Stablecoin Wars: Terra LUNA is Trying to Depeg Maker DAO's DAI Stablecoin

Terra (LUNA) is at war with Maker DAO (MKR) and its DAI stablecoin. Terra is starting a new Curve war with Maker DAO, and it partnered with serious Convex whales to choke out DAI's liquidity.

UST is the Terra ecosystem's stablecoin pegged to the US Dollar. Last year, UST exploded in popularity, and now the token has a $16.6B market cap. DAI is Maker DAO's US Dollar-pegged stablecoin. It has a $9.5B market cap. DAI has historically been much larger than UST, but in December 2021, UST flipped DAI.

Maker DAO's co-founder, who isn't officially in charge there anymore, accused UST and MIM of being Ponzi schemes on Twitter in January 2022.

This isn't necessarily what prompted Terra to attempt to kill Maker DAO, but in a world of crypto partnerships using pooled resources, it doesn't help to have Terra and its enormous ecosystem as an enemy.

Terra is attempting to kill Maker DAO and its DAI stablecoin by choking out DAI's liquidity on Curve Finance. Without liquidity, DAI could depeg and spiral to zero value, crashing Maker DAO's MKR token in the process.

If this sounds like a conspiracy theory, check Do Kwon's Twitter. He's the Founder and CEO of Terra, and he comes right out and says his "goal is to starve the [Curve Finance] 3pool" by drawing investors to his new Curve 4pool. DAI is the only stablecoin in the 3pool that's excluded from the 4pool.

Curve Finance (CRV) is the largest DeFi protocol, specializing in stablecoin swaps, with $21B in total value locked and a $1.4B market cap for its CRV governance token. Curve is the largest decentralized exchange (DEX) and it offers the deepest liquidity for stablecoins on the Ethereum network. Curve is a primitive protocol in the DeFi ecosystem, and its liquidity pools are used by Fantom, Yearn Finance, AAVE, SushiSwap, Synthetix, Badger DAO, Cream Finance, Compound, and many others.

From a crypto protocol's perspective, inclusion in a popular Curve pool can add a massive boost to a project's liquidity. Additionally, as more veCRV is applied to a liquidity pool, its yields increase. For individuals, this is tough to achieve, but for very large projects with huge amounts of CRV, it's possible to boost rewards by 2.5x. But if Curve is decentralized, who decides which crypto protocols get massive Curve pools?

Convex Finance (CVX) is an incentive protocol built on top of Curve Finance. Convex rewards Curve liquidity providers and CRV token holders by allowing them to stake their assets on Curve for higher yields than Curve offers. As Shrimpy Academy explains: "Essentially, everyone using Convex is pooling their assets together so the platform can acquire more CRV, convert it into veCRV, then maximize boost to all Curve LP token holders."

Inclusion in a Convex liquidity pool provides massive liquidity to a project. As Reddit user u/Set1Less explains, "If Curve is the king of DeFi, Convex can be regarded as the King maker. CRV+CVX combo can direct large portions of DeFi markets and are primitive protocols behind the DeFi infrastructure."

Curve's 3pool is the largest, most used, and most important stablecoin liquidity pool in the world. The liquidity pool allows investors to swap DAI, USDC, and USDT stablecoins for each other with very low slippage and fees. Today, the 3pool has $3.2B in liquidity–45% of which is DAI tokens. Almost all stablecoins pair with the 3pool for liquidity and stability, including UST and FRAX. So if you swap UST for USDC on a random DEX, there's a good chance that DEX is using the 3pool behind the scenes for liquidity.

Average Joe Crypto explains: "The largest and most important pool on Curve has always been the 3pool. [...] 3pool is critical infrastructure for maintaining the peg between USDT, USDC, and DAI, and by extension, critical for DeFi. Additionally, in part because of 3pool, USDT, USDC, and DAI have historically been the most prominent stablecoin options."

Terra's attack on this pool will harm DAI the most, since the pool provides so much liquidity to DAI, and the USDC and USDT tokens are included in the new 4pool.

Terra has teamed up with Frax and Redacted Cartel. Frax is the largest decentralized holder of CVX tokens, and Redacted Cartel has roughly 2/3 as much CVX as Frax. Combined with Terra, the trio hold 12% of all vote-locked CVX (~25M veCRV). Using this CVX, the team behind the 4pool can direct higher rewards to investors who stake their stablecoins in the 4pool. This is expected to drive investors from the 3pool to the new 4pool.

While Do Kwon may have already claimed victory, Maker DAO feels as though the conflict has simply entered a new phase. Maker DAO believes 4pool will fail to completely kill 3pool, but that the price to bribe investors to choose 4pool will increase rapidly.

Maker DAO is characterizing the new Curve war as a “war for survival,” rather than profit. The DAO behind DAI does have a war chest, but it's unclear if they'll use it to prop up 3pool. Additionally, other large projects use Curve, and Convex's largest whale, Tetranode, teased a new venture following Terra's 4pool announcement.