leading DeFi lending platform MakerDAO has proposed an “end game plan” to make the protocol more resilient, but it could severely impact its stablecoin and liquidity pools.
In late August, MakerDAO co-founder Rune Christensen proposed what he called an “endgame plan” to make the network more resilient to regulatory pressures.
The move was largely in response to the US Treasury Department’s move to sanction Ethereum blending service Tornado Cash. According to Christensen, two main paths have emerged for the future of crypto networks: the path of compliance or the path of decentralization.
He wants to lead MakerDAO down the path of resilience and decentralization, but it could have a big impact on the DAI stablecoin and DeFi protocols that rely heavily on it, such as Curve Finance.
Three MakerDAO endgame strategies
The Endgame plan proposes making DAI a free floating asset, initially backed by real assets (RWA). There will be a three-year period in which the DAI remains pegged to the dollar, during which the protocol doubles the RWA to accumulate as much ETH as possible. This increases the quota of decentralized collateral.
The plan proposes three different collateral strategies called stances. These range from a high RWA exposure to zero exposure. More exposure allows for faster growth but at the expense of resilience and the Phoenix stance which is the end game has no RWA exposure, is very resilient and sees DAI moving away from its USD peg and floating freely.
Source: forum.makerdao.com
The protocol would first be included in the Pigeon Stance to accumulate ETH to make DAI resilient to authoritarian threats against the RWA collaterals. It will then enter a transition phase called Eagle Stance after reaching 75% decentralized collateral from ETH accumulation. After all, the Phoenix Stage has no attachable RWA collateral.
Essentially, Christensen wants the protocol to move away from collateralizing centralized assets like USDC and towards a more decentralized model that is more resilient to third-party threats. It’s a difficult balance, and the development of DAI could have different implications for other parts of the industry.
The Curve Effect
Curve Finance uses DAI and other stablecoins to generate DeFi yield opportunities. One of the most popular farms is 3pool, a highly liquid pool for efficient stablecoin trading and arbitrage. It would be badly affected by a free-floating DAI.
On October 3rd, Crypto Risk Assessments reported that a fall in the price of DAI could result in traders using 3pool to exit DAI positions, which could lead to an accumulation of wealth in the pool. Arbitrage bots could also take advantage of the situation between the three stablecoins in the pool (USDT, USDC, and DAI) and empty the former two, causing the third to accumulate.
The Curve 3 pool may need to be restructured if DAI eventually becomes free-floating. There is currently $861 million in the pool, split evenly across the three stablecoins. It has a daily volume of just over $40 million.
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