Unstable DAI Dynamics Could Kill Ethereum’s Favorite Crypto-Backed Stablecoin
MakerDAO’s DAIDAI is the largest crypto-backed stablecoin in circulation, with an unprecedented supply of $5 billion and more than 500,000 unique wallets and 90,000 unique holders of the corresponding MKRMKR token, according to Etherscan. However, the stability of this popular stablecoin is far more uncertain than most users realize.
The project has faced a number of challenges, including capital inefficiencies and centralized points of failure. In 2019, the bond continued to fall due to high demand, leading to seven policy votes to raise the rate from 0.5% to 16.5% per annum to stabilize the bond near one dollar. That same year, a major split between the founders dubbed “The Purple Pill” saw co-founder Rune Christensen (red pill) advocate for formal structures and compliance, while his colleagues (blue pill) focused on increasing decentralization. The purple pill, a mixture of the two sides, did not satisfy either.
Taking a step back, MKR is used to vote on protocol changes related to DAI, funding and other proposals. For example, MKR passed votes to diversify DAI’s security beyond ETH to increase DAI usage across the decentralized finance ecosystem. But one MKR wallet has 12% of all these tokens and two unknown wallets have 44% of the voting power. This dynamic may be partly why Gary Gensler, chairman of the Securities and Exchange Commission, told New York Magazine that every altcoin, including those related to stablecoins, is actually a security. If regulated as such in the US, there’s no telling how (or if) the DAI ecosystem would survive that compliance shift.
Increasing the number of accepted securities may have expanded the DAI protocol’s attack surface. Vitalik Buterin, founder of EthereumETH, tweeted their concerns early on the amount of DAI generated relative to centralized stablecoins (currently 56% of all DAI) such as USDCUSDC and real assets (currently 9.6% of all DAI), such as real estate loans, which are not visible on-chain. Regardless, Christensen published his plans to deal with these major contradictions and challenges, called “The Endgame Plan” and “Pregame Constitution” to govern the so-called decentralized autonomous organization.
One of the many proposals indicates that MakerDAO would mint more of its governance token, MKR, to use as collateral. It may be unwise to use endogenous security, given the lessons learned from the collapse of Terra/Luna in 2022 and the way FTX, by comparison, listed the exchange’s own tokens on the balance sheet. Previous contributors, such as former business development officer Ashleigh Schap, have voiced their opinions disagree with the endgame as an attempt to solve instability in the token market by simply adding more tokens.
Creating multiple subDAOs to oversee different tasks may not reduce centralization, but rather obscure overlapping centralized points of failure behind a tangled web of organizations. Counter-intuitively, the project’s efforts to decentralize operations and ensure safeguards have made it more vulnerable.
MakerDAO has been constantly challenged by a hydra of capital inefficiency, centralized points of failure, token governance and impending regulation. Despite all of this, it has managed to dabble along and become a fundamental piece of the DeFi ecosystem. Ultimately, it remains to be seen whether the project can continue to evolve to survive in the long term, and users should be aware of the major effort that will be required to survive with any kind of stability.
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