Community members of Maker DAO, the decentralized autonomous organization (DAO) behind DeFi lending protocol Maker, voted to retain Circle’s USD Coin (USDC) as the primary reserve asset for issuing the company’s algorithmic stablecoin Dai (DAI).
Community Members Vote to Retain USDC as Primary Asset Backing DAI Reserves
In a proposal submitted to the DAO on March 20, Maker suggested two options, one to maintain USDC as DAI’s reserve asset and the other to diversify its reserve asset portfolio to other stablecoins like Paxos dollar (USDP) and Gemini dollar (GUSD).
In a ranked-choice vote, around 79% of participants supported the decision, with the remaining preferring to diversify the company’s reserves to better hedge itself against a probable banking crisis.
The move comes in the wake of the largest bank failure in the United States since the 2008 financial crisis, affecting both the crypto and traditional finance (TradFi) markets globally.
Earlier this month, U.S regulators shut down Silicon Valley Bank (SVB) and Signature Bank, two main banking partners of Circle – issuers of the USDC stablecoin, leading to a domino effect in the global banking sector.
Circle maintains the $34 billion reserves of its dollar-backed stablecoin in cash and short-term U.S. Treasury bonds. The assets are deposited across seven of the company’s banking partners, including SVB.
Following Silicon Valley Bank’s collapse, Circle revealed that it held $3.3 billion in USDC cash reserves at the bank, leading to panicked investors rushing to redeem their tokens. This resulted in the stablecoin losing its 1:1 peg with the U.S. dollar and trading at a record low of $0.87.
The fallout affected other stablecoins in the market, including DAI, which fell to $0.88. Maker holds $3 billion worth of USDC in DAI’s Peg Stability Module (PSM), making it the largest asset in the company’s stablecoin reserves, amounting to 52%, followed by GUSD with $308 million, and USDP with $197 million.
Maker, which issues and manages $5.2 billion worth of DAI, backs the token with cryptocurrencies from borrowers and real-world assets (RWA) such as liabilities from traditional financial institutions like banks.
The DeFi lender allows users to mint DAI by depositing crypto assets such as Ether (ETH), wrapped staked Ether (wstETH), Rocket Pool Ether (RETH), wrapped Bitcoin (WBTC), Polygon (MATIC), Gnosis (GNO), and Chainlink (LINK) as collateral.
MakerDAO Took Emergency Measures to Protect DAI’s Dollar-peg
Two days after the SVB shutdown and USDC’s de-pegging, Maker submitted a proposal to the MakerDAO to allow it to take emergency measures to protect DAI from losing its dollar constant. According to the proposal, the DAO would make an emergency switch that would pause PSM swaps on the protocol and freeze Maker from purchasing crypto tokens to mint new DAI.
The Peg Stability Module allows users to swap a supported collateral asset for DAI at a fixed rate instead of borrowing the stablecoin. Swapped tokens are held by Maker in its reserves to back DAI.
After the community accepted the proposal, Maker used the emergency measure to prevent DAI from losing its dollar parity further than other stablecoins. The feature allowed the protocol to freeze PSM swaps on the go rather than going through the usual 16-hour waiting period.
Federal Government’s Decision to Bailout the Banks Helped Regain Confidence in USDC
USDC recovered its dollar constant after the Federal Reserve introduced a new liquidity program that allowed banks facing financial stress to take out loans directly from the central bank by collateralizing their assets such as treasury bonds and mortgage-backed securities instead of selling them to raise capital.
Maker expects the move by the U.S. government to significantly reduce the risk of bank failures due to losses incurred from sales of their security portfolio. Meanwhile, the Federal Deposit Insurance Corporation (FDIC) insured deposits of up to $250,000 and the Treasury Department promised to make all depositors at SVB and Signature Bank whole.
However, Maker noted there are still outstanding risks and the possibility of further bank failures and losses to uninsured depositors because the federal government has not guaranteed whether they will backstop all deposits for banks other than SVB and Signature Bank. The company said the speculation forced stablecoin issuers to take more risk-aversed positions.
The maker stated that USDP and GUSD had “somewhat” lower counterparty risk because Paxos covered its deposits above the FDIC-insured limit with private bank deposit insurance and Gemini held GUSD cash deposits solely at accredited banks that are bankruptcy remote.
The DeFi lender claimed the risks related to USDC have declined significantly over the past week and solvency concerns or depegs are not expected for the time being.
With Maker deciding to continue holding its DAI reserves in USDC, the stablecoin issuer has reversed the emergency measures taken last week to protect the token from de-pegging. Parameters to issue new DAI through the PSM are closely related to the previous conditions.