Decrypting DeFi is Decrypt’s DeFi email newsletter. (Art: Grant Kempster)
Last Friday, Rune Christensen, the mastermind behind crypto’s unofficial central bank, MakerDAO, penned a proposal of epic proportions.
It detailed the ongoing impact of the tornado cash sanctions, saying the industry had “failed to show any value to society,” and outlined two potential avenues for makers.
Both of these avenues, illustrated by recent sanctions, require DeFi projects to either become the next fintech product (and comply with regulations) or “be treated as something else.” The latter choice in particular also carries a high level of risk, as evidenced by the recent arrest of Alexey Pertsev, a developer of Tornado Cash.
However, because Maker was engineered to eliminate any possibility of being blacklisted or bowing to requests from authorities, the previous route is not possible, Christensen wrote.
It also means: “At some point in the future, there is a high probability that Maker will be hit by a major attack by global authorities, targeting every attack surface they can find, through a process similar to that which leads to that.” has led [Tornado Cash] sanctions”.
In summary, it’s a question of when, not if, regulators will target MakerDAO and the industry’s leading decentralized stablecoin DAI. With that assumption in mind, Christensen argued that the task was now to be accomplished DAI as attack-resistant as possible.
The call to arms also means the project must “prepare for the likely possibility that DAI have to become free-floating” or cede the peg to the greenback. The project founder also pointed this out on August 11th.
The difference between then and now, however, is that now there is a real plan in mind.
Free floating Maker’s DAI stablecoin
DAI’s decoupling from the dollar is less a goal than a symptom of making the protocol attack-resistant.
Part of Christensen’s “Endgame Plan,” another monumental proposal outlining a reorganization of Maker and its leadership, would put a cap on how much of the project’s collateral is in real-world assets, or RWAs.
In addition to assets like Ethereum, Wrapped Bitcoin, and Uniswap, small businesses can also securitise their own assets to mint DAI.
For example, Reif Financial Investments Inc. has secured real estate loans in exchange for DAI. Another company called Gig Pool has done the same thing with advance payments for various gig workers from Instacart, Doordash, Upwork, and the like.
That includes Circle’s stablecoin USDC, of which about 50% is behind DAI, according to data from DAI Statistics.
about DAI statistics
As you can probably imagine, it’s much, much easier for regulators to crack down on these types of companies than it is to crack down on something like Ethereum. Circle already has a fairly well-known track record for blacklisting its stablecoin at the request of regulators.
This means that these types of collateral are a key attack surface that Christensen wants to secure.
“The decentralization journey means narrowing our attack surface to physical threats and specifically our RWA collaterals as a percentage of the total portfolio. In the endgame schedule, I set that limit at 25%,” he writes.
However, by limiting this type of collateral, there may be a limitation Not be sufficiently attack-resistant (i.e. pure cryptocurrencies) collateral to meet the continued demand for DAI.
As supply slows because there are fewer opportunities to mint more DAI, continued demand could push DAI’s price above a dollar. But wait, there’s more.
Christensen also advocated the introduction of a “negative target rate,” essentially Maker’s version of negative interest rates, to reduce demand for DAI and increase its supply “because it’s cheaper to produce [more DAI] with decentralized vaults like Ethereum.”
This breakdown also makes it clearer why some have called Maker Crypto’s central bank.
Much like in the real world, interest rates going negative mean that currency holders are costing themselves to sit on their money. And if said currency holders are also rational actors, would they then go out and spend that money on potentially more valuable things or easy into assets that will not cost them money.
Falling interest rates also make borrowing, or in our case minting more DAI, much cheaper.
That’s basically Christensen’s plan in a nutshell. Limit how much RWA can be used as collateral while curbing demand for DAI (and making it cheaper to increase supply).
That’s the basic recipe for surviving any and all government crackdowns, but the plan goes further, unwrapping two more tools that “transform the free-floating of DAI into something Maker can survive and even thrive on,” in Christensen’s words.
More tokens, more vaults
The only way to convince someone that owning an asset suffering from negative interest rates is a good thing is to also convince them that they need that asset in order to get other, more valuable assets.
Here Christensen introduces the idea of the so-called MetaDAOs and MetaDAO tokens.
From Christensen’s Endgame Plan proposal. Source: MakerDAO
As the diagram above shows, a Maker MetaDAO is like any other crypto DAO, except this one would be tied to the much larger MakerDAO and would have its own native token.
These mini-DAOs would also have full autonomy, according to the plan, to pursue any goals they defined and hunt down “profitable activities.”
And since they are attached to the nascent DAI-based ecosystem, DAI holders could then income farm these new tokens.
Finally: “Maker wants Not just get exciting again; It’s going to be the most exciting and important place in the entire crypto world – and we have the perfect tool to capture this meta and engage people in our ecosystem: MetaDAO Yield Farming.”
It’s a big, bold plan.
But the fact that it comes from one of DeFi’s most influential projects and not someone like Terras Do Kwon could easily put the crypto community behind it.
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