MakerDAO’s DAI Fell Behind Terra’s UST Months Ago. Here’s How It’s Trying to Catch Up

For longtime readers of this letter, you’re absolutely conscious of the 2 main decentralized stablecoin suppliers: MakerDAO and Terra.

Each Tether (USDT) and USD Coin (USDC) are a lot bigger than each of those initiatives, however they fail the decentralized take a look at.

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MakerDAO is behind the stablecoin DAI, and Terra is behind the fast-growing UST stablecoin. And although Terra has made a late entrance into this scene (Maker debuted in 2014 and DAI arrived in 2017), UST just lately took the crown as the most important decentralized stablecoin by market cap.

For reference, USDT has a market cap of $80.8 billion, USDC has $52.4 billion, Terra has $15.8 billion, and DAI has $9.3 billion.

Market capitalization of UST (purple) and DAI (orange) over the previous 12 months. Supply: CoinGecko

As you may see, UST took the lead in December. At the moment, some people could have thought it was only a fluke akin to varied different flash-in-the-pan stablecoin makes an attempt from the previous.

Since then, nonetheless, UST has continued to surge.

And simply because the stablecoin has surged in measurement, so too has Terra’s governance token LUNA, now a high 10 cryptocurrency by market cap—forward of Cardano, Solana, and Avalanche. Since UST overtook DAI on December 20, the value of LUNA has risen from roughly $78 to right this moment’s value of $93.5—a 19% hike.

The parallel rise of those two belongings is not any shock both. That’s as a result of every time extra UST is minted, LUNA is destroyed.

And insofar because the Terra-based DeFi ecosystem has expanded and elevated demand for a local stablecoin, there’s been tons of LUNA destroyed (that means much less accessible in the marketplace).

For extra on how Terra works, try our Study article on the topic.

The rise of Defi exercise on Terra since November 2020. Supply: DeFi Llama

Terra’s development has shocked many, however maybe none extra so than MakerDAO. And now the venture is lastly appearing.

MakerDAO has both carried out or is at present mulling over new updates to assist enhance the adoption of its stablecoin and in addition rethink the tokenomics of its native MKR token.

The very doubtless pretext for this wave of modifications is to convey DeFi’s authentic central financial institution again to the highest.

One proposal below dialogue is that of turning MKR right into a type of vote-locking token akin to Curve and Yearn’s “ve-” fashions. Because of this to take part in varied governance proposals, you would wish to stake your MKR token. In trade, you’d obtain “stkMKR” and voting rights.

Extra importantly, although, those that stake MKR tokens additionally can be rewarded with extra MKR (comparable to staking or yield farming rewards).

These rewards can be generated by means of a surplus public sale, a Maker occasion that’s triggered at any time when there’s a surplus of DAI. The surplus DAI is bought for MKR and a share of this public sale would, in accordance to this proposal, be diverted to stkMKR holders.

Diagram of present surplus public sale mechanism and the proposed mechanism. Supply: MakerDAO

The concept behind this redesign is to entice customers to 1) purchase MKR to allow them to stake and take part in MakerDAO governance, 2) stake MKR tokens, thus transferring them off of the market and making a band of never-sellers, and three) create juicy incentives akin to an APR for staking.

One other replace was that of including stETH-ETH liquidity provision (LP) tokens as collateral to MakerDAO.

Shortly, in case you forgot how Maker works: Maker mints DAI with overcollateralized collateral.

You need DAI? You then’ll want to deposit greater than 100% of any variety of different cryptocurrencies, starting from Ethereum, Wrapped Bitcoin, Uniswap, and on and on.

With the addition of stETH-ETH LP tokens, that listing of eligible collateral will get just a little longer.

It’s a very attention-grabbing inclusion as a result of it additionally exhibits how a historically conservative (not less than for DeFi) venture is onboarding a bit extra threat than up to now.

The explanation this specific asset is riskier than your run-of-the-mill cryptocurrency is that it depends on two different cryptocurrency initiatives. Here’s the way it works.

You’ll first want to stake your Ethereum on Lido Finance and get stETH in return. You then’ll deposit that stETH into Curve Finance’s stETH pool to get the stETH-ETH LP token. Lastly, now you can deposit that LP token on MakerDAO and mint DAI stablecoins.

stETH-ETH LP pool on Maker.Supply: Oasis (DAI minting software for Maker)

You’ll be able to then take these stablecoins and purchase extra cryptocurrencies, maintain these stablecoins in one other lending protocol incomes curiosity, or just rinse and repeat the stETH to DAI circuit till you’re max leveraged.

The final suggestion is, after all, an enormous threat. If ETH tumbles, dragging down the worth of that LP token under the 155% collateral ratio set by Maker, you’ll be liquidated.

The ultimate proposal, and maybe most controversial, has been that of onboarding extra real-world belongings (RWAs) as collateral to the Maker protocol.

“It’s time for the Maker protocol to take daring motion and seed the subsequent section of DeFi,” tweeted hexonaut, a protocol engineer at Maker who contributed to the proposal. “The bull market has been sort to us all, however that point is passing. We want to take the subsequent step and start integrating with the true world at scale.”

So, just like the stETH-ETH LP token talked about above, hexonaut (and two others) proposed to open the collateral pool to belongings like actual property loans or debt financing. This implies you possibly can mint DAI utilizing non-crypto issues.

And there are already protocols constructed to bridge these two worlds too, together with Centrifuge (which has already minted greater than $78 million in DAI utilizing these sorts of belongings).

And so as to make this much less dangerous for Maker, hexonaut additionally proposed one other change to Maker: Enhance its surplus by eradicating the present burn mechanism.

“We suggest this primary step to cease the burn and give attention to constructing an enormous system surplus,” they write. “By refocusing all income into the excess buffer this can enable us to risk-on for the protocol with out inflicting existential threats like flop auctions.”

The excess burn, which was additionally briefly talked about above, makes use of surplus DAI available in the market to purchase MKR tokens after which burn (crypto communicate for destroy) these tokens. The newest proposal needs to get rid of this mechanism and let the excess run in order that the protocol will likely be liquid sufficient to onboard extra threat.

With extra funds sloshing round, black swan occasions akin to what occurred in March 2020 (when DAI briefly misplaced its greenback peg) could possibly be higher cushioned.

Effectively, that’s the concept, not less than. And, after all, overtaking Terra.

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