MakerDAO, the issuer of the DAI stablecoin, is making strides at reducing its reliance on USDC, but that doesn’t mean it’s decentralized.
DAI is now 24% collateralized by USDC, down from 40% one month ago and above 50% for much of the year, according to Daistats. USDC, a stablecoin issued by a consortium between Circle and Coinbase, is backed by US dollars and US dollar-based liquid assets custodied in financial institutions.
Decentralization advocates have called for DAI to reduce reliance on USDC. However, the protocol now holds more than $1B worth of US Treasury bills and other bonds from its Monetalis Clydesdale strategy, where Maker uses the USDC it acquires to invest in bonds. Monetalis Clydesdale now accounts for 22.5% of DAI’s backing, while other centralized stablecoins account for over 20%.
In March, Messari estimated Maker had earned $3.8M in three months of holding treasury bills.
Declining USDC Dominance
Users mint DAI against collateral assets deposited to the MakerDAO protocol. They must repay the DAI to regain access to their collateral, destroying the DAI in the process.
The declining dominance of USDC comes as MakerDAO is undergoing its controversial “Endgame” roadmap, which aims to make the project resistant to regulation, reorganize the protocol into a series of specialized subDAOs, and pivot away from centralized collateral.
But despite Maker’s reduced reliance on USDC, the lion’s share of DAI’s backing remains centralized assets — 55% of which are stablecoins, and a quarter of which are real-world assets.
Critics have long described DAI as “wrapped USDC” due to USD Coin representing a significant portion of the assets backing DAI since MakerDAO first launched support for USDC in March 2020.
Warnings that Maker’s reliance on USDC and centralized assets could be its undoing appeared to be coming to fruition in March when DAI briefly depegged due to its exposure to USDC. Both stablecoins crashed below $0.90 after Circle disclosed part of USDC collateral was held in collapsed Silvergate and Signature banks.
Maker responded with emergency governance measures intended to limit its reliance on USDC, which accounted for 40% of the assets backing DAI at the time. However, Maker is unlikely to do away with USDC entirely any time soon, with the protocol receiving an annual return of 1.5% on 1.6B of the USDC it holds from Coinbase.
Gemini & Paxos
The decline in DAI’s USDC backing also coincides with increased collateral in the form of GUSD and USDP, the centralized stablecoins issued by Gemini and Paxos respectively. Each stablecoin accounts for 10.4% of DAI’s collateral basketIn January, Paxos proposed to pay Maker interest equating to 45% of the Fed Funding Rate — which currently sits at 5.08% — in exchange for the protocol holding $1.5B worth of the USDP stablecoin in its Peg Stability Module (PSM). The PSM facilitates one-to-one swaps between DAI and other stablecoins.
Maker was initially hesitant about the deal due to the New York Department of Financial Services ordering Paxos to stop issuing the Binance USD stablecoin in February. But its emergency measures intended to limit USDC exposure, also increased the debt ceiling for its USDP vault from 450M to 1B.Gemini, the cryptocurrency exchange founded by the Winklevoss twins, offered Maker a 1.25% interest rate on GUSD holding above $100M in September.Ether accounts for 11.5% of DAI’s backing, alongside stETH at 8.5%.