No Ethereum-based decentralized finance product has done as well as MakerDAO.
According to data site DeFiPulse, the project continues to dominate the open finance ecosystem with 54% dominance in terms of value locked in its contracts.
MakerDAO has done so well that the project’s governance token, MKR, managed to garner the support of one of the world’s most decorated venture capital companies, Andreessen Horowitz (a16z), which purchased a large swath of the tokens in 2018.
A16z is known for its early investments in companies like Twitter, Coinbase, Github, and many more.
But according to a new analysis by an Ethereum investor, DAI — the stablecoin that is the basis of the MakerDAO protocol — presents “the *BIGGEST* existential threat to DeFi.” He added that Maker is anything but the darling of the DeFi space.
DAI Presents a Massive Risk to Ethereum DeFi
On April 20th, Adam Cochran — a partner at Metacartel Ventures and a professor of information science at Conestoga College — released an extensive Twitter thread on why he thinks DAI may be a danger in the DeFi space.
His argument boiled down to three key reasons.
3 Reasons Why $DAI is DeFi's Biggest Risk:
I was huge into MKR when in first launched.
It made sense – a project where we could use ETH, the asset that all chain participants believed in, to back a stablecoin.
But, for the last 8~ months, I've taken a lot of flack for pic.twitter.com/uV9GMVSrm7
— Adam Cochran (@AdamScochran) April 21, 2020
Firstly, he explained that the simple fact that all DeFi protocols — whether it’s Compound, Fulcrum, SET, Uniswap, Aave, or what have you — are focused on DAI due to it being the first-mover is a risk. Cochran called it the “financial house of cards.”
His idea goes that because DAI is basically the core of the entire DeFi system — if you like the “money lego” analogy, DAI is the flat lego board at the bottom of the build — it is susceptible to multiple risks.
He accentuated this point by pointing to the dForce attack, whereas a glitch in only one token supported by the platform resulted in all cryptocurrency on dForce’s Lendf.me being stolen.
This brought Cochran to his second point: MakerDAO is not a decentralized protocol, at least according to him.
He explained that the fact that MKR is owned by a16z, the MakerDAO team, the Maker company itself, and other investment groups and large holders presents “an invisible hand” risk to DAI. The investor didn’t accuse the holders of acting against the community, but he did draw attention to some internal power struggles within the Maker company that may present a long-term risk to the protocol.
Finally, his last point: DAI is at risk because of the multi-collateral DAI setup, which means that the stablecoin is backed not only by Ether, but also by other tokens such as Basic Attention Token and USD Coin.
Although these are well-capitalized tokens, he explained that there are other tokens that are being proposed to be added to MakerDAO, like DigixDAO and Golem, that have “huge volatility and could fail,” thus acting as a risk for the rest of the Maker space.
Alternatives Are Being Set Up
One of the reasons why DAI has been allowed to reach this position, to be one of the largest cryptocurrencies as a decentralized dollar stablecoin, is because there have been few alternatives.
But, this is changing.
For instance, there’s Synthetix USD (sUSD), which operates similarly to DAI. There’s even been some talk of USD Coin, despite it not being 100% decentralized, becoming core to the DeFi ecosystem.
The thing is, DAI has the first-mover advantage, which is hard to shake. And right now, it would take a lot of effort, both on the part of developers and users, to shift off the DAI standard that exists today.
But maybe, the running DAI peg premium that has existed for the past five weeks may accelerate this process, and thus fix the “existential threat” that Cochran believes poses to DeFi as a whole.