The impact of Tornado Cash being sanctioned by the U.S. Treasury Department is far from over.

Since Circle froze the USDC funds in the Tornado Cash wallet after the sanctions, MakerDAO, which is the largest USDC holding address, also faces the risk of being sanctioned. At that time, the stable currency DAI, which is supported by 74% of USDC, will face debts that cannot be obtained Support, in the event of insolvency. In addition, for users, if all USDC will be frozen, users will not be able to transfer in and out, liquidate accounts, and withdraw collateral, which will lead to huge losses.

In response to this situation, MakerDAO co-founder Rune Christensen said in Discord that MakerDAO may choose to sell all USDC exposures in the agreement. Previously, Yearn core developer banteg said that MakerDAO would consider buying $3.5 billion in ETH and convert all stable modules linked by USDC to ETH to avoid the above-mentioned possible risks.

secondary title

The Choice Faced by MakerDAO

In order to clarify the whole story, Odaily first briefly reviews MakerDAO's mortgage model.

DAI is an overcollateralized stablecoin that can be minted with assets deposited in the MakerDAO protocol. DAI is currently the fourth largest dollar-pegged stablecoin among cryptocurrencies, with a current market cap of $6.9 billion.

DAI’s peg to the U.S. dollar is maintained by Maker’s Peg Stability Module (PSM), which allows users to exchange stablecoins like USDC for DAI on a one-to-one basis. At present, the collateral of DAI is mortgaged by about 74% of USDC, 7.4% of ETH and 4.1% of WBTC and other assets.

If all USDC is emptied and replaced with ETH, then ETH is the largest type of collateral, which indicates that MakerDAO will give up the road of diversified collateral. Using such a volatile asset as the main collateral of a stablecoin will face: once ETH drops sharply, the value of the collateral will drop, and DAI will also depreciate rapidly. In addition, PSM allows minting DAI at a fixed rate. This fixed rate requires a collateral of a little more than $1 to mint $1 worth of DAI. If all USDC is sold, DAI may be depegged to $1 due to the disruption of PSM.

In response, Rune said: "This is obviously suicide, but I think the risk or reward of partial uprooting is acceptable. If we are prepared to accept such consequences, it will greatly increase the chance of decoupling from the dollar."

Furthermore, in addition to turning ETH into the main collateral, some in the community believe that adopting real world assets (RWA) might also solve the problems faced by DAI.

Another solution is to increase negative interest rates, as V God said:"In my personal opinion, no one kind of non-ETH collateral should exceed 20% of the total. There may even be a limit of up to 20% in any one jurisdiction. If you can't, limit the growth of DAI (for example, by adding negative interest rates) until you can."

But judging from the current situation, selling USDC may be the team's first choice. Rune seems to have figured out how to turn ETH into collateral, saying in a Discord:

The first step would require explicitly warning users that in a worst-case scenario, DAI could be de-pegged from the dollar, but in return, DAI would not be sanctioned.

Second, we will immediately see a rapid loss of users who don't care about decentralization and use DAI just for the convenience of transactions. We need to push these users towards centralized stablecoins.

Then, once the demand for DAI decreases and sticky users increase, we start converting our USDC collateral DCA into our pledged ETH.

secondary title

What do you think about MakerDAO's decision?

This suggestion of not yet being a real threat seems to be very divisive.

For example, Adam Cochran, a partner at Cinneamhain Ventures, believes that MakerDAO's support for adding more risky assets will increase concentration risk, and this chilling effect will lead to fear of centralized facilities. Discussions of "depegging from the dollar" and "replacing all backed USDC with ETH" are both reputational risks that can shake confidence in DAI.

Of course, there are also constructive comments for MakerDAO. Even with aUSDC and cUSDC backing the PSM, splitting the Dai USDC reserves between different protocols makes work against MakerDAO more difficult. For example, in Aave, even if USDC is blacklisted, at least the borrowed part can be recovered.

However, compared to paying attention to the follow-up of the incident, MakerDAO representative Chris Blec seems to have a lot of opinions on the policy: "They can use anything to make a fuss. They may say that peanut butter is illegal tomorrow. If you buy It, eat it, and you go to jail. Then no one will buy peanut butter right away. This is actually totalitarianism.” Blec believes that, as far as encryption technology is concerned, unless the possibility of individuals anonymously transacting digital currencies is eliminated, the U.S. government will Will not let it go.

But from an industry perspective, MakerDAO's DAI will undoubtedly have a profound impact on the entire DeFi world. There is no doubt that stable coins are the cornerstone of DeFi. Without stable coins, there will be no various prosperous Dapps and ecology. And DAI has consistently ranked first among decentralized stablecoins. But looking at this sanction now, it also reflects that there may be big problems in the DeFi system with the stable currency supported by the centralized fiat currency as the core. If MakerDAO's USDC is really listed as an object of sanctions, its impact on the entire DeFi system will be huge.

In fact, there are too many discussions about the risks of centralized stablecoins such as USDC and USDT. Whenever there is an accident with stablecoins or DeFi, the topic that USDC and USDT may be frozen by the parent company will also be discussed at any time. And now, that topic is about to become possible. While watching the MakerDAO event, you should also consider whether DeFi should reduce its dependence on centralized stablecoins. Otherwise, more DeFi protocols may have such problems in the future.