MakerDAO co-founder Rune Christensen recently proposed removing all USDC from the DAI stablecoin’s peg-stability module. He suggested that the USDC within, worth $3.5 billion, could be used to buy ETH instead.
Yet despite what such a conversion could do to boost ETH’s price, Vitalik Buterin said it was a “terrible idea.”
Removing Exposure to USDC
In the governance channel of MakerDAO’s official Discord, Rune expressed concerns over the US Treasury Department’s latest sanctions against privacy protocol Tornado Cash. “It is a lot more serious than I first thought,” he said.
“I think we should seriously consider preparing to depeg from USD,” he continued, adding that such a transition is “almost inevitable” and should only be done with large preparation.
One way to do this could involve a so-called “uprooting” or “yolo USDC into ETH approach,” in his words.
On Tuesday, Circle CEO Jeremy Allaire said that Circle (the issuer of USDC) were forced to comply with the Treasury Department’s sanctions against Tornado Cash due to Bank Secrecy Act requirements. As such, it used its authority to freeze USDC in all sanctioned addresses, and related entities.
The crypto community has since begun discussing risks related to centrally-issued stablecoins, which are prone to state enforcement, censorship, and capture. By contrast, MakerDAO’s DAI is a “decentralized” stablecoin backed by a handful of digital assets.
While about 50% of its reserves are comprised of USDC, the second half contains ETH and other less centralized cryptos. Theoretically, converting USDC reserves into ETH could remove the risk of MakerDAO’s assets being frozen by Circle – and bolster ETH’s price to boot.
However, Ethereum co-founder Vitalik Buterin is not on board with the plan.
This seems like a risky and terrible idea,” he tweeted. “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.”
The developer added that DAI could mitigate centralization risks by diversifying reserves such that no asset comprises 20% of the total. Alternatively, he suggested applying a “negative interest rate” to DAI to reign in its growth.
In MakerDAO’s Discord, Rune recognized that the conversion could increase the risk of DAI losing its dollar-peg, but still believes a “partial uprooting” could be worth the risk.
“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.
Fears around decentralized and “algorithmic” stablecoins have abounded since TerraUSD (UST) – the former third-largest stablecoin – collapsed in May. The token was indirectly backed by the highly volatile LUNA, but crumbled after the prices of both assets were put under pressure.
Months before TerraUSD’s meltdown, the LUNA Foundation Guard conducted a similar plan to Rune’s by buying billions of dollars in Bitcoin for its stablecoin reserves. However, it was later forced to sell those Bitcoin in a failed attempt to protect UST’s fledgling peg.