Changes Proposed By MakerDAO To Guard Users Against Centralized Stablecoin Crisis

Key Ideas

• In order to reduce exposure to potentially impaired stablecoins and risky collaterals while maintaining DAI stablecoin liquidity, MakerDAO has proposed changes.
• Stablecoins with significant exposure to at-risk institutions are impacted by the banking industry crisis brought on by the failure of Silicon Valley Bank and Silvergate.

The banking sector is in crisis as a result of the failure of Silicon Valley Bank and Silvergate, which could have an effect on stablecoins. The proposed modifications are meant to keep liquidity while reducing MakerDAO’s exposure to risky collaterals.

In recent news, the failures of Silicon Valley Bank and Silvergate have plunged the banking sector into crisis. This has important ramifications for centralized stablecoins, which may experience impairment given their high exposure to the affected banks and other institutions that could be at risk. The vast majority of stablecoin bank deposits are unsecured deposits to underlying banks, who run the risk of not being fully repaid in the event that a bank closes, as only the first $250,000 of bank deposits are insured by the FDIC.

Circle has disclosed exposure to Silicon Valley Bank of about $3.3 billion, or slightly more than 25% of their total exposure to bank deposits of about $11 billion. A decentralized finance protocol called MakerDAO is putting forth changes to reduce its exposure to potentially troubled stablecoins and other risky collaterals while keeping enough liquidity to prevent its stablecoin, DAI, from trading significantly above $1 in the event that circumstances change.

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The debt ceilings for LP Collaterals Containing USDC are one change that has been suggested because these collaterals may be subject to USDC tail risk and because maintaining adequate DAI liquidity is not dependent on the availability of debt ceilings. Additionally, MakerDAO is suggesting that the gap parameter for the USDC PSM, which has historically been Maker’s main source of liquidity, be decreased from 950 million DAI to 250 million DAI. The higher fee will ensure that USDC is only used if the DAI price significantly diverges upwards, potentially encouraging users to dispose of USDC in other ways and preventing excessive USDC from being dumped into the PSM.

Additionally, MakerDAO is recommending that the gap for PSM-GUSD-A be decreased from 50 million to 10 million DAI due to GUSD’s significant exposure to uninsured bank deposits, which may or may not be linked to institutions that are at risk. To reduce potential losses, MakerDAO is proposing to raise the maximum debt ceiling line from the current 450 million DAI to 1 billion DAI and to increase the gap for PSM-USDP-A, which has relatively stronger reserve assets, from 50 million to 250 million DAI.

Compound v2 D3M and Aave v2 D3M are also momentarily turned off by MakerDAO to shield users from potential insolvencies. Finally, reducing the governance security module delay will enable greater agility. Maker governance may want to make additional parameter adjustments to take into account the rapidly shifting market conditions over the coming days. At the Protocol Engineering core unit’s discretion, a GSM delay of 12 to 24 hours may be taken into account.