Maker Integrates Centralized Stablecoin to Kickstart Borrowing
Amidst a wave of liquidations following Ether's crash, Maker has hurried through an integration of Circle's stablecoin, USDC.
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After Maker network’s $4 million undercapitalization debacle let users win collateral auctions for free, an emergency executive vote went through to add USDC as a form of collateral to mint DAI. The initiative will bring deeper liquidity to a DeFi protocol that suffered during the latest market crash.
Maker Community Scrambles for a Stablecoin
Maker’s decision to add USDC collateral took less than a day to be implemented. Circle’s USDC is a digital asset pegged to USD and some consider it to be a centralized asset.
When I woke up this morning Ethereum had two permissionless stablecoins, now we have 1…
— kain.eth L222 (@kaiynne) March 17, 2020
The inclusion of a centralized asset as collateral on Maker has also called the decentralization of the network into question. Despite this, USDC remains an integral component of crypto space nonetheless.
In Maker’s case, there was a need for a more stable form of collateral so the network could generate income via stability fees.
Those minting DAI against USDC will now pay an annual stability fee of 20% with a 125% collateralization ratio and a 13% penalty for liquidation.
This means that 100 USDC of collateral will allow users to mint 80 DAI for a 20 DAI fee. This change is helpful for traders too.
Ether Vault’s that use their DAI loan to buy more ETH are considered levered spot longs on ETH. By including USDC, Vault’s can create a levered spot long on the dollar. Trading long on the dollar is often used as a hedge against asset prices crashing.
Liquidations on Maker happen when the collateral falls under the minimum threshold. Due to the latest fall in Ether prices, there were many liquidations. This disrupted DAI’s peg to the dollar because the value of ETH locked up in vaults did not equal the amount of DAI in circulation.
It also meant that the network ran on a deficit, paying users fees that were non-existent.
Maker now needs to quickly recapitalize. For that, the project needs borrowers to continue borrowing so that Maker can earn a stability fee. It was determined that USDC collateral is the safest option now. Adding it offers an incentive to get the network going again.
The MakerDAO’s rapid response to the underlying issues plaguing the network offers a case study in token governance.
Earlier this week, the DAO also announced a MKR issuance auction to recapitalize the network. A community-led effort is attempting to set a floor for this auction by forming a syndicate of buyers.