The MakerDAO Endgame tokenomics has sparked controversy on social media, particularly on crypto Twitter. A specific excerpt from the tokenomics has drawn comparisons to the mechanism that some believe caused the collapse of the Terra ecosystem.
The PaperImperium crypto Twitter account, which covers decentralized finance news, brought attention to a document related to MakerDAO’s Endgame tokenomics. The excerpt in question details how users can borrow DAI using their delegated MKR tokens. According to PaperImperium, this mechanism could lead to the same mistakes that were made during the previous market cycle. The tweet has sparked discussion and concern among the crypto community, as MakerDAO is a prominent decentralized finance project.
The DeFi commentator, who uses the pseudonym PaperImperium, has suggested that the delegated token borrowing mechanism detailed in the MakerDAO Endgame tokenomics could potentially lead to a liquidation spiral. This could cause delegated tokens to re-enter circulation, which could decrease the value of MKR tokens. This, in turn, could leave the protocol vulnerable to attacks from malicious actors who could take control of the governance system, similar to the Mango DAO attack.
These concerns have raised questions about the potential risks associated with decentralized finance protocols and the need for transparency and risk management in the space.
PaperImperium also noted that in the event of a significant loss, it is DAI holders who could suffer the most, as the documentation states:
“Additionally, Maker Governance may now opt to interrupt the automatic use of MKR as a backstop for Dai value in the event of bad debt in the Maker Protocol. Instead, Maker Governance may choose to modify Dai’s Target Price, resulting in a loss of value for all Dai holders.”
Experts such as Arthur Hayes from BitMEX have likened MakerDAO’s delegated token borrowing mechanism to Terra’s ecosystem, where LUNA backed the TerraUSD (UST). This backing was achieved through a mint-and-burn mechanism that resulted in an excess of LUNA tokens when UST lost its peg, leading to a death spiral. Some have expressed concerns that the delegated token borrowing mechanism in MakerDAO could be a potential exit liquidity scam. This would allow users to exit the ecosystem through DAI without selling their MKR tokens while retaining control in protocol governance.
Despite the concerns raised by some experts and analysts, not all users are convinced that the delegated token borrowing mechanism in MakerDAO is problematic. Some have described the comparisons to the Terra ecosystem as overblown. It is worth noting that unlike the Terra ecosystem, where a mint and burn mechanism exists between LUNA and UST, there is no such mechanism for DAI in MakerDAO.
According to prominent DeFi researcher Ignas, the perceived risks to DAI in MakerDAO are relatively small due to the significant market cap difference between DAI and MKR. Ignas explains that DAI’s $5 billion market cap compared to MKR’s $670 million means that using all MKR tokens to mint DAI with a 250% collateralization ratio would only create 263 million new DAI. This disparity in market cap size suggests that the delegated token borrowing mechanism is unlikely to cause significant issues for MakerDAO.
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For reference, DAI is a stablecoin that is backed by a combination of fully collateralized centralized stablecoins and various other cryptocurrencies, such as Bitcoin and Ethereum, and operates on an overcollateralization mechanism.
MakerDAO’s co-founder Rune Christensen proposed the Endgame plan in response to his belief that government authorities would eventually target MakerDAO as a decentralized stablecoin in the aftermath of the Tornado Cash sanctions, with the goal of making the platform and DAI more resistant to censorship.
The proposal suggests dividing the DAO into smaller units known as MetaDAOs, each having its tokens and objectives. Additionally, there will be a cap of 25% on the number of centralized assets that can support DAI, and negative interest rates will be introduced. To encourage DAI holders, they can earn MetaDAO tokens by participating in yield farming.
There are 8 proposals in Christensen’s Endgame plan, which were allowed for voting after a controversial majority vote in October. The plan has faced opposition from some community members due to various concerns, including the possibility of causing DAI to become a free-floating asset that is not pegged to the value of the US dollar.
As of the time of writing, DAI is trading just under its value of $1 at a price of $0.9997. According to data from DAI Stats, there are approximately 5.2 million DAI tokens currently in circulation, which are supported by assets valued at around $6.96 million.