MakerDAO’s Strategic Response to USDC’s Depegging: A Closer Look

A Rocky Road for Stablecoins

On March 11, MakerDAO, the issuer behind the popular DAI stablecoin, made a dramatic move with an urgent executive proposal designed to tackle rising concerns over its exposure to USDC risks. If that wasn’t enough to send shockwaves through the DeFi world, USDC’s recent depegging from the U.S. dollar added to the drama, showcasing how quickly the tides can turn in the crypto ocean.

Mitigating Risks: The Proposal Breakdown

MakerDAO isn’t just sitting back sipping piña coladas while the storm rages. Their robust strategy includes:

• Slashing Debt Ceilings: The proposal outlines plans to reduce the debt ceilings on specific liquidity provider collaterals (UNIV2USDCETH-A, UNIV2DAIUSDC-A, GUNIV3DAIUSDC1-A, and GUNIV3DAIUSDC2-A) to a cool 0 DAI. Talk about a deflationary diet!
• Minting Limits and Fees: It also seeks to cut the daily minting limit of its USDC peg stability module from 950 million DAI to 250 million DAI and implement a 1% fee to discourage USDC dumping. Because who wants to be the last one holding a hot potato?
• Daily Minting Cut for GUSD: If sanctioned, GUSD will see its minting limit slashed from 50 million DAI to a mere 10 million DAI. Tightening the belt seems to be the mantra.

Breaking Ties: A Strategic Withdrawal from DeFi Protocols

It’s not just about numbers. MakerDAO is eyeing a complete exit from certain DeFi protocols like Curve Finance and Aave. For Curve, the concern arises from its tendency to stick to a fixed price of $1 for USDC. As they say, “What goes up must come down,” and at this point, a plummeting USDC could lead to bad debts reminiscent of a low-budget horror film.

Even though Aave doesn’t carry the same baggage, Maker emphasizes that the potential risk-reward profile just doesn’t cut it in the current market climate. Sometimes, cutting ties is the best strategy—even if it means breaking a few romantic hearts in the process.

Paxos: The New Hero?

In a surprising twist, MakerDAO is looking to strengthen its relationship with the Paxos Dollar (USDP) by proposing to increase its debt ceiling from 450 million DAI to a hefty 1 billion. Why the love affair? According to Maker, Paxos boasts robust reserve assets primarily rooted in U.S. treasury bills and reverse repurchase agreements—all safer bets than a game of poker in a dingy backroom.

The Aftermath of USDC’s Plunge

As of the events transpiring on March 10, USDC had become a hot topic of conversation, trading at a distressing $0.9025 after its depegging was attributed to collateral funds trapped in the now-defunct Silicon Valley Bank. Meanwhile, DAI wasn’t the picture of stability either, floating around at $0.9235. It appears that the storm is still brewing, and stakeholders across the board are bracing for the aftermath.