DeFi Platform Maker DAO Takes Swift Action to Address $3.1B USDC Risk with Emergency Proposal

The crypto market has again met with another stablecoin collapse after UST as investors are rushing to withdraw their funds. Circle, the issuer of USD Coin (USDC), today announced that it faced challenges in withdrawing $3.3 billion from its $40 billion deposits at Silicon Valley Bank (SVB). As a result, it created panic among investors and brought subsequent sell-off, depegging the USDC from $1. The collapse of USDC has forced several firms to take quick action as DeFi platform Maker DAO recently filed an emergency proposal to prevent its DAI stablecoin from dropping further after being negatively impacted by USDC’s depeg. 

Maker DAO’s DAI Stablecoin Becomes the Latest Victim After USDC

Maker DAO, the issuer of the DAI stablecoin pegged to the US dollar, has made an urgent executive proposal to address risks to its protocol. As per a forum post on March 11, the company expressed concern about its multiple collaterals being exposed to the “tail risk” of USDC due to the sudden de-pegging of the stablecoin that began today. Maker DAO currently holds over 3.1 billion USDC in collateral supporting its DAI stablecoin.

The proposed Maker DAO emergency plan involves several actions to mitigate risks to its protocol:

• It suggests reducing the debt ceiling of UNIV2USDCETH-A, UNIV2DAIUSDC-A, GUNIV3DAIUSDC1-A, and GUNIV3DAIUSDC2-A liquidity provider collaterals to zero DAI.
• The plan recommends lowering the daily minting limits of its USDC peg stability module from 950 million DAI to 250 million DAI and introducing a 1% fee to prevent the excessive dumping of USDC.
• The daily minting limit of the GUSD stablecoin module may also be reduced from 50 million DAI to 10 million DAI if the proposal is accepted.

Maker Aims to Eliminate Exposure to Curve and Aave

Maker DAO is considering entirely eliminating its exposure to decentralized finance protocols Curve and Aave. According to the company, Curve’s fixed $1 price for USDC presents a risk of insufficient debt accrual and potential bank runs, leading to market insolvency if the USDC’s market price drops significantly below the current collateral factor. Though Aave does not pose such risks, Maker DAO states that its overall risk-reward for depositing funds into the D3M is not advisable under current conditions.

The proposed emergency plan by Maker DAO also includes increasing the protocol’s debt ceiling for the Paxos-issued stablecoin, USDP. The ceiling would be raised from 450 million DAI to 1 billion DAI. The firm said, 

“Paxos has relatively stronger reserve assets versus other available centralized stablecoins, consisting primarily of U.S. treasury bills, reverse repurchase agreements collateralized by U.S. treasury bonds. They face relatively lower potential for impairment versus other available stablecoins.”

The proposal has been put forth to the Maker DAO community for voting, and if accepted, it will be implemented immediately. The swift action taken by Maker DAO to address the USDC risk demonstrates its commitment to maintaining the stability of its protocol and ensuring the safety of its users’ funds.