Robert Steinadler, 4 months ago

MakerDAO is weighing in to drop USDC for Ethereum

MakerDAO is a decentralized stablecoin protocol that works fine. The protocol’s stablecoin is backed by digital assets like USDC. Recently it became clear that Circle, the issuer of USDC, would follow through and start to freeze funds on the Ethereum blockchain when the US Department of the Treasury sanctioned Tornado Cash. There is a huge debate going on whether this is a good thing or if a decentralized economy should be 100 % censorship resistant no matter what.

Why is MakerDAO discussing turning in $3,5 billion USDC for Ethereum and is this a good idea?

Is this a war on code?

Tornado Cash was sanctioned by the US because the government believes that the Ethereum tumbler facilitated money laundering for the Lazarus group. Lazarus is believed to work for North Korea and the claim is that the North Korean government is using the income from these illegal operations for its weapons program.

These are indeed serious accusations since North Korea is trying to develop nuclear weapons. The country is under heavy sanctions and the regime in Pyongyang is ruling the population with an iron fist. The problem here is that Tornado Cash is simply a piece of open-source software that could be used by anybody for any purpose. This includes purposes that are supported throughout our society.

What about protecting your funds from being tracked by marketing agencies or other actors? What about donating to Ukraine using crypto? Even Vitalik Buterin admitted that he used Tornado Cash for exactly that purpose in the past. Cryptocurrencies were meant to disrupt the banking system and put the control in the hands of all users rather than a central authority.

Since USDC is controlled by a smart contract that is in the hands of a single party, things are different with that stablecoin.

USDC could become a liability to MakerDAO

The problem for Maker is that the developers cannot control who is interacting with its protocol. That being said, they risk engaging with a party that is under US sanctions. Around 50 % of Makers reserve is invested in USDC and in the light of current events it only seems rational to look out for an alternative.

While there are no actual plans yet, there is a discussion between the founders and the community to simply dump all USDC for Ethereum. The cryptocurrency is censorship resistant and MakerDAO would become independent from any decisions by Circle or any government.

This carries a high risk. Circles stablecoin is pegged to the US-Dollar, Ethereum on the other hand is volatile. Meaning that Maker could risk witnessing a similar disaster as Terra did in the case that Ethereum should drastically decrease in value. Some argue that this step is necessary to truly decentralize DAI, while others believe that this could sink the whole ship.

Bullish and bearish at the same time

Dumping a gigantic bag of USDC for Ethereum is bullish. MakerDAO would need to acquire the coins within a relatively short amount of time. This could create a huge buying pressure and of course influence the anticipation of traders that a rally is imminent.

On the other hand, the biggest and so far, safest decentralized stablecoin would all of sudden carry a big risk of shifting its assets by choosing volatility and decentralization over stable value. Vitalik Buterin pointed out that this is probably a bad idea and that the risk is too high.

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