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You Don’t Just Destroy DAI: Maker Founder’s ‘Endgame’ Proposal

Decrypt DeFi is Decrypt’s DeFi email newsletter. (drawing: Grant Kempster)

Last Friday, Rune Christensen, the mastermind behind the unofficial crypto central bank, MakerDAO, writing a proposition of epic proportions.

He described the continuing effects of Cash Tornado Penaltiessaid the industry had “failed to show any value to society” and outlined two potential paths for Maker.

These two paths, which have been made clear by the recent sanctions, require that DeFi projects either become the next fintech product (and be regulatory compliant) or be “treated like something else”. Notably, the latter choice also carries great risks, as evidenced by the recent arrest of Alexei Pertseva developer of Tornado Cash.

But because Maker was designed to remove any possibility of blacklisting or bending the knees to requests from authorities, the old way is not possible, Christensen wrote.

This also means that “at some point in the future, there is a high probability that Maker will be hit by a severe attack from global authorities targeting any attack surface they can find, through a process similar to that which led to the [Tornado Cash] punishments.”

In summary: it is whennot ifregulators will target MakerDAO and the industry’s leading decentralized stablecoin AID. With this hypothesis in mind, Christensen argued that the task now is to do AID as resistant to attacks as possible.

The call to arms also means that the project must prepare “for the probable possibility that AID will have to become floating”, or leave its peg to the greenback. This is also something that the founder of the project pointed out on August 11.

The difference between then and now, however, is that there is now a real plan in mind.

Maker DAI Free Floating Stablecoin

The fact that the DAI is no longer pegged to the dollar is less a goal than a symptom of making the protocol resistant to attacks.

Part of Christensen”End game plananother monumental proposal outlining a restructuring of Maker and its governance, would limit the share of project collateral in real-world assets, or RWA.

Along with assets like Ethereum, Wrapped Bitcoin, and Uniswap, small businesses can also secure their own assets in order to mint DAI.

For example, Reif Financial Investments Inc. has guaranteed home loans in exchange for DAI. another company called Gig Pool did the same with payment advances for various gig workers from Instacart, Doordash, Upwork, and more.

This would also include Circle’s USDC stablecoin, about 50% of which back DAI, according to data taken from DAI statistics.

via DAI statistics

As you can probably imagine, it’s much, much easier for regulators to crack down on these types of companies than it is to crack down on something like Ethereum. Circle already has a fairly well-known track record for blacklist its stablecoin at the request of regulators.

This means that this type of collateral is a key attacking surface that Christensen wants to consolidate.

“The path to decentralization means limiting our attack surface to physical threats, and specifically our RWA guarantee as a percentage of total wallet. In the Endgame Plan, I put that limit at 25%,” he writes.

However, by capping this type of guarantee, there may be not be enough attack-resistant collateral (i.e. pure cryptocurrencies) to meet the continued demand for DAI.

As supply slows because there are fewer ways to mint more DAI, continued demand could push the price of DAI past one dollar. But wait, there’s more.

Christensen also argued for the introduction of a “negative target rate”, essentially the Maker’s version of negative interest rates, to drive down demand for DAI and increase its supply “because it becomes cheaper to generate [more DAI] with decentralized vaults like Ethereum.

This breakdown also helps to better understand why some have called the central bank of Maker crypto.

Just as in the real world, falling interest rates into negative territory means that costs currency holders to sit on their money. And to the extent that said currency holders are also rational actors, they would then go out and spend that money on potentially more valuable things or merely trade for assets that aren’t going to cost them any money.

Lower interest rates also make borrowing, or in our case, minting more DAI, much cheaper.

That’s basically Christensen’s plan in a nutshell. Limit the amount of RWA that can be used as collateral while simultaneously reducing demand for DAI (and making increasing supply cheaper).

It’s the basic recipe for surviving any regulatory crackdown, but the plan goes further, unboxing two more tools that “turn DAI’s free float into something Maker can survive, and even thrive on,” in the words by Christensen.

More tokens, more chests

The only way to convince someone that it is good to own an asset suffering from negative rates is to also convince them that they need this asset to obtain other more valuable assets.

This is where Christensen introduces the idea of ​​so-called MetaDAOs and MetaDAO tokens.

From Christensen’s proposed endgame plan. Source: MakerDAO

As shown in the diagram above, a Maker MetaDAO is like any other crypto DAO, except this one would be tied to the much larger MakerDAO and have its own native token.

These mini-DAOs would also have full autonomy to pursue the goals they set, as well as track down any “profit-generating activity,” according to the plan.

And since they are attached to the emerging DAI-based ecosystem, DAI holders could then produce these new tokens.

Concluding: “The manufacturer not become exciting again; this is going to be the most exciting and important place in all of crypto – and we have the perfect tool that allows us to capture this meta and hook people into our ecosystem: MetaDAO yield farming.

It’s a big, bold plan.

But the fact that it came from one of DeFi’s most influential projects, rather than someone like Do Kwon of Terrathe crypto community could easily rally behind it.

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