Why did MakerDao abandon USDC and turn to ETH starting with MakerDao

2022-08-25, 01:31

TL: DR

The US Treasury recently sanctioned crypto mixer Tornado Cash, which runs on USDC.

In a statement, MakerDAO co-founder Rune Christensen said that the sanctions were more serious than he had anticipated.

To circumvent this situation, he thought of purchasing ETH with the USDC.

Moving collateral from USD to ETH may outweigh the consequences of a deppeg of DAI.

Community members, as well as other stakeholders, spoke up on the dynamics of such a move. A major opinion was obtained from Vitalik Buterin, the co-founder of Ethereum.

Vitalik expressed his reservations about the move as it could be affected by any fluctuation in the value of Ethereum in the market. He gave a few pieces of advice on what to do.

The final decision from Rune is yet to be known. In any case, the final decision will factor in the possible risks involved.

Rune Christensen, the co-founder of MakerDAO, recently proposed removing all USDC from DAI's peg-stability module. He suggested purchasing ETH with the USDC, worth $3.5 billion, as an alternative.

Vitalik Buterin believes such a conversion would be a terrible idea, regardless of how much it could boost ETH's value.

Why MakerDAO considers opting out on circle’s USDC

The US Treasury recently sanctioned crypto mixer Tornado Cash, which runs on USDC. Circle, which issues USD Coins, was also subject to the recent sanctions. In a recent interview, Circle CEO, Jeremy Allaire, revealed that Tornado Cash sanctions are mandatory for the stablecoin network. A total of 75,000 USDC worth of funds were frozen across 44 Tornado Cash addresses.

Rune expressed concerns about the US Treasury Department's latest sanctions against Tornado Cash on MakerDAO's official Discord channel. He remarked, "It is much more serious than I originally thought."

Twitter

He continued, saying that such a transition is "almost inevitable" and must only be undertaken after much preparation.

According to him, one way to accomplish this would be to "uproot" USDC or to "yolo USDC into ETH."

According to Circle CEO Jeremy Allaire, Circle (the issuer of USDC) had to comply with Treasury Department sanctions related to Tornado Cash due to requirements under the Bank Secrecy Act. Due to this, USDC was frozen in all sanctioned addresses and associated entities.

The Risk of Centrally-Issued Stable Coins

Several crypto groups have begun discussing the risks associated with centrally-issued stablecoins, which can be seized, censored, and enforced. Unlike MakerDAO's DAI, which has an asset pool backing it, MakerDAO's DAI has no central bank.

Its reserves comprise about half USDC, half ETH, and the restless centralized cryptocurrencies. The conversion of USDC reserves into ETH could potentially remove MakerDAO's assets from Circle's freeze - and boost the price of ETH as well. Although this plan does not appeal to Ethereum co-founder Vitalik Buterin.

Although the conversion increases the risk of DAI losing its dollar peg, Rune still believes it is worthwhile to go through with a "partial uprooting."

In his view, the market may finally begin to reward decentralization so that these risks can be accepted because USDC is no longer a no-brainer.

Buterin’s objection to the idea

It's interesting to note that Ethereum founder Vitalik Buterin opposes Christensen's plan. Buterin, like other stablecoin holders, is weighing the risks associated with the swap, which could help push Ethereum's price upward. He tweeted that he thought it was a bad idea in typical Russian-Canadian style.

It's a terrible, risky idea," he wrote on Twitter. ETH dropping a lot would lead to a big drop in collateral value, but CDPs would not be liquidated so the system would become fractional.

Twitter

Several suggestions were made by Buterin that could aid DAI in reducing the risks associated with centralized networks. First, he suggested expanding reserves so that no asset would account for more than 20% of the total. As a means of preserving the growth of DAI, he added that the network could apply a "negative interest rate."

Fears of DAI community on having a similar "LUNA" experience

After TerraUSD (UST) - the third-largest stablecoin in May - collapsed, fears about decentralized and algorithmic stablecoins have risen. LUNA, which was indirectly backed by the token, crumbled after its prices fell.

Before TerraUSD's meltdown, the LUNA Foundation Guard had purchased billions in Bitcoin for its stablecoin reserves in a similar plan to Rune's. As a result, the fledgling peg of UST was later forced to sell the Bitcoins it had acquired earlier.

Conclusion

The situation with DAI is quite dicey, with Vitalik proposing important factors to consider. The final decision of Rune Christensen is yet to be known, but we can be sure it will take into account the risks involved in pulling it off.

Author: Gate.io Observer: M. Olatunji
Disclaimer:
* This article represents only the views of the observers and does not constitute any investment suggestions.
*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all other cases, legal action will be taken due to copyright infringement.