Andrey Shevchenko, the founder of decentralized finance (DeFi) protocol Zircon Finance, shared his view that MakerDAO (MKR)’s so-called “decentralized stablecoin” DAI (DAI) introduction of USD Coin (USDC) as collateral was a attempt to plug a hole in a faulty system.
In its original state, DAI was only backed by ethereum (ETH), which was on-chain, meaning that the stablecoin’s backing was decentralized and the only centralized point of failure was the oracles that provided the ETH-USD price.
While the DAI whitepaper published in late 2017 he mentioned that more types of collateral would be added to the stablecoin soon, no mention of centralized collateral tokens.
Shevchenko pointed out that in its first stage, DAI was unstable and reached a discount of around 8% compared to the US dollar in 2019 and then, after the so-called Black Thursday, instead negotiated with a premium.
He explained that this was when USDC was introduced as a collateral option to mint DAI and coded in a way that made a USDC equal to a DAI through a so-called “pin stability modulus.” This ensured price stability for DAI.
The founder argued that the system is fundamentally flawed as DAI is created when users want to increase their exposure to crypto through margin, meaning there is little incentive to issue the stablecoin during bear markets.
Another factor that stood out is that the DAI issuance does not include an arbitrage mechanism, which means that it cannot be withdrawn unless you have issued tokens yourself. While USDC fixed the problem, it introduced a new set of problems.
“For today’s Maker, the counterparty and centralization risks you are taking are enormous. Things like real world asset vaults, handing over the PSM USDC to Coinbase custody; In isolation, they may seem like good ideas, but they are steps in the wrong direction. And we have seen the negative effects of relying on USDC this past weekend. DAI has watered down its brand to become functionally indistinguishable from USDC in people’s minds…however, I think in the future we could have multiple of these types of stablecoins backing a single ‘master’ stablecoin wrapper. Compatibility in DeFi can really help us.”
Andrey Shevchenko, founder of Zircon Finance.
Shevchenko suggested that a solution might be a better framework for creating synthetic assets, such as the perpetual swap funding method, but would require a robust and liquid perpetual futures trading platform to be feasible.
He highlighted a few projects trying to do something different in the algorithmic stablecoin space, citing NakaUSD, but argued that “it’s not a start because it uses CeFi exchanges” and the UXD protocol, which is a completely different can of worms since it’s based on Solana (SOL).
As crypto.news recently reported, USDC lost its $1 peg to the USD, trading at a low of 81.5 cents on March 11. Meanwhile, trackers indicate that USDC issuer Circle has burned through $2.34 billion in the past day to meet the redemption surge. requests.
