Decentralized finance giant MakerDAO is now allowing the centralized USDC stablecoin to be used as collateral for loans after last week’s ethereum crash.
The platform was left with under-collateralized debt worth millions of dollars after ether (ETH) fell by 30% in 24 hours on “Black Thursday.”
MakerDAO loans to crypto borrowers are paid using the DAI stablecoin, which is pegged to the U.S. dollar. Dramatic, sudden falls in ETH’s price meant large chunks of collateral were liquidated—and the DeFi platform’s automated systems could not cope with demand.
Ever since last week’s volatility, DAI has traded significantly above its intended price point of $1. Why? Nervous crypto traders have been flocking to stablecoins—and this has caused supplies of DAI to dwindle, putting MakerDAO under threat.
In an executive governance vote, which took place in the early hours of March 17, members agreed to add USD coin (USDC) as a third option for collateralization alongside Ether and the Basic Attention Token.
The total amount of USDC that can be used through the MakerDAO system is being capped at $20 million, but lenders will be able to earn interest rates of up to 20%. Since the vote took place, DAI worth over $1.15 million has been backed by USDC.
The central issue
There are some differences between how ETH and USDC is treated when it comes to collateralization. When ether is used to back a loan, users are obliged to provide enough ETH to cover 150% of the DAI they are borrowing. With USDC, the collateralization rate falls to 125%.
A major reservation with accepting USDC as collateral was that the stablecoin is centralized. This is a significant departure from Maker’s stance of ensuring DAI is only backed by decentralized assets. However, USDC is the brainchild of Coinbase and Circle, major players in the crypto industry. As MakerDAO’s (now out of date) white paper noted: “Unlike other Stablecoins, DAI is completely decentralized.”
According to Maker, lively debate took place over the advantages and disadvantages of adding USDC. This was tempered by the urgency of the governance community’s vote, which had “atypical” timing because of DAI’s ongoing instability and liquidity woes. In a previous vote on Monday, the Maker Foundation had attempted to boost DAI’s liquidity by adjusting network metrics and cutting interest rates to zero, but this did not appear to have the desired effect.
In an upbeat message to update MakerDAO users on the outcome of the executive vote, a blog post read: “The flexibility of the Maker Protocol means that almost any kind of asset that can be tokenized can be added as collateral in the system, as long as it has appropriate risk parameters and it is approved by Maker Governance. It’s exciting to add USDC to the list of collateral types.”
At least in the short term, this could provide MakerDAO with an insurance policy in case ETH prices crash again—an event that some feared could trigger an emergency shutdown of the DeFi platform. A further decline in prices is entirely plausible given uncertainty surrounding the coronavirus pandemic.
Long term, expect scrutiny intensify as to how a major DeFi platform struggled to cope with a very predictable stress test.