Erik Weijers, a year ago
MakerDAO has officially tied its stablecoin DAI to the traditional financial system: it will lend 100 million to Huntingdon Valley Bank (HVB), a local bank in Philadelphia. It is the first integration between a decentralized financing protocol and a traditional bank.
Earlier there was already talk about collaboration between MakerDAO and the French bank Société Générale. Simply put, HVB will guarantee collateral from the traditional financial system - this could be government bonds or dollars, for example. In return, it will receive a loan of 100 million to DAI.
DAI is a decentralized stablecoin, which means that no central party can determine the amount of DAI. It is an application built on Ethereum. The Decentralized Autonomous Organization (DAO) MakerDAO is the community that votes on major changes to the protocol.
Unlike the failed UST (Terra), DAI has more collateral than the total amount of stablecoin dollars outstanding. Someone who wants to mint DAI must first put in 150% collateral (e.g. Ether or USDC). When selling DAI, this collateral can be retrieved.
In its own words, MakerDAO wants to spread their counterparty risk. All the collateral that guarantees DAI's stable price is currently in crypto - mostly in USDC and ETH. But the crypto ecosystem is so intertwined that there is always a risk of contagion. For example, former competitor stablecoin US Terra ended up using Bitcoin as (part) collateral. When the price of Terra and Luna started to fall in early May, that collateral had to be sold like mad and the entire crypto market crashed. DAI survived this crash well, but still. Investing part of the DAI in traditional markets reduces relative exposure to crypto crashes.
There is another more recent reason why DAI wants to move to tradfi in part. Namely that the censorship resistance of crypto has recently been under the magnifying glass. DAI's collateral currently consists of approximately 50% stablecoin USDC. After the US sanctions against Tornado Cash, Circle, the company behind USDC, informed that USDCs that had passed through Tornado Cash were no longer valid. So the fate of USDC owners - including the DAI collateral vault - rests in the hands of a corporate boardroom, which is (understandably) sensitive to pressure from the US government. That is a risk factor for DAI.
The irony, of course, is not lost on us that an cutting-edge decentralized stablecoin is taking a step into the traditional banking world. In a sense, MakerDAO gives up the ideal of a currency that is not under the influence of central governments. On the other hand, this is of course a stablecoin, which by definition is linked to a government-controlled currency. So maybe the move isn't that alien.
The increasing intertwining between crypto and the traditional system is a signal that crypto will stay. It is conceivable that crypto will split into two worlds. That some of the crypto projects will want to completely withdraw from regulations, but that another part will be more encapsulated. MakerDAO seems to be following this latter path.
May 18, 2023
Stablecoin issuer Tether (USDT) in its recent reserves report reveals that the company holds approximately 52 thousand BTC, worth a respectable $1.5 billion. This is only a fraction of its total assets but signals an interesting potential trend of institutions allocating a piece of their capital to Bitcoin.
May 01, 2023
Circle, the creator of stablecoin USDC, has launched a protocol that lets users transfer USDC between Ethereum and Avalanche. It will help increase user-friendliness and remove the risk of bridge hacks.
Apr 20, 2023
Stablecoins are highly attractive. Payments can be settled within minutes and investors have access to many different currencies that they can add to their portfolios. These are only two use cases for stablecoins and judging from their overall market cap, they will not only dominate the crypto space. They have a real chance to drive mass adoption since they tokenize currencies that are demanded by billions of people worldwide. It looks like Societe Generale recognized this potential.
Mar 17, 2023
When it became clear that Circle had $3.3 billion stuck at the Silicon Valley Bank the market went wild. USDC lost its peg and was trading way below 1 US-Dollar. Bear market PTSD set in and the broader crypto media was already discussing if USDC would fail. Fortunately, things turned around shortly after the initial turmoil and Circle was made whole again. This has been a big relief for the market but needs some explanation.