makerdao

MakerDAO, behind the DAI stablecoin, is considering depegging from USD. The founder of MakerDAO, Rune Christensen, has proposed that the MakerDAO members consider depegging the stablecoin from USD. The proposal comes amid sanctions imposed by the US against the Tornado Cash crypto mixer.

MakerDAO could depeg from USDC

The DAI stablecoin is 32% backed by Circle’s USDC stablecoin. The backing represents around $3.5 billion, making it the single largest collateral asset backing DAI. However, Christensen wants part of the collateral removed from USDC and converted into another asset such as Ethereum.

Christensen has expressed concern about the ripple effects of the sanctions imposed against the Tornado Cash crypto mixer. He said these sanctions’ consequences were more severe than he had initially thought.

The US government sanctioned Tornado Cash on August 8 due to money laundering allegations. The crypto mixer is believed to have laundered over $7 billion worth of cryptocurrencies since 2019. The sanction means that US citizens and institutions are prohibited from using the privacy tool.

Circle, the issuer of the USDC stablecoin, blacklisted 38 crypto wallet addresses and froze $75,000 of the USDC linked to Tornado Cash. The blacklisting of these wallets has raised the issue of decentralization of the MakerDAO DAI stablecoin.

Critics have aired concern over the dependence of DAI on USDC, given that the latter is a centralized asset subject to government and corporate control. MakerDAO is one of the best DeFi platforms that has praised itself for its focus on decentralization.

MakerDAO was one of the first platforms to establish a decentralized autonomous organization. In a DAO, there is no central authority that controls the operations of an organization.

Given that a third of DAI’s collateral is backed by USDC, selling this collateral would place the DAI stablecoin at the risk of depegging from $1. However, Christensen believes that removing the USDC peg is worth the risk. The MakerDAO founder added that this event would inevitably happen, but it was a realistic plan if vast amounts of preparation were implemented.

Christensen plan criticized

According to Christensen’s Discord communication, many have alluded that his plan involves converting its USDC stablecoin into Ether. However, the crypto community has vehemently opposed this plan.

The co-founder of the Ethereum blockchain, Vitalik Buterin, has criticized any plan by MakerDAO to convert its USDC collateral into ETH. In a Twitter post, Buterin said that doing that was “a risky and terrible idea.” If the price of Ether dropped, the value of the collateral would decline, posing a risk to the platform.

Other community members have also expressed concern that such a move would create a situation like that of Terra LUNA. Terra LUNA collapsed a few weeks after the Luna Foundation Guard started aggressively buying Bitcoin to back the UST stablecoin. However, after the UST depegged, the foundation failed to sustain the peg because Bitcoin was also dropping in value.

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