MakerDAO and Aave Face Strains Amid DeFi Innovations and Controversial Stablecoin
Summary:
The previously harmonious relationship between stablecoin issuer MakerDAO and lending protocol Aave is under strain due to developments and perceived risks within the decentralized finance (DeFi) sector. Tensions stem from the introduction of a potentially problematic stablecoin that mimics a "basis trade," and the Direct Deposit Dai Module (D3M) by Maker's initiative Ethena's USDe. Amidst the 2022 bear market, MakerDAO temporarily cut ties with Aave's D3M, raising alarm bells in the cryptocurrency space. The rift between the protocols deepened as competition grew and contentious debates ensued. The outcome of the dispute and the fate of Ethena's USDe remain uncertain, suggesting potential future conflicts between the two protocols.
The working synergy between autonomous stablecoin creator MakerDAO and loan service Aave is becoming strained as experiments and advancements within the decentralized finance (DeFi) realm cause tensions to rise. Both prominent protocols now find themselves at a pivotal point due to the perceived risks associated with new innovations. The contentious introduction of a stablecoin, which functions just like a "basis trade," and the Direct Deposit Dai Module (D3M) by Maker, known as Ethena's USDe, can be traced to the root of the fall out.
MakerDAO initiated its Dai (DAI) token in 2017, an autonomous decentralized stablecoin backed by Ether (ETH), which required users to mint tokens on the MakerDAO platform through the deposit of ETH. In 2019, Maker introduced multicollateral DAI, enabling DAI to be backed by multiple digital currencies like the centralized stablecoin USD Coin (USDC).
Around the same period, Aave (formerly ETHLend) was introduced as a peer-to-peer digital currency lending platform, integrating DAI's collateral from its early stages. Both platforms enjoyed a healthy collaboration during the 2021 DeFi upsurge, and the subsequent launch of the D3M, in cooperation with Aave, enabled Maker to directly engage with its secondary market by actively imposing a maximum variable borrowing rate.
However, the 2022 bear market witnessed a series of setbacks with the collapse of prominent DeFi protocols, major cryptocurrency lending firms, and a banking crisis that led to the fall of Credit Suisse, exerting immense pressure on these protocols.
Troubles escalated when the bear market of 2022 saw a spate of bankruptcies and high-profile collapses, beginning with the Terra system in May. Terra's algorithmic stablecoin lost its peg which led to the collapse of Terra (LUNA). The repercussions were severe, leading to the collapse of lending platforms Celsius and BlockFi, among others. Consequently, MakerDAO decided to temporarily disconnect Aave's D3M to shield itself.
Later, the centralized stablecoin USDC lost its peg momentarily after the now-defunct Silicon Valley Bank, the bank holding $3.3 billion of the stablecoin's reserves, collapsed. It was only reinstated after regulators intervened to ensure complete reimbursement to depositors. This incident rang alarm bells for MakerDAO, which subsequently demanded an "urgent executive proposal to mitigate risks to the protocol" in response to its $3.1 billion exposure to USDC. Maker also cut off exposure to Aave as the "overall risk-reward of placing funds into the D3M are not favorable under existing conditions."
Becky Sarwate, head of communications at cryptocurrency exchange Cex.io, pointed out that DAO's next course of action was to invest in real personal properties in the form of U.S. Treasurys to strengthen market faith in DAI by harmonizing the network's value composition. Real-world properties, such as U.S. Treasurys and short-term loans, actually represent a significant portion of DAI's support, constituting 20% of all generated stability fees in March.
Increased competition arose when MakerDAO introduced Spark Protocol, a fork of Aave’s version 3 allowing users to borrow, lend, and stake DAI directly. The tension grew when AaveDAO debated limiting the quantity of MakerDAO's DAI stablecoin used as collateral on its lending platform, possibly completely eliminating it. The case was finally resolved with a 12% loan-to-value diminishment after Aave Chain founder Marc Zeller proposed to entirely remove DAI.
Ethena's USDe, a questionable stablecoin, deeply exposed to the controversial MakerDAO, in conjecture with the expanded line of credit, proved to be a tipping point for the Aave community. Critics argue the stablecoin can become under-collateralized during a cryptocurrency bear market when the cost of perpetual ETH futures contracts drops below the spot price of ETH.
The Aave and MakerDAO dispute was seemingly resolved by Chaos Labs' analysis of DAI leading to a 12% loan-to-value reduction for Aave DAO. While it's uncertain what fate Ethena's USDe will be met with - be it a collapse, falling behind the competition, or something else - it's likely that sparks could fly between these two protocols again.
Published At
5/13/2024 4:28:00 PM
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