When it was launched, MakerDAO — a protocol for the issuance of decentralized loans and the decentralized stablecoin DAI — only involved Ethereum; users of the protocol could deposit Ether and in return, get an amount of DAI less than the dollar value of their deposit.
But, MakerDAO’s sole reliance on ETH had to end if the protocol wanted to increase adoption of DeFi and thus, the supply of DAI, which is dependent on consistent and ample liquidity to maintain its artificial peg to the U.S. dollar.
After adding Basic Attention Token (BAT) and USD Coin (USDC), a centralized stablecoin backed by a dollar reserve, MakerDAO is expanding its horizons in a move urgent because DAI has briefly become illiquid, trading 1-4% above its dollar peg for the past seven weeks.
MakerDAO Embraces More Collateral Types
This weekend, holders of MakerDAO’s governance token, MKR, convened to add Wrapped Bitcoin (WBTC) — a tokenized representation of custodied Bitcoin on Ethereum — to the DeFi protocol. This allows WBTC holders to deposit their coins into the MakerDAO system to get DAI in return.
WBTC is just the start for MakerDAO though. The past few weeks have seen a number of different entities in the DeFi space propose the addition of other collateral types.
Parafi Capital, a crypto venture fund focusing on DeFi, proposed the addition of Chainlink’s LINK, remarking that the cryptocurrency has the “marketcap, liquidity profile, and appetite for speculation” that would make it a good addition to the MakerDAO system.
There’s also been discussion of adding the decentralized stablecoin of Synthetix, which would make DAI, an artificial stablecoin, partially backed by another stablecoin, along with the addition of tBTC, a decentralized tokenized Bitcoin variant.
This Isn’t a Good Thing
While many have embraced MakerDAO’s acceptance of new cryptocurrencies into its list of accepted collateral, this trend has become controversial for a variety of reasons.
Firstly, assets like Wrapped Bitcoin and USD Coin are somewhat centralized when compared to Ether or DAI itself.
As aforementioned, WBTC is a tokenized version of Bitcoin on Ethereum. The issue is, to mint the cryptocurrency, one must deposit their BTC into a custodian account run by BitGo; the individual minting WBTC must also go through the process of KYC verification. Although BitGo isn’t a bad custodian and KYC isn’t a bad process, some criticize that the implementation of Wrapped Bitcoin decreases the decentralization of MakerDAO and DAI.
Similarly, USDC, minted by Circle, is a centralized stablecoin backed by dollar reserves. its level of decentralization comes into question because the cryptocurrency has terms of service, which indicate that any user of the asset is subject to KYC and cannot be used for certain activities, such as being used to contraband, being deposited into a Ponzi scheme, or acting as a vehicle for gambling.
DAI, on the other hand, could be used for all the above, though that’s not saying that such use is ethical.
Secondly, some analysts think that the more collateral types MakerDAO adds, the more likely it is that the system fails.
As reported by Blockonomi previously, leading this argument is Adam Cochran, partner at Metacartel Ventures, a community-run fund focusing on DeFi.
Cochran explained in an extensive Twitter thread on “why DAI poses the biggest existential threat to DeFi” that the addition of what the Ethereum community defines as “good cryptocurrencies” is a misnomer. Referencing how most altcoins from the first big crypto market cycle (2013-2015) are now dead, he wrote:
“Peercoin, NXT, Mastercoin, Quark, Megacoin, Primecoin, and Feathercoin were all considered top brass projects in 2014. But, now, in hindsight, [they’re worthless.] How would you feel about any of those coins being the backer for your digital dollar?”
His point is that the more coins MakerDAO needs to support to maintain a DAI peg, the higher chance one coin involved will fail, which would reverberate throughout the DeFi ecosystem.
