MakerDAO is the decentralized organization behind DAI, an over-collateralized stablecoin pegged to the US Dollar with a $7.3B market cap. Earlier this week, the DAO's co-founder Rune Christensen proposed MakerDAO dump all the USDC from its treasury–about $3.5B worth. Christensen wants to buy ETH with the funds.
In April, Do Kwon declared war on MakerDAO, threatening to de-peg its DAI token and unseat Curve's 3pool. Today, Do Kwon is a joke and MakerDAO has proposed to de-peg the DAI token on its own.
Tornado Cash Sanctions Put USDC at Risk
US Treasury sanctions against Tornado Cash led to frozen accounts across the Ethereum ecosystem, including USDC. In response to the sanctions, USDC's parent company Circle froze a small amount of USDC that was linked to Tornado Cash in compliance with the US Bank Secrecy Act. This is scary for projects holding large amounts of USDC, since it's hard to control whether tainted crypto enters the project's wallet.
Since MakerDAO and DAI are decentralized, and USDC is subject to US finance regulations, Christensen believes DAI would benefit from MakerDAO dumping its USDC and using ETH to back DAI. Roughly half of DAI's reserves are held in USDC. That means, in a roundabout way, that the US government can freeze half of DAI's reserves. Naturally, this puts DAI's peg to the US Dollar at risk.
To De-Peg or Not to De-Peg?
Is it more important for DAI to stay pegged to the US Dollar or for MakerDAO to protect DAI's reserves from US sanctions? Obviously, MakerDAO can't hold $3.5B in USDT, since Tether has its own problems. Any stablecoin that complies with the US government's financial regulations is going to be too risky to use to back DAI.
But without its peg to the US Dollar, how will DAI stay in Curve's 3pool? The 3pool is a stablecoin pool containing ~$1B of DAI, USDC, and USDT that is used throughout the Ethereum DeFi ecosystem for its deep liquidity. Without inclusion in the 3pool and a peg to the US Dollar, will investors want to use or hold DAI?
Despite years of success, it seems like MakerDAO has been struggling to back DAI for ages, including loans to companies like Tesla and purchases of real estate. MakerDAO will likely come out fine, but this proposal shows how tricky it is to operate a major DeFi project now that the US has sanctioned Tornado Cash.