The collapse of Terra’s (LUNA) stablecoin UST set a bad example for the algorithmic stablecoin industry. But DAI, currently the largest algorithmic stablecoin, has managed to get even stronger. The native token of the DAI-issuing MakerDAO platform, MKR, is up 40 percent even as most cryptocurrencies continue to struggle at various price levels.
The stablecoin that turned the LUNA crash into an opportunity: DAI
The biggest algorithmic stablecoin that you follow on the news on Kriptokoin.com, the collapse of UST is bigger than the related projects like LUNA, whose value is reset, like Bitcoin struggling with $30,000. It has had a far-reaching impact on many other cryptocurrencies, up to projects. But in this crash, there was a big winner: DAI.
DAI is an algorithmic stablecoin But that’s all they have in common with UST. The first is issued by a decentralized autonomous organization (DAO) known as MakerDAO and is distributed on Ethereum as an ERC-20 token. Since it is issued by a DAO, it relies on algorithms to maintain a 1:1 constant with US dollars, unlike Tether, which relies on a centralized asset.
At press time, DAI is trading at $1 as it should. In fact, its biggest drop since the year was on May 11, when it dropped to $0.9961. In terms of context, May 11 was the day the UST lost half of its value and fell below $0.5 for the first time ever and the entire market was turbulent, yet DAI managed to hold its steady.
DAI’s related coin Maker (MKR) went against the market
However, while DAI remained stable during the turmoil as designed, another related coin was rising. MKR is up nearly 50% since the May 11 market turmoil, rising from $992 to $1,479 today.
Henry Elder, head of decentralized finance at Wave Financial, an asset manager, said that new-found belief in MakerDAO’s MKR is due to recent UST fallout. believes. Henry Elder comments:
This is directly related to the eruption of the UST. UST exploded almost as soon as demand flattened, leaving Maker as the undisputed king of decentralized stablecoins for now.
Michael Bucella agrees. The general partner of BlockTower Capital, which has invested in Dapper Labs, Injective Protocol and more, says:
The market seems to value stability/moderation in stablecoinland. Presumably a relative value game, DAI ‘performs well’ and is one of the few remaining decentralized money games that has been stress-tested before. How did
DAI hold onto its target and what mistake did Terra (LUNA) make?
It is believed to be a great achievement for DAI to withstand the great test brought by the collapse of the UST. However, he ‘just did what he had to do’ for Luca Prosperi, one of the people at the top of MakerDAO. Luca is a leader in lending oversight at MakerDAO. So how did DAI do this?
First, while the project adheres to UST game theory, which differs from UST in its attribution model
and believes that arbitrage traders will keep the price fixed at $1 for their personal financial gain, DAI is fully collateralized. In fact, it’s over-collateralized. To mint 100 DAI, a user needs to lock $150 worth of Ethereum. If the price of Ether starts to drop, the user needs to add it to the margin call immediately to protect the rate or risk of collateral being liquidated.
At press time, the coverage ratio according to Dai Statistics is 165.18%. That means every DAI is backed by $165 as collateral. This alone gives DAI the buffer it needs in the event of sudden market shocks. As Luca points out, the DAI is based on a conservative model, and while this isn’t as attractive as the Terra and UST model, it’s much more stable and almost immune to sudden shocks. Luca comments:
The system was stable because it was built very conservatively, and core team members put a lot of effort into it because this community was so impatient. So when Terra (LUNA) was growing up, a lot of people accused us of being too conservative. But we run a currency.
The second reason is that it was issued by a DAO
The second reason the DAI remained strong while the IHR collapsed is that it was issued by MakerDAO, a decentralized autonomous organization. By their nature, DAOs are leaderless and governance is democratically done by the community that holds the management tokens virtually.
This is a big plus for DAI. With UST, there was always only one person everyone looked at: Do Kwon. And as the house of cards collapses, it can be an overwhelming responsibility. Do Kwon gave a lot of suggestions on how to fix the LUNA crash, but none of them worked. Many blame him for his aggressive and exaggerated pursuit of dominance and power.
The last advantage is less likely to encounter regulatory restrictions
DAI has an additional advantage of being from a DAO: It is less likely to encounter regulatory restrictions. Without any leaders, DAOs are still a mystery to the legal system, and while regulators will eventually find a way to catch them, so far they haven’t. My current version is summed up by Luca:
I definitely think there will be some pressure from regulators. But I think Maker is probably not on the front lines. I think USDT, USDC, these launchers are at the forefront and other services that allow liquidity to enter the Blockchain will be explored.
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