A potential change to one of DeFi’s oldest and largest protocols is raising concerns in the crypto community.
One facet of MakerDAO’s proposed overhaul would allow users to borrow its DAI stablecoin against its MKR governance token.
“It’s devastatingly disappointing to see Maker’s co-founder pushing this plan,” PaperImperium, a self-described “governance liaison, wrote on Twitter. “It’s as if nothing was learned this cycle.”
Maker is DeFi’s largest lending protocol, with over $6B in total value locked (TVL). It allows people to mint the DAI stablecoin against major crypto assets like Ether and Ethereum-based Bitcoin.
Maker TVL, Source: The Defiant Terminal
Noticeably missing from the set of supported collateral assets so far has been MKR, Maker’s governance token. Some would say this omission is for good reason — governance tokens tend to be much more volatile and illiquid than assets like ETH and BTC, raising the risk of so-called ‘bank runs’ that have driven many a stablecoin into the ground.
Comparisons To Terra’s UST Mechanism
Allowing users to borrow DAI against MKR could be considered similar to the mechanism behind Terra’s ill-fated UST stablecoin, which spectacularly collapsed last May, torching over $40B of market value.
DAI is crypto’s fourth largest stablecoin with a $4.1B market capitalization on Ethereum, according to The Defiant Terminal.
USDT Mkt Cap + BUSD Mkt Cap + USDC Mkt Cap + DAI Mkt Cap + FRAX Mkt Cap, Source: The Defiant Terminal
While many observers like Arthur Hayes, the influential co-founder of the BitMEX exchange, are remarking about the similarity of the proposed mechanism to that of UST and the LUNA token which backed it, there are some key differences.
For one, only users who have delegated their MKR tokens to an active participant in the protocol’s governance will be allowed to use the feature.
Another compelling difference is that the proposal does not call for MKR to back DAI entirely.
A key moment in UST’s collapse came when the stablecoin’s market capitalization eclipsed that of LUNA — At $4.1B on Ethereum mainnet alone, DAI’s value eclipses that of MKR, which stands at $712M.
Regardless, if the price of MKR collapses and leaves the protocol with bad debt, that shortfall will remain on its books.
And if MKR is liquidated en masse, that could potentially create a dangerous scenario for Maker, as an opportunistic group could more easily acquire a large stake in voting rights for the protocol. This opens up the spectre of “governance attacks” not unlike the one carried out by Avraham Eisenberg, a now-notorious exploiter, on a lending protocol last October.
The proposed change is part of a larger ongoing battle over the Endgame, a major overhaul of Maker put forward last May by the protocol’s co-founder, Rune Christensen.
When asked by The Defiant, PaperImperium, expanded the scope of his concerns regarding Maker. “The MKR-as-collateral is not an *urgent* issue, but part of the so-called End Game plan, which has that and other suboptimal ideas,” the governance liaison said.
PaperImperium specifically highlighted the 20,000 MKR tokens, worth over $15M as of Feb. 27, requested to fight climate change, and the additional payment of 60,000 tokens annually to the teams behind Maker, as other questionable aspects of the Endgame plan.
The first stage of the Endgame plan was ratified by Maker governance in October. The decision came under fire, however, when it came to light that Christensen had either voted or delegated three-quarters of the MKR tokens used to vote on the proposal.
Still, not everyone is up in arms about MKR’s potential usage as collateral. “With stuff like this, it’s always about the risk parameters,” Sam Macpherson, a member of Maker’s protocol engineering team, told The Defiant. “If it’s a small amount compared to the other collateral, it will be fine in practice.”
Macpherson is also involved in developing a decentralized lending market called Spark Lend, as part of a larger thrust toward building products which integrate with Maker.
Frax Takes Conservative Approach
As the debate around Maker’s future rages on, Sam Kazemian, the founder of Frax Finance, which issues the FRAX stablecoin, couldn’t help taking a shot at the proposed change — he tweeted that he would try out minting DAI against Maker’s governance token if the functionality went live.
Frax governance has voted to move away from having its FXS governance token partially back its FRAX stablecoin, specifically citing comparisons to UST as being a barrier to adoption.
Having rallied 24% in the last 30 days, MKR has outpaced crypto’s three largest non-stable assets, BTC, ETH, and BNB, according to The Defiant Terminal.
ETH Price + BTC Price + MKR Price + BNB Price, Source: The Defiant Terminal