In what would mark a dramatic strategic reversal, Rune Christensen, the founder of MakerDAO, is calling for the DeFi stalwart to reduce its exposure to real-world assets and freely float the value of its stablecoin, DAI, against the dollar.
The move would depeg the currently stable DAI token from the U.S. dollar and prevent holders from redeeming it on a one-to-one basis for other stablecoins. It would also do away with one of DAI’s core value propositions, and could result in the token trading below the dollar.
Christensen argued that MakerDAO may not have a choice. Invoking the U.S. government crackdown and the meltdown of major crypto platforms, Christensen said MakerDAO, along with the rest of decentralized finance, was facing an existential crisis.
‘Window of Opportunity’
“The window of opportunity for DeFi to prove that it is worthy of a new middle ground of being considered a public, neutral financial utility rather than regulated as banks has now closed because DeFi failed to deliver anything of real value, and the massive crashes of Terra, Celsius etc ruined its mainstream image,” Christensen wrote in a post published on Aug. 26.
Christensen, who’s not shy about delivering hard truths to the crypto community, is clearly convinced that MakerDAO must retool its model and its strategic growth plan if it is to survive a potential “physical crackdown” on crypto.
In the Aug. 26 post and his ‘Endgame Plan v3’ roadmap that was also published last week, Christensen laid out his vision for how MakerDAO, a DeFi lender with a total value locked of $9.5B, should address the intensifying regulatory risk.
The documents outline the process for executing and recovering from an emergency shutdown, call for Maker to accumulate a large sum of staked ETH in a “Protocol-Owned Vault” to generate income, and push for the project to restructure its core units into ‘MetaDAOs’ to generate yield for DAI holders.
The posts are a direct response to the U.S. Treasury Department’s sanction of Ethereum wallets associated with the crypto mixer, Tornado Cash, on Aug. 8. The step prompted Centre, the consortium behind the centralized stablecoin, USD Coin, to blacklist 38 wallets containing 75,000 USDC to comply with the sanctions.
The news sent shockwaves across the MakerDAO ecosystem, with some in the community fearing that core Maker contracts may also be the target of future sanctions should DAI users be identified as sending the stable tokens to Tornado Cash.
Cam Crossley, an analyst at the Australian web3 venture studio, NotCentralised, said Christensen was right to be concerned. The failure of the Terra stablecoin, and subsequently its entire ecosystem, in May galvanized authorities to clamp down on crypto.
“It’s easy to imagine governments pointing to Terra and other stablecoin blow-ups as justification for unfriendly stablecoin regulation,” Crossley told The Defiant. “If that were to happen it’ll put MakerDAO, particularly their Real World Assets, as low-hanging fruit for seizure — these assets are owned by registered organizations in the traditional system.”
Christensen’s recommendations will now be discussed by the MakerDAO community before further action is taken by the protocol. Christensen stepped down for the position of CEO and dissolved the Maker Foundation during July 2021, turning MakerDAO into a fully decentralized organization.
MakerDAO is a collateralized debt protocol, meaning users can mint the DAI stablecoin against collateral assets they deposit into Maker. Launched in 2017, the project has been a pacesetter in DeFi and its efforts to connect with TradFi players and execute a sound growth plan have provided a window into DAO governance.
When MakerDAO launched, users could only mint DAI against overcollateralized ETH deposits. But the protocol has steadily expanded the list of collateral assets it supports. Today, the largest source of backing for DAI is USDC, with more than $3.5B worth of the centralized stablecoin deposited into the protocol.
Since late last year, MakerDAO has pursued a strategy of embracing diverse forms of real-world assets (RWAs) as collateral. The move has allowed Maker to diversify its exposure outside of the crypto sector, and unlocked new sources of growth. Last month, Maker voted to create a $100M DAI vault for the 151-year-old lending institution, Huntingdon Valley Bank, in Pennsylvania.
