Following Circle’s recent blocking of some wallets, MakerDAO founder Rune Christensen said a solution to replace USDC for collateralising DAI must be found quickly. Concerned about the power of regulators, stablecoin may even abandon any US dollar-based model.
MakerDAO reacts to Circle’s recent decision
The shockwave caused by the recent blacklisting of cryptocurrency mixer Tornado Cash by the Office of Foreign Assets Control (OFAC) continues to take its toll and is causing significant concern among various decentralized finance (DeFi) players in particular.
This is especially true since OFAC’s decision was supported by Circle, the issuer of the stablecoin USDC, which is only the second most capitalised stablecoin on the market behind the USDT. Three days ago, on 9 August, Circle decided to freeze 38 wallets that had interacted with Tornado Cash, which amounted to about $75,000 at the time.
This decision was widely criticised, with some people claiming that the American giant was being overzealous, as Circle was not in fact obliged to blacklist these addresses. In fact, it is more of a preventive measure to ensure its back to the regulators.
Some commentators had already imagined what such decisions taken on the fly could imply, taking the example of DAI, Maker’s stablecoin largely collateralised by the USDC: what would happen if the USDCs in question were frozen and caused a depeg of DAI?
A scenario not unlike the downward spiral Terra found itself in earlier this year.
MakerDAO may abandon the dollar
According to a recent statement by Maker founder Rune Christensen on the project’s Discord server, DAI may well abandon not only a USDC-based model, but perhaps even any stablecoin dependent on the US dollar.
rune: we should seriously consider depegging from usd pic.twitter.com/HBMrPH7LrW
– banteg (@bantg) August 11, 2022
I’ve done a lot of research into the consequences of the TC [Tornado Cash] ban and unfortunately it could be much more serious than I first thought. […] We should seriously consider breaking away from the USD. It is inevitable […]. “
The reliance on such a fragile stablecoin from regulators could indeed bring very heavy damage to not only DAI, but the entire cryptocurrency ecosystem, and for good reason, the total locked-in value (TVL) of DAI is close to $11 billion.
As such, stablecoin is present in all 4 corners of decentralised finance, and the repercussions of a potential depeg for a stablecoin of this scale could be immeasurable. Today, most of the collateralisation of DAI is done by the USDC, as we can see from this chart:
Collateralisation and total locked value of the ICD
Thus, Rune Christensen proposed to convert the USDC in question into Ethers, most likely due to the bullish sentiment regarding the 2nd most capitalised cryptocurrency in the market behind Bitcoin (BTC) due to the arrival of Merge.
This was however strongly advised against by Vitalik Buterin himself on Twitter:
Errr this seems like a risky and terrible idea. 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.
– vitalik.eth (@VitalikButerin) August 11, 2022
” This sounds like a terrible and risky idea. If the ETH loses a significant amount of value, the value of the collateralization could fall but the CDPs [Collateral Debt Positions] will not be liquidated, and so the whole system could become a fractional reserve. “
In response, the founder of MakerDAO posted a tweet explaining that indeed, transferring all USDCs into ETH was probably not a good idea. However, he did not rule out buying at least some of it, especially through the dollar cost averaging (DCA) strategy.
In any case, we should continue to hear about the DAI, with the USDC issue still to be resolved regarding the collateralisation of Maker’s stablecoin.
