Sep 28, 2022 - Economy

A major DeFi protocol weighs fundamental dilemma

Illustration of a golden scroll on a golden pedestal in a golden room.

Illustration: Aïda Amer/Axios

One of the largest players in decentralized finance (DeFi) is sitting with an offer that looks hard to refuse, but one that would divert it from a larger vision seeking to distance the protocol from centralized, authoritarian threat.

The big picture: MakerDAO's own stablecoin is collateralized in part by some 1.6 billion in another, which could become another revenue stream. The U.S.'s largest crypto exchange, Coinbase Global, is proposing to hold those assets for a 1.5% annual yield — offering some $20 million in recurring revenue. The problem is, Maker's co-founder, Rune Christensen, thinks it should leave vulnerable real-world assets, including other stablecoins, behind.

The intrigue: $20 million in recurring revenue is an enticing offer amid a crypto winter. And it would likely be a no-brainer if Christensen hadn't proposed his path forward.

  • Christensen's proposal, which he calls the "Endgame," is motivated by his desire to remove the risk of holding assets that can be censored — all the more pressing in the wake of sanctions levied against Tornado Cash.
  • It would likely require that dai lose its 1:1 peg with the U.S. dollar and go free float.

Be smart: MakerDAO is behind a collateralized debt protocol, which is how it creates dai, an Ethereum-based stablecoin that people can borrow against deposited collateral, like ether or real-world things.

  • People can borrow dai against deposited collateral, like ether or real-world things. (Recall our story on Centrifuge, which funds real estate loans and trade receivables.)

State of play: usdc, the stablecoin that Coinbase is proposing to hold for Maker, accounts for roughly 40% of the $8.7 billion total value locked in dai, per Daistats.

  • Parking a chunk of what's backing dai at Coinbase would effectively take MakerDAO off-course per Christensen's vision.

The latest: Coinbase CFO Alesia Haas answered questions in a live video call Monday, saying the proposal was motivated by the exchange's ambition to accumulate assets and be a custodian of size; to "grow" usdc as a good partner to its issuer, Circle; and to be one for Maker, too.

  • What they're saying: "This is not a loan," Haas said, emphasizing that the deal was "purely a custody arrangement," and that "nothing will be done with these assets."

Questions ranged from technical to hypothetical. For examples, would the Fed's raising rates eventually change initially promised terms?

  • Haas said rate updates will be available by year-end, and Coinbase's rewards rate is "not in any way shape or form" linked to FOMC meetings.

Separately, who exactly would be Coinbase's counterparty given MakerDAO is a DAO?

  • Whoever Maker wishes, Hass said, with "a team standing by" to help decide what legal entity is onboarded, assuming the entity proposed meets eligibility criteria.

Yes, but: What if the SEC shuts down the rewards program?

  • Haas said there is no relationship between MakerDAO's offer and Coinbase Lend: "We’re confident in the program."

What others are saying: Chris Blec, a MakerDAO delegate, tweeted that the "existential risk to dai from the custody offer is far, far too great."

Our thought bubble: It sure is wild for a DeFi giant like MakerDAO to eyeball a 1.5% annual yield.

  • Remember when Coinbase first rolled out its dai rewards program to retail customers with a 2% annual yield.

What we're watching: Today is the last day for Coinbase to make updates to the proposal. Then, a vote will go up for two weeks from Oct. 10 to 24, assuming the exchange does not withdraw it.

The big picture: Coinbase becomes a bigger custodian with the help of MakerDAO if the vote goes through.

  • The question for MakerDAO's voters is if the additional $20 million per year would help them realize a future in which it wouldn't be tied to the U.S.'s largest centralized exchange.
Go deeper