Rune Christensen, the outspoken co-founder of DeFi stalwart MakerDAO, triggered a bout of angst in crypto after suggesting the protocol’s stablecoin, DAI, might drop its peg to the U.S. dollar.
The reason: the Tornado Cash sanctions and recent USDC freezes that occurred this week after the U.S. Treasury executed the most significant enforcement action in crypto in memory.
“I think we should seriously consider preparing to depeg from USD […] it is inevitable that it will happen and it is only realistic to do with huge amounts of preparation,” Christsensen wrote on August 11 in Discord.
Some observers like Yearn developer banteg took this to mean that Maker would sell the entirety of its USDC collateral for Ether. Naturally, this caused quite the stir on Twitter.
Ethereum co-founder Vitalik Buterin called such a plan “a risky and terrible idea.” He went on to write, “If ETH drops a lot, value of collateral would go way down but CDPs would not get liquidated, so the whole system would risk becoming a fractional reserve.”
Prominent NFT collector DCinvestor compared it to Terra founder Do Kwon’s ultimately ill-fated move to shore up UST with Bitcoin reserves.
Christensen later clarified his position. “What I actually wrote in the maker governance discord was that yoloing all the stablecoin collateral into ETH would be a bad idea,” he tweeted.
Scalability vs Decentralization
On August 9, Christensen had asked his audience to pick two options out of three: a USD peg, non-USD linked collateral, and scalability. With an intended USD peg and non-USD collateral, there are scaling issues, as Maker discovered in its early days when it only accepted ETH as collateral.
To effectively scale DAI, Maker needed USD-linked collateral— which is why USDC was added. Christensen seems to think that the only way to have a stablecoin with non-USD collateral at scale is to abandon the USD peg.
According to crypto investor and MakerDAO delegate Mika Honkasalo, the massive ETH purchase “won’t happen, but efforts to reduce the collateral risk will become more important.”
“Right now, a practical setup would be to place the USDC in the PSM into e.g. Uniswap pools & other LP tokens just so it doesn’t sit in the same place,” Honkasalo told The Defiant. “Over the long term, it makes sense to stick with the existing roadmap & try to over time get rid of the USDC collateral.”
MakerDAO’s MKR governance token rallied as much as 20% when the news initially broke, but has since reversed lower.