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starcrypto — Exponential has downgraded the Maker DAI pool ranking from Low danger to Common danger, reflecting a reassessment of the dangers related to Maker’s collateralization technique for DAI.
MakerDAO is a lending platform that helps a decentralized stablecoin known as DAI. The latter is pegged to the U.S. greenback, offering a steady worth when customers change extra risky cryptocurrencies.
The protocol permits anybody to take out loans in DAI by utilizing different cryptocurrencies as collateral. These loans are overcollateralized, which means it is advisable to deposit extra belongings than you borrow.
The lender-borrower construction appears to be nice for MakerDAO, however Exponential analysts say a radical evaluation of its evolving collateral technique justifies the downgrade to an Common danger ranking.
Initially, DAI was backed solely by on-chain belongings like ETH, , and some centralized stablecoins, offering DAI holders with an easy, overcollateralized mannequin.
“Maker’s transfer in direction of incorporating real-world belongings (RWAs) into its collateral combine represents a big departure from its unique single-asset mannequin. This diversification, whereas interesting in a high-interest charge surroundings, introduces new layers of danger that should be addressed,” Exponential co-founder Mehdi Lebbar instructed starcrypto.
Lebbar identified the latest defaults in smaller RWA vaults as a reminder of the dangers related to integrating conventional monetary devices into decentralized methods.
“It’s important for the DeFi group to grasp how these belongings generate yield and the potential implications if key RWA-backed vaults have been to underperform or default,” he stated.
Discussing the potential for future upgrades, Lebbar stated, “the potential for an improve exists if Maker can take away the lower-quality collateral and strengthen governance mechanisms across the protocol’s resolution making.”
He additionally warned of the dangers related to additional enlargement into lower-quality collateral with out strong danger controls, saying “our focus stays on making certain that the protocol’s monetary well being and governance practices align with the pursuits of DAI holders.”
Over time, MakerDAO has diversified its collateral, notably specializing in real-world belongings (RWAs), which now account for almost 30% of DAI’s whole backing. This shift has added new complexities and dangers, main Exponential to reassess the state of affairs.
In keeping with Exponential, the reliance on RWAs has allowed MakerDAO to lift the DAI Financial savings Price (DSR) yield to eight%, capitalizing on the present high-interest charge surroundings within the US. Whereas this generates respectable income for MKR holders, it additionally brings about higher counterparty dangers for DAI holders associated to authorized preparations and transparency.
“Questions come up comparable to: How does every RWA generate yield? Who’re the counterparties concerned in these transactions? Would MakerDAO be chargeable for making certain the execution of justice in the actual world in case of default?”
Though minor relative to DAI’s total backing, there have already been 4 defaults on smaller RWA vaults. If bigger RWA vaults have been to see comparable defaults, Maker might face a financial institution run that will destabilize DAI’s 1:1 USD peg, the report warns.
Exponential analysts argue that the introduction of lower-quality collateral deviates from DAI’s unique decentralized mannequin and provides higher dangers to the steadiness of DAI as a USD stablecoin.
“Enchancment within the high quality of collateral might scale back protocol danger. Moreover, enhanced governance mechanisms that successfully handle the dangers related to new collateral varieties might additionally result in an improve.”
Exponential warned that additional enlargement of lower-quality collateral with out sufficient danger controls might result in one other downgrade.