DAI is king of decentralised stablecoins after Terra collapse

JUST when you thought the world of cryptocurrency stablecoins couldn't get more complicated, it does.

A so-called governance token named MKR, which is used to help run the decentralised DAI stablecoin, has surged about 40 per cent in value over the past week in the wake of the collapse of the algorithmic stablecoin TerraUSD that shook cryptocurrency markets. DAI is part of the ecosystem of the MakerDAO, one of the first decentralised autonomous organisations in crypto, which in theory acts like a community of pooled interests with no central control.

The idea of decentralised decision making, while long a theme in crypto, is particularly attractive given the amount of sway over TerraUSD, or UST, by Terraform Labs co-founder Do Kwon. UST was also billed as a decentralised coin, though it attempted to use algorithms to balance supply to maintain a 1-to-1 peg to the dollar. That failed when the built-in arbitrage mechanism no longer worked as demand for Terra's Luna token tumbled. Maybe more importantly, DAI seeks to overcollateralize assets.

"This is directly related to UST blowing up," said Henry Elder, head of decentralised finance at asset manager Wave Financial. "UST imploded pretty much the moment demand flattened out, leaving Maker as the undisputed king of decentralised stablecoins for the time being."

Stablecoins can be a bridge between 2 worlds that weren't designed with mixing in mind - cryptocurrencies and traditional finance. That makes them useful as a way to lock in gains from crypto trading or as a safe harbour if investors think a downturn is coming. They also make it easier to move funds onto crypto exchanges and have become a key component of the world of DeFi.

DAI requires overcollateralization via Ethereum-based coins. For example, users have had to deposit US$150 worth or more of Ether to get US$100 worth of DAI. If the price of Ether drops, they have to add more collateral or face liquidation.

SEE ALSO

Amid crypto crash, some market players argue for less regulation but more clarity

DECODING ASIA

Navigate Asia in
a new global order

Get the insights delivered to your inbox.

MKR directly benefits when DAI does well. Certain fees that MakerDAO collects go towards buying up MKR on secondary market and burning it.

Created in 2017, DAI is the oldest decentralised stablecoin. It has survived the crypto winter of 2018 and the tribulations of the Covid lockdown of 2020.

"Market seems to be valuing stability/moderation in stablecoinland," said Michael Bucella, general partner at BlockTower Capital. "Likely a relative value play, DAI is 'performing well' and has been stress tested before, is one of the few decentralised money plays remaining." BLOOMBERG