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MakerDAO governance leaves the foundation
On Saturday, crypto fund ParaFi Capital posted a 900-word piece on Maker’s online governance forum entitled [Action Required] State of the Peg. The post argues that Dai is in a “perilous and dislocated state at $1.02-1.03” that demands “emergency action” outside of the newly implemented MIP process.
We discussed why Dai is trading above its peg last week, but the campaign to return it to $1.00 picked up considerable steam over the weekend with several prominent DeFi voices replying in agreement with ParaFi Capital, including Scott Lewis at DeFi Pulse/DEX.AG and Tom Schmidt at Dragonfly Capital, a major MKR holder.
While a 2% premium may seem small, Tom Schmidt explains how that can make a big difference:
“We’re (anecdotally) speaking with a few teams that are considering switching to USDC away from Dai, and we see this switch already happening through on-chain data. dYdX posted its first day 1 with more USDC-WETH volume than DAI-WETH volume last week. Currencies, even fully-backed ones like Dai, still rely on network effects and strong narratives, which can often unwind just as quickly as they grew.
With this in mind, it’s important to think about the problem itself, which is that ~6-10MM more Dai needs to be minted in order to re-peg. So, where is this going to come from?”
The Maker forums are typically populated by the Maker team and core members of the community; most attend Maker’s weekly Governance and Risk meetings on Zoom. Some in the community reacted defensively, diminishing the seriousness of the situation. They argued macro volatility justified the drift from the peg and that rushed solutions could endanger Dai’s long-term sustainability.
Others in the community, like the pseudonymous LongForWisdom and Maker Founder Rune Christenson, were more open to solutions to restore the peg and increase Dai liquidity, namely slashing stability fees and expediting collateral onboarding.
Just this afternoon, Maker’s Head of Risk Cyrus Younessi posted four polls to gauge the community’s feeling on how to proceed:
Are you in favor of adding LINK as a collateral type to MCD?
Are you in favor of adding ETH with a lower liquidation ratio as a collateral type?
Are you in favor of adding additional fiat-backed stablecoins (such as PaxUSD) as a collateral type?
Are you in favor of significantly reducing the stability fee and liquidation ratio for USDC?
LINK looks like it will be fast-tracked for inclusion and # 2 seems like an odd fix, but Rune’s initial reply to ParaFi Capital may be the most prescient:
I think it would make sense to set all SFs to 0 (temporarily) and onboard as many new collateral types that the community has shown interest in, and that the domain teams state can be easily onboarded (so only erc-20’s). Taking such decisive action would hopefully have the effect of overshooting, taking the dai price below 1 USD, and from there the peg can then be stabilized from below, by increasing the DSR and the stability fees.
It’s clear that Rune sees a fully implemented Multi-Collateral Dai system as the key bulwark against the liquidity crunch that Dai finds itself in the long-term and the quickest way to restore Dai in the short-term. But never waste a crisis.
Important: Dai has been trading at ~ $1.015 on dYdX and Coinbase pro for most of the day. If it dips below $1.01, it may assuage fears of a Dai spiral.
Related: Popular currency blogger JP Koning’s latest in Coin Desk argues that Maker should consider negative rates.
How did we get here?
These are tough problems to solve. There are real long-term risks to account for, and there should be push back to short-term fixes for an ecosystem that hopes to be around for decades.
Taking a step back, the MakerDAO ecosystem features 3 pretty different interest groups:
While there is large overlap in these constituencies right now, they will trifurcate in the future as the system develops. As Scott Lewis pointed out, CDP/Vault holders are much more sophisticated than Dai holders, which may be acquiring Dai to save in a stable currency, rather than opening a CDP to take a levered bet on the price of ETH.
Meanwhile, MKR holders, are the ones with decision-making power. It’s up to them to balance the interests of all three and create a sustainable and secure Dai ecosystem.
There is perhaps a more important constituency that MKR holders should consider: companies/projects building on top of Dai. Two companies come to mind: PoolTogether and Dharma.
Both are building consumer-facing products that leverage Dai but (almost) completely abstract away Dai/Ethereum. With other stablecoin options, it’s a simple choice of what works better and “better” typically means more liquidity – something that benefits all Maker stakeholders.