• MakerDAO’s DAI stablecoin was launched with only Ethereum as collateral, which created instability and a single centralized point of failure.
• USDC was introduced as a collateral option for minting DAI in order to ensure price stability, but this created new issues such as counterparty and centralization risks.
• The founder suggests that the system should be improved in the future by introducing multiple stablecoins underpinning a single ‘master’ stablecoin wrapper.
Flawed Introduction of DAI
DeFi protocol Zircon Finance founder Andrey Shevchenko shared his view that MakerDAO’s (MKR) so-called “decentralized stablecoin” DAI’s (DAI) introduction of USD Coin (USDC) as collateral was an attempt to plug a hole in a flawed system. In its original state, DAI was only backed by ethereum (ETH), which meant that the stablecoin’s backing was decentralized and the only centralized point of failure were the oracles providing the ETH-USD price. While the DAI whitepaper published back in late 2017 mentioned that more collateral types would soon be added, there is no mention of centralized-collateral tokens.
Unstable DAI Prices
Shevchenko pointed out that in its first stage, DAI was unstable and reached about 8% discount compared to the U.S. dollar in 2019 then after so-called black Thursday it instead traded at a premium. He explained that this is when USDC was introduced as a collateral option for minting DAI and it was hardcoded in a way that made one USDC equal to one DAI through the so-called “peg stability module.” This ensured price stability for DAI.
The founder argued that the system is fundamentally flawed since DAI is created when users want to increase their exposure to crypto through margin, which means that there is little incentive to issue the stablecoin during bear markets. Another factor he highlighted is that DAI issuance does not include an arbitrage mechanism, which means that it cannot be withdrawn unless you issued tokens yourself. While USDC solved the problem, it introduced a new set of issues such as counterparty and centralization risks due to Real World Asset vaults handing over PSM USDC to Coinbase custody.
Shevchenko noted how relying on USDC has led to brand dilution for MakerDAO since now “DAI has diluted its brand” making it “functionally indistinguishable from USDC” in people’s minds..
Solution: Multiple Stablecoins Wrapper
The founder suggested solving this problem by introducing multiple types of stablecoins underpinning a single ‘master’ stablecoin wrapper with composability features from DeFi helping out with this idea.