Terraform Labs CEO Do Kwon has revealed a new alliance with Frax Finance and Redacted Cartel, a move targeted at winning the so-called ‘Curve Wars’ while potentially dealing a deadly blow to the DAI stablecoin.
DeFi protocol OlympusDAO is also joining the ‘4pool‘ alliance, according to an April 2 tweet by Kwon.
“Curve wars are over, all emissions are going to the 4pool,” he claimed, referring to the often heated race between protocols competing for higher rewards on Curve Finance, the popular DeFi platform built on Ethereum.
What is 4pool?
Comprised of USDC and USDT stablecoins, 4pool is a new four-token liquidity pool on Curve which also includes decentralized stablecoins UST of Terra and Frax Finance’s FRAX. It aims to dominate Curve’s stablecoin market with more than $21 billion in assets under management.
In accomplishing this, Kwon intends to sway investors away from 3pool, an existing stablecoin pool on Curve, by offering them incentives that drive more liquidity toward his new coalition pool.
“In the future, we will also direct emissions to other stablecoins that pair against the 4pool, not just the 4pool itself,” said Kwon. “Goal is to starve the 3pool. [It] shall not be long,” he added.
Kwon is also hoping that Terra, Frax, Redacted and Olympus will use their significant holdings of Convex’s CVX, a token that grants holders power to vote on key decisions on Curve, to bring deeper liquidity to 4pool.
Convex allows users to access liquidity and earn fees on Curve. It accounts for about 40% of voting power on the protocol, according to some analysts. Others say it is far less, just 14 percent.
“I call on every CVX holder and Curve user to the 4pool,” the Terra CEO urged. Ultimately, this gives Convex Finance significant leverage in terms of deciding the pool that gets more liquidity, and therefore, the greater reward, on Curve.
To date, 3pool has received over $3.3 billion, which has been dominated by DAI. However, according to observers, 4pool alliance could change this.
“If UST and FRAX become more liquid than DAI, it means their utility as stablecoins increase over DAI’s,” crypto analyst Erica Wall, wrote on Twitter.
“Each of these coins still have their own native stabilizing mechanisms but being able to run size through Curve Finance is a big deal.”
Analysts say the new coaltion could lead to DAI losing its US dollar peg, as liquidity is drained out of 3pool, and into 4pool. Conversely, the scenario could boost the stability of UST, which has suffered serious risks with its peg in the past.
Kwon has fantasized about the demise of DAI in the past, declaring, “[b]y my hand DAI will die.”
‘DAI won’t die’
While this seems promising for the Terra founder, there are some who question his beliefs.
DeFi investor and analyst Korpi argues that 4pool “will not flip 3pool”, even if the cartel grew “substantially”, drawing more liquidity.
“I don’t see how a drop in liquidity in 3pool, which will probably happen, may lead to DAI losing the peg,” asserted Korpi.
“DAI is debt-based stablecoin. To mint DAI, users have to lock collateral in MakerDAO vaults which is worth much more than DAI issued. As long as collateral [exceeds the] DAI issued, DAI won’t lose $1 peg. It may become more volatile with lower liquidity but depeg is highly improbable.”
Continuing, Korpi says “there are examples of over-collateralized stablecoins that are below the peg for some longer period but it’s not because of their low liquidity but low utility in DeFi. DAI as the first DeFi stablecoin has been used in many projects and this risk is extremely low. DAI won’t die.”
However, Frax Finance founder Sam Kazemian is planning to issue extra incentives to bring liquidity providers to 4pool, while starving DAI-related pools.
“Any stablecoin that uses 4Pool for its base liquidity will get direct support by both Terra and Frax,” he said in a tweet. “Frax will immediately propose a veFXS gauge which will emit additional FXS tokens on top of the CRV+CVX tokens of your pool,” he added.
Frax’s native token, FXS, has doubled in price in the previous 48 hours, witnessing a 3% increase at $40 in 24 hours, as of press time. Redacted Cartel’s BTRFLY fell 6.6% to $302 but the token is up more than 300 percent in 30 days. LUNA of Terra and OHM of Olympus dropped to 2.2% and 1.2% to $112 and $35, respectively.
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BeInCrypto has reached out to company or individual involved in the story to get an official statement about the recent developments, but it has yet to hear back.