In-depth interpretation of DAI: don't let it become Wrapped USDC

Original source: TokenInsight

Original source: TokenInsight

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Overcollateralized loans and the stablecoin $DAI

MakerDAO offers two products: over-collateralized loans and the stablecoin $DAI. Like AAVE and Compound, MakerDAO is a DeFi lending protocol. Borrowers deposit eligible crypto collateral, such as $ETH, and MakerDAO will issue $DAI-denominated loans. MakerDAO provides products with different mortgage rates and lending rates. As shown in the figure below, $ETH loan products that require a higher mortgage rate of 170% offer a lower interest rate of 0.5%, and products that require a lower mortgage rate of 145% need to pay more High interest rate of 2.25%.

This is MakerDAO's most basic lending mechanism, on which the protocol's balance sheet is simple.

Loans taken are assets of MakerDAO as they generate interest income for the protocol, while $DAI is a liability of the protocol. For a fiat-backed stablecoin like $USDC, the balance sheet looks like this. User sends USD to Circle, the issuer of $USDC. Circle uses these dollars as a reserve and issues $USDC.

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Peg Stability Module

In 2020, MakerDAO launched the Peg Stability Module (PSM) when the market fluctuated violently. It allows users to swap fiat stablecoins ($USDC, $USDP, $GUSD) with $DAI at no cost. PSM strengthens $DAI’s peg to USD through arbitrage, as arbitrage traders are now able to arbitrage the price difference between $DAI and other fiat-backed stablecoins. Unlike over-collateralized borrowing products such as $ETH vault, using the PSM module does not retain the ownership of fiat stablecoins, but directly exchanges them for $DAI. You can also return $DAI to the PSM module and get back the legal currency stable currency, the upper limit is the amount in the PSM.
PSM changes MakerDAO's balance sheet.

In terms of assets, in addition to $DAI-denominated encrypted asset-backed loans, stablecoin assets have also been added. In terms of liabilities, $DAI is the liability of the Maker protocol, which is backed by stablecoin assets and crypto collateral.

Because in the PSM module, the exchange price between fiat currency stable currency and $DAI is set to 1, so when the price of $DAI deviates from 1 dollar, PSM can be used for risk-free arbitrage. Since its launch in late 2020, PSM has attracted significant capital inflows. The share of fiat stablecoins backing $DAI has since continued to rise.

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Invest in U.S. Treasury bonds

Reducing exposure to $USDC and increasing profitability have been two of MakerDAO's main focuses since last year. While the loan collateral in Maker's reserve assets belongs to the pledger and cannot be misappropriated, the stablecoins in the PSM are owned by the Maker protocol and can be reinvested to generate income. The point here is to increase income while reducing risk, so the strategy of putting $USDC into various DeFi protocols to generate income may not be a good idea. Considering that $USDC is backed by USD deposits and US Treasuries, investing directly in US Treasuries reduces Circle's exposure risk and essentially holds the same underlying assets. While the protocol cannot hold financial assets directly, as there is no legal entity representing the DAO. MakerDAO designed a trust structure to indirectly hold real-world assets, including treasuries. The details of the trust structure are beyond the scope of this article, and those who are interested can find it in Maker'sGovernance Forumfirst level title

one big step

Although it has not attracted much attention in the industry, this is actually an important step for DeFi. Holding U.S. Treasuries directly can significantly reduce counterparty risk. Holding $USDC presents MakerDAO with double counterparty risk. First, the issuer of $USDC, Circle's risk. Second, $USDC itself is backed by a variety of assets, including U.S. Treasuries and U.S. dollar deposits. $USDC is at risk from these depository banks. Additionally, Circle will not pay $USDC holders the proceeds it earns from bank deposits and treasuries. All proceeds become Circle's profit. By directly holding U.S. Treasury bonds, the income is earned and credited by the Maker agreementsurplus buffer。
write at the end

write at the end

When people realize that $DAI could potentially become a decentralized fiat-backed stablecoin, I believe we will see an explosion in demand for $DAI. I believe the market will reprice the governance token $MKR when people realize that the yield generated from the investment will accrue to the protocol. It may seem like a small step, but it has profound implications for the crypto industry.