MakerDAO is the best Ethereum-based decentralized financial product. Data site DeFiPulse says that the project continues to be the dominant open finance ecosystem, with 54% of the value locked in its contracts. MakerDAO has performed so well that its governance token, MKR (Made in the USA), was able to attract the support of Andreessen Horowitz (a16z), one of the most prestigious venture capital firms in the world. They purchased a large portion of the tokens back in 2018.
Analysis
According to an Ethereum investor’s new analysis, DAI – the stablecoin on which MakerDAO is built – is “the *BIGGEST* existential danger to DeFi.” He also said that Maker is not the DeFi space’s darling.
DAI presents a huge risk to Ethereum DeFi. Adam Cochran, a partner in Metacartel Ventures as well as a professor at Conestoga College of information science, published a lengthy Twitter thread about why he believes DAI could be a threat to the DeFi space on April 20th.
MKR was my favorite when it first launched. It was logical – a project in which we could use ETH (the asset that all chain participants believed) to back a stablecoin. But, for the last 8~ months.
DeFi Protocols
Firstly, he explained the simple fact that all DeFi protocols – whether Fulcrum, Fulcrum or SET, Uniswap and Aave – are focused upon DAI because it is the first-mover. It is the “financial home of cards,” Cochran said.
He argues that DAI is the core of DeFi’s entire system. If you like the “money Lego” analogy, DAI represents the bottom of the build. It is vulnerable to multiple risks. He emphasized this point by pointing out the dForce Attack, where a glitch in one token supported on the platform resulted the theft of all cryptocurrency on dForce’s Lendf.me
Cochran was then able to make his second point: MakerDAO does not represent a decentralized protocol.
He explained that MKR is owned both by a16z, MakerDAO team and Maker company, as well as other large holders and investment groups, which he said poses “an invisible hand” risk for DAI. Although he didn’t accuse holders of acting against community, he did point out some internal power struggles in the Maker company that could pose a long-term threat to the protocol.
DAI Setup
His last point is: DAI is at Risk because of the multi-collateral DAI setup. This means that the stablecoin’s backing is not just Ether but also other tokens like Basic Attention Token or USD Coin.
These tokens are well-capitalized, but he explained that MakerDAO is also considering adding other tokens like DigixDAO or Golem that have “huge volatility” and could fail, thus creating a risk for the Maker space.
Alternatives Are Being Set Up. DAI is one of the few alternatives that have allowed it to reach this position as a decentralized dollar stabilizecoin. However, things are changing. Synthetix USD (sUSD) is an example of a DAI-like system. Even though it is not 100% decentralized, there has been talk of USD Coin becoming the core of the DeFi ecosystem.
DAI is the first-mover advantage. This is difficult to overcome. It would take a lot of effort on both the part of developers as well as users to change the DAI standard currently in place.