MakerDAO increasingly relies on centralized collateral


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Between 2018 and 2019, the leading decentralized financial protocol MakerDAO encountered difficulties in growth. The agreement provides users with a decentralized loan paid in a multi-collateralized U.S. dollar stable currency DAI (MCD), but the locked-in value in the contract has stalled at $300 million.


This situation has changed in recent months. Now a variety of cryptocurrencies worth nearly 2 billion U.S. dollars are locked in the MakerDAO contract, which has promoted the increase in DAI circulation.

What is MakerDAO?

MakerDAO’s monetary policy is controlled by holders of Maker (MKR) tokens, and they will dynamically adjust various levers to ensure that the transaction price of DAI is maintained at around $1.00. These leverages include but are not limited to interest rates (stability fees), DAI savings rates, and global debt ceilings.

The total value locked in MakerDAO is close to 2 billion US dollars

As can be seen from the figure below, MakerDAO’s TVL has grown substantially since 2020. On January 1, the indicator was located at 350 million US dollars, accounting for 19.1% of the current total value. On June 1, MakerDAO’s TVL rose to $510 million.


MakerDAO’s TVL growth has benefited from two trends.

First, the rise of Yield Farming has led to a substantial increase in the demand for DAI. Yield Farming is a term used to describe the use of cryptocurrency to earn passive income, mainly involving the stable currency DAI. From Compound to, all mainstream Yield Farms are developed around stable coins. The demand for DAI and other stablecoins has risen sharply. Especially for MakerDAO, this means that investors are depositing mortgage assets into the system to obtain DAI loans.

DAI is an attractive asset in the DeFi field, especially because the amount of DAI is quite limited compared to its main competitors USDC and USDT. Taking the Vaults of Yearnfinance as an example, the current annualized growth rate of DAI deposits is 13.5%, while the annualized growth rate of USDT deposits is only 0.94%.

In response to this increase in demand, MKR holders have introduced a series of monetary policy measures. The global debt ceiling has been raised to 1.416 billion DAI, and new vaults have been launched for Chainlink, Loopring, Compound, USDT, Paxos, Kyber Network and Wrapped Bitcoin. This led to a strong increase in DAI in circulation, which lowered the premium to 1%.

Second, after the controversy in March that user loans were liquidated but mortgage assets were completely wiped out, people have restored confidence in the MakerDAO agreement.

During the “Black Thursday” crash in March, the price of ETH plummeted and network congestion caused MakerDAO users to liquidate their mortgage assets at a price of $0 instead of the current price. This incident caused a 2-3% premium in DAI’s trading price for a long time.

ParaFi Capital, an encrypted asset fund, explained that this continuous delinking of DAI is the result of users losing confidence in the MakerDAO protocol. In a post on the matter on the MakerDAO forum, the fund explained:

“We believe that this lack of stability and liquidity is turning into the uncertainty of using DAI as a decentralized stable currency in many DeFi protocols. According to rumors, we have heard that a small number of DeFi teams lack liquidity for DAI. /Stability expresses disappointment, some people choose to use USDC instead. We believe that in the long run, this will damage DAI’s network effect.”

Many concerns surrounding centralization, a data website that tracks MakerDAO, reported on October 3 that out of the 866 million DAI in circulation, 358 million was generated by depositing USDC. In addition, there are tens of millions of DAI generated through the use of WBTC, USDT and PAX, and these currencies can be frozen through the administrator address.

This means that more than half of the total circulation of DAI is generated by cryptocurrencies that can be rendered valueless or frozen by a centralized group. For MakerDAO, this problem is systemic because DAI is interchangeable—all DAI is the same, no matter what token it is generated by.

Tyler Reynolds, a cryptocurrency investor who works at Google Pay, expressed his concerns about USDC-based DAI:

“They destroyed their only value proposition-a decentralized, uncensorable, USD stablecoin backed by equivalent liquid collateral. SAI is good. MCD only has non-custodial assets that would be great. Custody DAI comes from all aspects It seems to be an inferior choice to USDC/USDT.”

“Up to now, I guess you can only care about holding DAI or USDC, don’t you? The same stablecoin, different names?”

Although Tether has reviewed these transactions to ensure that users’ funds are not lost to malicious actors, some people are concerned that governments that want to attack DeFi and Ethereum may persuade USDT’s issuing company, Tether, to review more transactions.

MakerDAO is now at the center of these worries because it increasingly relies on believing that the actors behind centralized collateral will not arbitrarily freeze or review transactions related to DAI loans.