But the U.S. Treasury’s action on Tornado Cash has cast Maker’s plans in considerable peril, Christensen argues.
While Christensen previously supported Maker’s pivot to increase its exposure to RWAs in his May 31 ‘Endgame’ thesis, he now sees RWAs as a source of regulatory risk. Christensen said the Tornado Cash sanctions have established the precedent for regulators to target MakerDAO without advance notice, and without providing the means for innocent users to recover their assets.
“At some point in the future there is a high probability that Maker will be hit by a severe attack by global authorities targeting any attack surface they can find, through a process similar to what led to the [Tornado Cash] sanctions,” Christensen wrote. However, he added that such an attack “is still very likely many years out,” giving Maker time to prepare and restructure.
Christensen continued that the window of opportunity for DeFi to prove itself as a “public, neutral financial utility” rather than a risky financial sector that must be tightly regulated has closed. He said this is due to DeFi “fail[ing[ to deliver anything of real value” during the previous bear trend, adding that the massive fallout from the collapses of Terra and Celsius “ruined [DeFi’s] mainstream image.”
Crossley said he also expected that regulatory attacks targeting crypto “would come with more warning,” either in the form of “draft bills with requests for public comment or drawn-out legal battles before a precedent is set.”
Yet Crossley noted that reducing RWA exposure will hinder MakerDAO’s growth strategy, and questioned how much demand there would be for a “free-floating stablecoin that falls in value vs USD.”
In response to the perceived threat of regulatory action, Christensen published his “Endgame Plan v3” roadmap on Aug. 25.
Maker’s founder asserts that DAI must float freely against the dollar in order for Maker to guarantee a hard limit of 25% exposure to real-world assets and address the risk of regulatory action, including minimizing its backing in the form of USDC. DAI’s parity with USD is currently maintained through its peg stability module, which allows DAI to be exchanged with stablecoins such as USDC on a one-to-one basis.
Christensen warned that “excess demand for DAI may not be able to be met with additional supply backed by fully decentralized assets such as ETH” once the protocol has reduced its backing from RWAs.
He added that “attempts to guarantee a peg to 1 USD without having access to USD-linked RWA collateral only ends in even worse misery and disaster, such as the Terra collapse.”
Maker’s founder also proposes that yields generated through MetaDAO token farming be used to offset the risk of DAI’s price going down in the future for token holders.
Christensen suggested restructuring Maker’s core units into MetaDAOs as a means to provide its subdivisions with greater autonomy. He said the move would allow the subDAOs to pursue independent and aggressive growth strategies without being hindered by the overarching MakerDAO governance process.
He also pushes for the project to begin accumulating a large stash of leveraged staked Ether to provide the project with revenue outside of the interest, minting, and redemption fees currently generated through DAI.
He added that a protocol-owned vault would importantly afford more direct control over how to utilize negative rates for DAI. He said the move will help to stabilize a freely floating DAI in addition to serving to “protect users against the uncertainty of randomly getting hit by extremely negative rate because of some demand or supply shock.”
Responses in Maker’s governance forum show widespread support for Christensen’s proposals. However, monet-supply, a MakerDAO delegate, doesn’t believe the protocol should solely be focusing on floating DAI’s value.
“I think a more balanced approach of reducing liquidity risk from centralized assets… strong public engagement and advocacy for decentralized money, and willingness to sacrifice short term profit… to try to win greater ETH market share and decentralized collateral backing will be more effective,” they said. They also expressed skepticism regarding the efficacy of adopting a metaDAO structure.
Fellow delegate, Luca-pro, backed money-supply’s critique of Christensen’s plans. They said that “farming tokens to raise money from retail investors [is] not a good way to improve relationships with the regulators.”
“DAI cannot become blacklistable, so Maker does not have the option of becoming compliant,” Christensen asserted in his Aug. 26 post. “The only choice is then to limit attack surface by reducing [real-world asset] exposure… this requires free floating away from USD.”