The Tornado Cash sanctions, which we covered here and here, have raised concerns over DAI’s exposure to USDC. Understandable, considering the new precedent of the government shutting down code at will.
How concerned are people? Rune Christensen, Maker’s founder, is advocating for Dai to “free-float” (have no peg) within the next three years. This would be unimaginable as recently as six weeks ago.
However, not everybody thinks that ditching USDC as soon as possible is the best way forward. The latest battleground in the fight for the future of DAI is an intriguing offer from Coinbase. What Maker ends up doing carries immense consequences not just for DAI, but the entirety of DeFi.
Dai and USDC
MakerDAO allows people to deposit collateral and mint the dollar-pegged stablecoin DAI. The most popular form of collateral used is USDC, the centralized stablecoin from Circle, and it’s not even close. More than half of all DAI was created from USDC.
This reliance means it would be game-over for Dai should USDC receive the Tornado Cash treatment. That doomsday scenario is scary enough for Rune and his supporters to pitch for the removal of USDC from DAI.
As expected, not everybody agrees.
Many envision Maker as a bridge between TradFi and DeFi. They want to increase exposure to USDC and related real-world assets (RWAs), not reduce it as Rune wants. An unpegged DAI would hinder this quest.
These are the two sides in Maker’s civil war: (A) Those who prioritize DAI’s security and (B) those who prioritize growth and revenue.
Last Wednesday, Coinbase proposed that Maker loan $1.6 billion of its USDC reserves into Coinbase Prime in exchange for an annual 1.5% return, which would net Maker a cool $24 million a year in revenue.
Predictably, the two warring sides had differing opinions of the proposal.
The anti-USDC party opposes the proposal. They argue that not only does this proposal not help wean Maker off USDC, but it exposes Maker to another real-world counterparty risk. Now, the government could destroy Maker by leaning on Circle or Coinbase. To them, that existential risk is not worth the financial gain.
The pro-USDC party liked the proposal. To them, an unpegged DAI is impractical in the short-medium term. Rune even admits that it will take years for his plan to bear fruit. Their argument is if Maker is going to hold USDC anyway, they might as well make some money in the meantime.
We’re not sure if Maker will accept Coinbase’s offer. What we are sure of is that it’s an important decision.
DAI is a foundational stablecoin. A failure in DAI would be disastrous for other DeFi protocols. This is an outcome that DeFi, still recovering from Terra, can ill-afford. We’re living in uncertain times, but as Rekt puts it, “crypto’s original crypherpunk ethos may prove to be a lifeline as we spiral into an ever more volatile future.”