MakerDAO To Convert USDC Into ETH Ahead Of Ethereum Merge

Recently, Circle suspended USDC tokens belonging to 38 wallet addresses which were blacklisted by the US Treasury Department. These wallets were of Tornado Cash addresses.

Following this, MakerDAO has raised concern about the risks related to USDC. MakerDAO founder, Rune Chirstensen, has asked the community members, through the company’s discord channel, to be prepared for a depegging of the DAI stablecoin from the US Dollar.

After the Office of Foreign Assets Control (OFAC) restricted residents from using Tornado Cash, Circle decided to freeze $75,000 worth of stablecoins. Following this, Rune claimed that these restrictions by OFAC are serious and MakerDAO should start preparing to depeg from USD.

Affected by the tornado sanctions, MakerDAO founder Rune Christensen said that he is seriously considering moving away from using USDC as collateral and converting USDC into ETH. Vitalik said non-ETH collateral should be allowed to exceed 20% of the total. pic.twitter.com/x3ocsCq6KH
— Wu Blockchain (@WuBlockchain) August 12, 2022

Will The Entirety of USDC Be Converted Into ETH ?

It’s interesting to note that Rune plans to convert the afore-mentioned USDC into ETH. At the moment, USDC has collateral for more than 50% of MakerDAO’s DAI stablecoin. Hence, the founder appears very concerned with the dependency on single stablecoin and a centralized asset.

DAI’s market cap that stands at $7.5 billion, makes the currency one of the largest DeFi protocols by total value locked.

@bantg, a core engineer at Yearn.finance, tweeted that MakerDAO may propose converting all of its $3.5 billion USDC to ETH. As a result, more than 50% of DAI stablecoins will be secured by ETH, increasing from 7% currently.

MakerDAO is considering a $3.5 billion ETH market buy, converting all USDC from the peg stability module into ETH.
— banteg (@bantg) August 11, 2022

Dear @MakerDAO $DAI community… you should start unwinding your USDC collateral immediately, converting it into stables that are more censorship resistant.
You have some time to do it, but you need to get started.
— Erik Voorhees (@ErikVoorhees) August 8, 2022

The community is comparing this move to the Terra (LUNA) collapse and saying that this another “Terra in the making”. This is because the Terra network had made a similar mistake of backing all its USDT tokens with Bitcoin. After USDT underwent a huge depegging, Terra was forced to liquidate all its BTC reserves.

Other individuals have spoken out as well.

Even Vitalik Buterin, Ethereum co-founder, is of the opinion that this would be a risky approach. Vitalik states that if Ethereum plunges in its value, even the collateral value will drop. Hence, the overall system would be affected, making it a fractional reserve.

Errr this seems like a risky and terrible idea. If ETH drops a lot, value of collateral would go way down but CDPs would not get liquidated, so the whole system would risk becoming a fractional reserve.
— vitalik.eth (@VitalikButerin) August 11, 2022

In reply to Vitalik’s comment, Rune Chirstensen replied that they don’t have any plan to transfer all of USDC into ETH and only might transfer a few.

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Source: https://coinpedia.org/news/makerdao-to-convert-usdc-into-eth-ahead-of-ethereum-merge-community-reacts/