US Treasury Pressure Ideologically Separates MakerDAO Community

After MakerDAO’s co-founder Rune Christensen floated converting USDC to ether from the protocol’s treasury backing crypto’s fourth largest stablecoin DAI, community members are torn.

Unlike stablecoin giants Tether and Circle, Maker’s decentralized autonomous organization (DAO) is, as the name suggests, decentralized — so all its decision-making is open to the public. 

Every DAI is overcollateralized by a real-world asset, and DAI’s value is held together by its so-called Price Stability Peg (PSG), which allows USDC holders to swap their tokens for DAI with the protocol.

But since one-third of all DAI is backed by USDC, and after its issuer Circle froze all blacklisted Tornado Cash addresses based on US sanctions, MakerDAOs DAI is hypothetically at risk of depegging, despite the $10.9 billion in digital assets backing it.

MakerDAO figures have voiced concern about the potential for the US Treasury to sanction the smart contract associated with the PSG, which would effectively send the value of USDC sent to the protocol’s stability peg to zero if Circle follows suit.

But moving USDC collateral to ether (ETH) is not a simple task. Luca Prosperi, a prominent MakerDAO community member, told Blockworks that MakerDAO faces two major issues with  offloading $3.5 billion in USDC for ETH. 

MakerDAO is backed by the status of the US dollar

The first problem Prosperi identified is that the Maker community is torn between two ideologies.

“The first [group] is looking at the protocol with rational eyes and the other wants to detach as much as possible from the US dollar and US regulation in general,” he said. 

“It’s very difficult to know what the protocol will prioritize because the two camps are not compatible.”

DAI’s value, pegged to the US dollar and partly collateralized by USDC, is ultimately backed by the status of US-issued fiat, Prosperi said. Many investors are using DAI as a proxy for the dollar on-chain, which they can then off-ramp and use in the real world.

Removing USDC from DAI’s collateral means saying goodbye to the real world — and Prosperi said he was unsure how this would be received by DAI token holders writ large.

The second major issue that concerns Prosperi is the technicalities behind moving so much USDC to ETH.

A handful of MakerDAO community members believe switching off the protocol’s Peg Stability Module (PSM) would inspire DAI to outstrip the dollar, depegging it upward, as there would be organic excess demand for DAI.

“This is true in the short term,” Prosperi said. “But obviously things could go both ways.”

Realities of moving USDC to ETH

Further, Prosperi is concerned that publicly announcing that the protocol intends to buy $3.5 billion of another asset can lead to unwanted attacks. 

“There are so many ways a hacker could attack this situation — the existential risk of this move for the protocol is massive,” he said. “I will do everything I can, governance-wise, to make sure to carefully engage MKR whales to think this through properly.”

Prosperi said he’ll soon release a recommendation piece on his blog Dirt Roads, covering the potential MakerDAO move.

Meanwhile, Christensen has backtracked some of his earlier statements made in MakerDAO’s Discord server. “What I actually wrote…was that yoloing all the stablecoin collateral into ETH would be a bad idea,” he tweeted. Christensen last Thursday said risks associated with partially swapping USDC for ETH “may be worth it.”

In any case, considering MakerDAO is one of the largest — and oldest — DAOs in the crypto ecosystem, all eyes are on the protocol to see what its next moves will be. After all, it may just set a precedent for the rest of DeFi to follow.

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