As the governance token on the MakerDAO ecosystem, MKR’s resurgence represents a boon for the DAO’s decentralized DAI stablecoin. The original decentralized autonomous organization, and its ethos of decentralized decision-making, now holds increasing appeal given the dominance Terraform Labs co-founder Do Kwon seemed to have over TerraUSD (UST).
While operating as another decentralized stablecoin, UST attempted to balance supply by using algorithms to maintain a 1-to-1 peg to the dollar. However, this proved to fail as demand for Terra’s LUNA token tumbled, and the stablecoin’s built-in arbitrage mechanism no longer functioned.
“This is directly related to UST blowing up,” said the head of decentralized finance at Wave Financial, Henry Elder. “UST imploded pretty much the moment demand flattened out, leaving Maker as the undisputed king of decentralized stablecoins for the time being.”
A stability mechanism distinguishing UST and DAI is that the latter requires over-collateralization through ethereum-based coins. This means that users would have to deposit $150 worth of ethereum to get $100 worth of DAI. Consequently, if ethereum drops in value, users would have to increase their collateral or risk liquidation.
DAI is the oldest decentralized stablecoin, having been created in 2017. In addition to riding the highs of the 2020-21 COVID lockdown, it managed to survive the crypto winter of 2018. “Market seems to be valuing stability/moderation in stablecoinland,” said general partner at BlockTower Capital, Michael Bucella. “Likely a relative value play, DAI is ‘performing well’ and has been stress tested before, is one of the few decentralized money plays remaining.”
In addition to requiring over-collateralization, MakerDAO utilizes other methods to maintain the value of its assets. Some of the fees that MakerDAO collects it uses to purchase excess MKR on secondary markets, which it proceeds to burn, keeping its value aloft.
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