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One Does Not Simply Destroy DAI: Maker Founder’s ‘Endgame’ Proposal

One Does Not Simply Destroy DAI: Maker Founder’s ‘Endgame’ Proposal

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Decrypting DeFi is Decrypt’s DeFi email newsletter. (art: Grant Kempster)

Last Friday, Rune Christensen, the mastermind behind crypto’s unofficial central bank, MakerDAO, made a proposal of epic proportions.

It described the ongoing effects of the Tornado Cash sanctions, stated that the industry “has not demonstrated any value to society” and outlined two possible paths forward for Maker.

These two paths, made clear by the recent sanctions, require DeFi projects to either become the next fintech product (and be regulated) or be “treated as something else”. The latter choice in particular also carries a high risk, as the recent arrest of Tornado Cash developer Aleksei Pertsev makes clear.

But because Maker was designed to eliminate any possibility of being blacklisted or bowing to the authorities’ requests, the former path is not possible, Christensen wrote.

This also means that “at some point in the future Maker will very likely come under serious attack by global authorities targeting any attack site they find through a process similar to the one that led to [Tornado Cash] sanctions.”

In summary: That is the question whenNo ifregulators take aim at MakerDAO and industry-leading decentralized stablecoin DAI. With this assumption in mind, Christensen argued that the task now is to do this DAI as attack-resistant as possible.

A call to arms also means that the project must prepare for “the likely possibility that DAI must become free-floating”, or leave the attachment on the green back. This is also something that the founder of the project alluded to on August 11th.

However, the difference between then and now is that now there is a real plan in mind.

Maker’s free-floating DAI stablecoin

DAI breaking away from the dollar is not so much a goal, but rather a symptom of making the protocol vulnerable to attacks.

Part of Christensen’s “Endgame Plan,” another monumental proposal outlining a restructuring of Maker and its management, would set a cap on how much of the project’s collateral is in Real World Assets, or RWA.

In addition to assets like Ethereum, Wrapped Bitcoin, and Uniswap, small businesses can also securitize their own funds to hit DAI.

For example, Reif Financial Investments Inc. has insured real estate loans in exchange for DAI. Another company called Gig Pool has done the same with advance payments to various gig workers from Instacart, Doordash, Upwork and the like.

This would also include Circle’s USDC stablecoin, about 50% of which support DAI, according to data from DAI statistics.

via DAI Stats

As you can probably imagine, it’s much, much easier for regulators to crack down on these types of companies than it is against Ethereum. Circle already has a fairly well-known track record of blacklisting its stablecoin at the request of regulators.

This means that this type of collateral is a key attacking surface that Christensen wants to support.

“The path of diversification means that our attack surface is limited to physical threats and especially to the percentage of risk-weighted collateral in the total portfolio. In the Endgame Plan, I set this limit at 25 percent,” he writes.

However, by limiting this type of collateral, there may be No have enough attack-proof (i.e. pure cryptocurrencies) collateral to satisfy the constant demand for DAI.

As supply slows down because there are fewer ways to create more DAI, continued demand can drive the price of DAI above the dollar. But wait, there’s more.

Christensen also advocated the introduction of a “negative target rate”, essentially Maker’s version of negative rates, to reduce demand for DAI and increase its supply “when it becomes cheaper to produce [more DAI] with decentralized vaults like Ethereum.”

This breakdown also clarifies why some have called Maker the central bank of crypto.

Just like in the real world, dropping interest rates into negative territory means that costs currency holders can sit on their money. And to the extent that said currency holders are also rational actors, they would then go out and use the money for potentially more valuable things or simply switch to an asset that doesn’t cost them money.

The drop in interest rates also makes borrowing, or in our case, adding DAI, much cheaper.

This is basically Christensen’s plan in a nutshell. Limit how much risk-weighted assets can be used as collateral while curbing demand for DAI (and making it cheaper to increase supply).

That’s the basic recipe for surviving any regulation, but the plan goes further by unlocking two other tools that will “turn DAI’s free float into something Maker can survive and even thrive on,” in Christensen’s words.

More tokens, more vaults

The only way to convince someone that owning an asset with negative interest rates is a good thing is to also convince them that they need that asset to get other more valuable assets.

Here, Christensen introduces the idea of ​​so-called MetaDAO and MetaDAO tokens.

From Christensen’s Endgame Plan proposal. Source: MakerDAO

As you can see from the diagram above, the Maker MetaDAO is like any other crypto-DAO, except that it is tied to the much larger MakerDAO and would have its own native token.

These mini-DAOs would also have full autonomy to achieve the goals they set, as well as hunt down all the “profitable actions” according to the plan.

And because DAI holders are tied to the emerging DAI-based ecosystem, they can farm these new tokens.

Conclusion: “The author will No just get exciting once again; it will be the most exciting and important place in all of crypto – and we have the perfect tool to capture meta and hook people into our ecosystem: MetaDAO revenue farming.

It’s a big, bold plan.

But the fact that it comes from one of DeFi’s most influential projects and not someone like Terran Do Kwon, the crypto community could quite easily rally behind it.

Decrypting DeFi is our DeFi newsletter headed by this essay. Subscribers to our emails get to read the essay before it goes on the site. Order here.

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