On Thursday, MakerDAO co-founder Rune Christensen shared a proposal via the network’s official Discord server. Christensen raised the suggestion that the MakerDAO organization should swap its $3.5B worth of USDC for Ether.
However, Ethereum creator Vitalik Buterin tagged Christensen’s plan a “terrible idea” despite the potential benefits of such a move on Ethereum’s value.
Christensen To Remove USDC Exposure
Rune’s actual goal is to eliminate MakerDAO’s exposure to USDC following the US Treasury’s recent sanction on crypto mixer Tornado Cash. Indeed, the recent sanction also affected USD Coin issuer Circle. Circle CEO Jeremy Allaire, revealed that the stablecoin network is mandated to comply with the sanctions on Tornado Cash. Circle had to freeze funds spread across 44 Tornado Cash addresses worth about 75,000 USDC.
In light of the situation, Christensen commented on the entire saga. The Maker co-founder confessed the situation was a lot more serious than he first thought. He then suggested that MakerDAO seriously review getting set to ditch their USD reserves.
Notably, USD Coin makes up roughly half of the network’s reserves. The remainder is composed of ETH and less centralized digital currencies. However, according to Christensen, de-pegging from the centralized stablecoin is a move that is practically guaranteed to happen.
Christensen does believe adequate thought should go into the move. At the same time, he suggests simply “uprooting” the reserve tokens or an approach that is to “yolo USDC into ETH.”
Naturally, the idea has prompted conversation among crypto users with several rehashing the risky qualities of centralized stablecoins. Some of these include censorship, capture, and the likelihood of state enforcement. However, MakerDAO’s DAI stands in clear contrast as a decentralized stablecoin pegged to a couple of cryptocurrencies.
Rune acknowledged the risk in his Discord post, noting that DAI could lose its peg to the US dollar. A good part of MakerDAO’s reserve is USDC, but Christensen insists a “partial uprooting” might be worth the risk. By switching their USDC backing for ETH, MakerDAO removes the chance of Circle freezing its funds in compliance with requirements.
I think the market may finally start to reward decentralization to the point where these risks are acceptable because USDC is no longer the no-brainer it used to be,” he said.
Buterin Opposes the Idea Despite the Ethereum Benefit
Interestingly, Ethereum co-founder Vitalik Buterin does not support Christensen’s plan. While the swap could help push Ethereum’s price upward, Buterin like others is weighing the risk to the stablecoin network. The Russian-Canadian developer in typical fashion bluntly tweeted that he thought it was a terrible idea.
If ETH drops a lot, value of collateral would go way down but CDPs would not get liquidated, so the whole system would risk becoming a fractional reserve” he explained.
Buterin dropped a few suggestions that could help DAI reduce the risks posed by centralized networks. According to him, they could expand their reserves making it such that no one asset made up 20% of the total. He also added that the network could apply a “negative interest rate” to DAI to preserve its growth.
May’s Terra crash gave birth to a wave of anxiety around decentralized and algorithmic stablecoins that is yet to fade. While the stablecoin was indirectly backed by the network’s LUNA token, both took a tumble in the face of market pressure. Notably, just a few months before the collapse, the LUNA Foundation Guard moved similarly to Christensen’s suggestions.
The LFG purchased billions of dollars worth of BTC to strengthen its stablecoin reserve. It later dumped its Bitcoin holdings as it scrambled unsuccessfully to restore the UST’s peg to the dollar.