Will MakerDAO’s New Plan Save DAI From Becoming Another UST?

In the midst of the chaos that is presently plaguing the crypto market for the past twenty-four hours — with USDC depegging from its $1 value to rising concerns over the extent to which it can affect other cryptocurrencies — MakerDAO has devised an emergency plan to protect its native stablecoin DAI, from further exposure to potentially unstable stablecoins.

MakerDAO Issues Emergency Proposal

According to an official post made on the MakerDAO forum, the company demanded an immediate executive proposal to limit threats to its protocol. DAI, a stablecoin pegged to the value of the U.S. dollar slipped by roughly 8% to hit an all-time low of $0.88. In light of the unprecedented de-pegging of the USD Coin (USDC) that started on March 10, Maker stated that it had numerous collaterals that were “exposed to USDC tail risk.” At the moment, the DAO has more than 3.1 billion USDC worth of collateral underpinning its DAI stablecoin.

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To begin, Maker suggests lowering the debt ceiling of UNIV2USDCETH-A, UNIV2DAIUSDC-A, GUNIV3DAIUSDC1-A, and GUNIV3DAIUSDC2-A liquidity provider collaterals to 0 DAI. Next, Maker intends to cut the daily minting restrictions of its USDC peg stability mechanism from 950 million DAI to 250 million DAI and raise the tax from 0% to 1% in order to prevent aggressive unloading of USDC.  In the event that the proposal is approved, the daily minting limit for another stablecoin module called GUSD will be slashed from 50 million DAI to 10 million DAI.

Although, MakerDAO suggests that the Paxos module is safer as it has a stronger reserve asset compared to other available centralized stablecoins — majorly consisting of US treasury bills, insured bank deposits and privately insured bank deposits — it faces comparatively lower potential for impairment. However, according to Maker’s analysis, it can still provide crucial “backstop liquidity” to restrict DAI from trading over the $1 price mark and subsequently impact liquidations if there’s a sudden crypto market crash. Therefore, MakerDAO suggests raising the protocol’s debt ceiling from 450 million DAI to 1 billion DAI for the USDP stablecoin produced by Paxos.

DAI Limits Exposure To DeFi

The stablecoin issuer has proposed taking similar steps for DeFi protocols as well, thereby eliminating exposure to platforms such as Curve and Aave in order to prevent the accrual of bad debts and potential bank runs if the “market price of USDC falls significantly below the current collateral factor.”

After USDC-issuer Circle, publicly revealed that it had over $3.3 billion worth of funds collateralizing the stablecoin now trapped in the troubled Silicon Valley Bank, USDC depegged from its U.S. dollar on March 10. At the time of writing, USDC’s price is still hovering just over the $0.91 mark while DAI is currently exchanging hands at $0.93.

Also Read: Is Vitalik Buterin Supporting USDC Amid Heavy Depegging?