makes sense: the more cryptocurrencies a DeFi protocol supports, the wider the attack surface. Assuming that DAI is backed by ten cryptocurrencies (each accounting for 10%), as long as one of these assets crashes, it can easily throw the MakerDAO system into chaos, forcing the price of DAI to deviate from the anchor price.
A well-known DeFi commentator with the username “@DegenSpartan” added that, on MakerDAO’s current trajectory—namely, adding USDC and WBTC—the decentralized stablecoin is becoming centralized, which clearly has nothing to do with decentralization. Finance runs in the opposite direction. Both USDC and WBTC are produced by a centralized authority and therefore can also be frozen by the issuer.
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Maker's popularity wanes among DeFi users
Based on this, the cryptocurrency and its associated protocol, MakerDAO, do not appear to be really ready for its golden age, given the recent issues surrounding DAI. Yes, the crash of ETH and its aftermath is not the protocol’s fault, but commentators have pointed out the protocol’s sluggish response in times of crisis.
The aforementioned commenter "@DegenSpartan" commented:
Ryan Berchmans, a senior engineer at Augur, an ethereum-based derivatives marketplace, agrees. The DeFi engineer commented on April 29 that after "spent 20 hours researching how Maker reacted during and after Black Thursday," he decided not to use the protocol, citing DAI's premium as "Maker has failed" a clear signal of public trust.
Parafi Capital backed up this sentiment, stating that they understand that the premium issue has actually deactivated some businesses and individuals from DeFi, or at least DAI and MakerDAO. On the subject, the VC firm wrote in the above-mentioned post about premium status:
“After research we believe that the lack of stability and liquidity is translating into uncertainty about the use of DAI as a decentralized stablecoin in many DeFi protocols. We have heard a small number of DeFi teams express the lack of liquidity and stability for DAI Sexually disappointed, some of them have chosen to use USDC as an alternative.”
The loss of MakerDAO's users has made DAI's value stability even more shaky, because whether it can be anchored to the US dollar depends on its liquidity.
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The Need for a MakerDAO Competitor
But there may still be a silver lining to things: DAI’s premium issue may boost competition in the DeFi space. If members of the Ethereum community do lose trust in MakerDAO, this could be a good opportunity for other platforms to enter the market, creating competition that will ultimately make the entire DeFi space better.
So far, MakerDAO’s leadership in decentralized stablecoins and lending has been almost unquestionable — DAI is the only decentralized stablecoin in the top 100 cryptocurrencies. While the market is always changing, so far no established project has been able to replicate Maker’s unique model of issuing stablecoins through decentralized lending.
The Block reported on May 4 on the birth of a new stablecoin protocol on Ethereum called Liquity. According to the project website (which says the project is “coming soon”), Liquity and its stablecoin LQTY promise to differentiate itself from MakerDAO in the following ways:
2) Borrowers who choose LQTY only need to maintain a mortgage-to-asset ratio of 110%
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