DAI was flawed from the beginning says DeFi founder

Andrey Shevchenko — the founder of decentralized finance (DeFi) protocol Zircon Finance — shared his view that MakerDAO’s (MKR) so-called “decentralized stablecoin” DAI’s (DAI) introduction of USD Coin (USDC) as collateral was an attempt to plug a hole in a flawed system.

In its original state, DAI was only backed by ethereum (ETH) which was on-chain meaning that the stablecoin’s backing was decentralized and the only centralized point of failure were the oracles providing the ETH-USD price.

While the DAI whitepaper published back in late 2017 mentioned that the stablecoin would soon see more collateral types be added, there is no mention of centralized-collateral tokens.

Shevchenko pointed out that in its first stage, DAI was unstable and reached about 8% discount compared to the U.S. dollar in 2019 then after so-called black Thursday it instead traded at a premium.

He explained that this is when USDC was introduced as a collateral option for minting DAI and it was hardcoded in a way that made one USDC equal to one DAI through the so-called “peg stability module.” This ensured price stability for DAI.

The founder argued that the system is fundamentally flawed since DAI is created when users want to increase their exposure to crypto through margin, which means that there is little incentive to issue the stablecoin during bear markets.

Another factor he highlighted is that DAI issuance does not include an arbitrage mechanism, which means that it cannot be withdrawn unless you issued tokens yourself. While USDC solved the problem, it introduced a new set of issues.

“For today’s Maker, the counterparty and centralization risks it’s taking are enormous. Things like Real World Asset vaults, handing over the PSM USDC to Coinbase custody — in isolation they may sound like good ideas but they’re steps in the wrong direction. And we’ve seen the negative effects of relying on USDC last weekend. DAI has diluted its brand to become functionally indistinguishable from USDC in the minds of people…regardless I think in the future we might have multiple of these stablecoin types underpin a single ‘master’ stablecoin wrapper. Composability in DeFi can really help us out.”

Andrey Shevchenko, founder of Zircon Finance.

Shevchenko suggested that a solution could be a better framework for creating synthetic assets such as the perpetual swap funding method — but it would require a strong and liquid perpetual futures trading platform to be feasible.

He highlithed some projects that are attempting to do something different in the algorithmic stablecoin space and cited NakaUSD but argued that it is “a non-starter because it uses CeFi exchanges” and UXD Protocol which is a whole other can of worms since it is based on Solana (SOL).

As crypto.news recently reported, USDC lost its $1 peg to the USD, trading to low as 81.5 cents on March 11. Meanwhile, trackers indicate that Circle, the issuer of USDC, has burned $2.34 billion in the last day to meet increasing redemption requests.