Why DAI stablecoin can now be backed by…USDC stablecoin

Fibo Quantum

MakerDAO, the DeFi lending and stablecoin protocol, was hit hard by the crash last week that wiped much of the crypto backing its dollar-pegged stablecoin off the market. 

To remedy the situation, the protocol yesterday introduced a feature that lets users collateralize loans for its decentralized stablecoin, DAI, with the US dollar-pegged stablecoin, USDC, which is maintained by less-than-decentralized companies Coinbase and Circle.

DAI’s peg to the US dollar is partially maintained by people collateralizing it with Ether or the Basic Attention Token. They can put ETH or BAT in as collateral to receive a loan of DAI. 

But last week, the crypto market crashed amid increasing uncertainty around the coronavirus pandemic. On March 12, the price of ETH fell 30% within 24 hours. 

 

That meant there wasn’t enough money backing DAI to maintain a stable peg to the US dollar. Stability was reduced even further on Thursday when a bug in the protocol let people buy some of the collateralized ETH for almost no cost.

At its worst moment, DAI was worth 90 cents, according to metrics site CoinMarketCap, with several million dollars of bad debt.

That’s why the holders of MakerDAO’s MKR governance token have voted in favor of an option to back DAI with the Coinbase-led stablecoin, USDC. The hope is that it’ll plug the several-million-dollar hole left by the ETH crash and ensure DAI’s stability for the near future. 

It’s the latest in a series of efforts to fix the issue of DAI’s stability. 

MKR token holders increased the supply of DAI to increase liquidity and lowered its interest rate to zero percent. In addition, they voted for a debt auction that sells off MKR—the governance token for the Maker Protocol—for DAI. This auction, the proceeds of which will cover some of the bad debt left by the ETH crash, will take place tomorrow. 

But backing a decentralized stablecoin with USDC—a stablecoin whose reserves are maintained by Centre, a company run by Coinbase and Circle—is controversial, and a sign of the dire straits the platform is in. “It introduces more centralization risk to DAI,” Stani Kulechov, founder and CEO of DeFi lending protocol Aave, told Decrypt.

However, Kulechov noted that the community has set the “stability fee” for USDC—a fee that determines how expensive it is to take out loans of DAI—40 times higher than for ETH loans. “It seems that the idea is to keep a high stability fee, so as not to flood the system with too much USDC,” he said. 

But should the bet pay off, the darling of the DeFi world will continue to grow apace.