Window of Opportunity

Maker DAO is going through a governance crisis.

The US crypto crackdown combined with the falling markets has placed pressure on the protocol to define their purpose, and pick a side in DeFi’s struggle between idealism and reality.

The novelty of DeFi 1.0 has now worn off, and the window of opportunity for real world impact is slowly closing, as international regulators start to flex their powers.

A recent forum post from Maker founder, Rune Christensen, suggested that DAI should depeg from the dollar if it is to survive and fulfil its purpose as “a public, neutral financial utility”.

Yet, as monet-supply wrote in response;

”Why would an authoritarian government disallow fiat pegged stable assets, but permit free floating stable assets (or even volatile base crypto assets for that matter) when they still undermine government control over the monetary system?”

The best route forward is becoming increasingly unclear.

During the bull market, growth was the priority for every protocol. Freshly-printed fiat was flowing into DeFi and, while there was plenty of risk from within, the threat of heavy-handed regulators was often ignored.

Now, before the window of opportunity closes for good, Maker DAO is forced into an internal struggle:

Strive to preserve the crypto ideals and reject the legacy system altogether?

Or embrace growth, whatever it costs…

Since the collapse of UST, stability has been the key focus for stablecoin issuers, and fiat-backed USDC & USDT offered a safe haven during the crashes of early summer.

Though DAI remained strong through the chaos, the aftermath saw Rune’s Endgame Plan outline a move towards integration of real world assets (RWA).

However, DAI has long been criticised as a wrapped USDC, and it’s hard to argue with the stats.

In the wake of the Tornado Cash sanctions, Circle’s immediate freezing of the associated USDC prompted calls for Maker to wind-down dependence on such a centrally-controlled asset, which can be frozen directly on-chain, even leading to suggestions of a “yolo USDC into ETH” approach from Rune.

The OFAC sanctions have been a harsh wake up call for DeFi, bringing into focus the vulnerabilities associated with forfeiting autonomy in place of growth.

Now, Maker DAO’s internal debates are bringing up a variety of proposed solutions.

Rune’s latest opinion is that Maker “has no choice but to prepare for free float DAI”, albeit at a “stable, predictable rate that feels like negative interest rates”. This would see the protocol eventually decouple from USD, backed instead by Rune’s earlier ideas of MetaDAOs which print their own tokens, as well as large reserves of protocol-owned staked ETH to generate revenue.

This contrasts starkly to the proposal to deposit ~1.6B USDC from DAI’s PSM into Coinbase in order to earn 1.5% interest, maintaining large quantities of dollar-backed collateral whilst earning stable revenue. However, the plan would also take on the risk of a large portion of Maker’s collateral being frozen should the government take control of Coinbase and USDC.

Trusting custody to a US-based centralised exchange widens the regulatory “attack surface” Rune warns against.

Just like Circle, Coinbase can freeze assets as they please (or when they’re forced to).

The ethos behind the two approaches couldn’t be more different.

The vision of adapting DAI into an experimental, fully-decentralised currency, free from any ties to the fiat system (including a peg) seems far-fetched, even to many of their hardcore fans.

However, if the alternative is to embrace the route of regulation, and seek safety through compliance, then haven’t they lost their purpose?

A free-floating stablecoin is not a new concept.

Reflexer’s RAI, launched in Feb 2021, has attracted decentralisation maxis with its focus on non-pegged stability, ETH-only collateral and aims of minimal governance.

But, despite drawing more attention after recent crashes and fears of sanctions fallout, its model of non-pegged stability has not yet achieved major adoption. Perhaps the harsh truth is that the majority of users still feel most comfortable thinking in dollars.

DAI already represents billions of said dollars worth of adoption. Perhaps gradually preparing to abandon the dollar peg would allow enough time for users to become comfortable with a new definition of stability. Even so, it would take time, and perhaps some unwanted volatility, before users became accustomed to transacting in a fully alternate economy.

At some point, every DeFi protocol will have to address the issues that Maker DAO are tackling right now.

And with the pervasiveness of Curve’s 3pool, many projects will face serious systemic risk if Maker’s choices lead to DAI falling out of favour.

Although it may be uncomfortable, it’s good to see one of the most fundamental DeFi protocols taking steps to tackle difficult issues, and holding conversations about how to continue in the face of existential threats.

And although controversial, Rune’s proposed gameplan may also serve to usher in a new paradigm of non-reliance on the dollar, potentially putting DeFi out of the reach of those that want to see it stamped out.

In proposing such bold steps, Rune is risking the death of DAI, this time, by his own hand. But faced with increasing volatility in the “real” world, with fiat currencies rapidly devaluing and no near-term end in sight, the window of opportunity is closing fast.

In Rune’s own words:

Another last point that is important to discuss is how this all fits into the broader, global meta caused by the state of irreversible, accelerating decline that exists in modern globalized society. There are multiple factors, including overshoot, overpopulation, climate change, peak oil, peak farmland, peak fertilizer, post-truth social media etc. It is likely that modern global capitalism cannot overcome these problems of its making, and the most immediate consequence is that politics will become increasingly polarized and unhinged. The world is going to enter a new, much more chaotic and unpredictable equilibrium dominated by anarchy, ecofascism, deglobalization and large scale human suffering.

Crypto’s original cypherpunk ethos may prove to be a lifeline as we spiral into an ever more volatile future.

And with Aave and Curve entering their own DeFi-native stables into the ring, the competition is heating up.

It’s do or DAI for Maker DAO.

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