MakerDAO Restructuring Proposal Sees LUNA, UST Comparisons: DAI at Risk of Death Spiral?

MakerDAO Restructuring Proposal Sees LUNA, UST Comparisons: DAI at Risk of Death Spiral?

Stablecoins—especially decentralized ones—have experienced regulatory uncertainty worldwide. Government regulators may target a decentralized stablecoin for numerous reasons.

Cryptocurrencies like decentralized stablecoins operate outside the financial system. Authorities may worry about their economic impact or usage in illegal activities like money laundering and terrorism financing.

After Tornado Cash sanctions last year, MakerDAO Co-Founder Rune Christensen said something similar. Christensen predicted government attacks on MakerDAO as a decentralized stablecoin. So, he advocated Endgame, a massive restructure to make MakerDAO and DAI censorship-resistant.

MakerDAO is an Ethereum-based DeFi platform that lets users produce and trade stablecoins backed by other cryptocurrencies. MakerDAO’s MKR token governs and stabilizes the platform.

MakerDAO created “Endgame tokenomics” to stabilize DAI’s price and eliminate liquidation risk. This new system breaks the DAO into MetaDAOs. Each MetaDAO includes unique tokens with specific aims, a 25% cap on centralized assets backing DAI, and negative interest rates.

MakerDAO Co-Founder advises DAI holders yield farm the new MetaDAO tokens as an incentive. Nonetheless, the proposal was heavily criticized. Today, PaperImperium, a pseudonymous crypto Twitter account covering decentralized finance, highlighted a section of the text. If the proposal passes, MKR token holders can borrow DAI. MakerDAO risked repeating last market cycle mistakes.

A liquidation spiral would reintroduce delegated tokens, lowering MKR’s value, the commentator said. The Mango DAO hack showed that hostile actors can simply takeover governance, exposing the protocol to attack.

LUNA and UST were compared to this new DeFi platform. Terra’s native token is LUNA. Terra’s US dollar-pegged stablecoin, UST, plummeted. BitMEX’s Arthur Hayes tweeted: Terra’s stablecoins were stabilized through “seigniorage” like MakerDAO’s Endgame Tokenomics. When the stablecoin price drops, seigniorage creates new tokens and destroys them when it rises.

Others called it a potential exit liquidity scam that lets users depart the ecosystem through DAI without selling their MKR tokens while still having a role in protocol governance.

Terra is a blockchain network for stablecoins. TerraUSD (UST), one of its stablecoins, is backed by cryptocurrencies, notably the platform’s native token, LUNA. LUNA backs UST to keep it pegged to the US dollar.

Terra mints and burns the peg. When UST prices rise above $1, users can mint fresh UST by submitting collateral like LUNA and receiving UST in return. Users can burn UST below $1 to get the collateral.

Unfortunately, the UST sank below its peg to the US dollar, causing a death spiral where consumers sold their UST to avoid losses. To maintain the peg, surplus LUNA was minted.

As LUNA was minted to support UST, its value dropped, worsening the problem. Terra stabilized the system by burning extra UST and LUNA and adding peg-maintaining systems.

The episode showed the difficulties and risks using stablecoin pegs in unpredictable markets. It stressed the significance of transparency, communication, risk management, and contingency planning in such scenarios.

Not everyone thought this decision was bad. Frax Finance CEO and founder Sam Kazemian said:Despite the uproar, another researcher noted the development’s modest danger. Highlighting DAI’s market cap advantage over MKR reduced DAI’s perceived risks.

BeInCrypto hasn’t heard back from MakerDAO’s representatives about the problem.

MakerDAO’s Endgame Tokenomics appeals to platforms like LUNA and UST because it reduces liquidation risk and stabilizes stablecoin prices. DAI receives 40.8% of collateral from USDC. This stabilizes and reduces de-pegs.

Other collateral besides USDC and MKR is allowed. This decreases danger, but MakerDAO made a bad decision. This links MKR to minting. These platforms can make DeFi more dependable and predictable by buffering price volatility and motivating users to keep stablecoins stable.

Given community concern before the new revelation, DAI did submit to some pressure at the time of writing.