The largest algorithmic stablecoin plummeted from $1 and is now changing hands at just a tenth of this value, as its market capitalization collapsed from $19 billion to $1 billion. The collapse of UST seemed to have had a far-reaching effect on many other cryptocurrencies, from related projects like LUNA, which plummeted to near zero, to larger projects like Bitcoin, who is fighting for $30,000. But there has been a big winner: DAI.
ICD it is an algorithmic stablecoin, but that is all it has in common with UST. For one, it is issued by a decentralized autonomous organization (DAO) known as MakerDAO and is implemented on Ethereum as an ERC-20 token. Being issued by a DAO, it is based on algorithms to maintain its 1:1 parity with the US dollar, unlike Tether, which is based on a central entity.
At press time, DAI is trading at $1, as intended. In fact, its biggest drop to date was on May 11, when it fell to $0.9961. For context, May 11 was the day UST lost half its value to drop below $0.5 for the first time and the whole market was in crisis. And yet, DAI remained stable.
But while DAI was stable during the turmoil, as designed, another related coin soared. MKR is up 50% since the market turbulence on May 11, from a low of $992 to trading today at $1,479.
Henry Elder, head of decentralized finance at Wave Financial, an asset manager, believes MakerDAO’s newfound belief in MKR is due to the recent UST fallout. He commented:
This is directly related to the UST explosion. UST imploded practically at the time that demand leveled off, leaving Maker as the undisputed king of decentralized stablecoins for the time being.
Michael Bucella agrees. General Partner at BlockTower Capital, which has invested in Dapper Labs, Injective Protocol, and more, opined:
The market seems to be pricing in stability/moderation in Stablecoinland. Probably a relative value game, DAI is ‘performing well’ and has been tested before, it is one of the few decentralized money games left.
how he stood firm ICD and the mistake that UST made
Many believe that the fact that DAI was able to withstand the great test caused by the UST collapse It is a great achievement. However, for Luca Prosperi, one of the people at the top of MakerDAO, “he just did what he was supposed to do.” Luca is Lead Loan Monitor at MakerDAO.
So how did DAI do it? For one thing, the project differs from UST in its linkage model. Whereas UST relied on game theory and believed that arbitrage traders would keep the price fixed at $1 for their own personal financial gains, DAI is fully guaranteed. In fact, it is overcollateralized.
To mint 100 DAI, a user would need to lock up $150 worth of Ethereum. If the price of Ether starts to drop, the user must immediately add to collateral to maintain the relationship or risk having their collateral liquidated.
At the time of publication, the warranty relationship according to dai stats is 165.18%, which means that each DAI is backed by $165 in collateral. This just gives DAI the buffer it needs in case of sudden market shocks.
As Luca said, DAI is based on a conservative model, and while it may not be as glamorous as Terra and her UST model, it is much more stable and almost immune to sudden shocks.
The system has been stable because it was built very conservatively, and that took a lot of effort from core team members because this community is so impatient. So when Terra was growing up, a lot of people accused us of being too conservative. But we are dealing with a currency.
The second reason DAI has remained strong when UST collapsed is that it is issued by MakerDAO, a decentralized autonomous organization. By nature, DAOs are leaderless, and governance is democratically performed by the community through virtual ownership of governance tokens.
This is a great advantage for DAI. With UST, there was always one person everyone looked up to: Do Kwon. And as the house of cards came crashing down, this can be an overwhelming responsibility. Kwon came up with all sorts of suggestions on how to remedy the lost cause that is LUNA, but none of it worked. Many also blame him for his aggressive and exaggerated pursuit of dominance and power.
There is an additional advantage to DAI being from a DAO: it is unlikely to get caught up in regulatory action. Without any leaders, DAOs remain an enigma to the legal system, and while regulators will eventually find a way to catch up with these organizations, they have not done so so far.
luke it summarized:
I think there will be some pressure from regulators, for sure. But I think Maker is probably not on the front lines. I think USDT, USDC, these ramps are the front line, and other services that allow liquidity to enter the chain will be examined.