By Hassan Mehmood (Saudi Arabia)
MakerDAO is the DAO project that issues a decentralized token called DAI. This project has recently issued an emergency protocol to manage price volatility. This new proposal plans to decrease the total supply of DAI for minting with other stablecoins on centralized platforms.
The increase in the price volatility of DAI stems from the demise of SVB, which was holding a massive amount of fiat reserves used to back the stablecoin.
Since this incident, many investors have moved to other cryptocurrency trading options while dissolving their stablecoin positions. It is worth noting that Circle, the project responsible for USDC stablecoin, had placed $3.3 billion under the custody of SVB before it went down.
However, the government has recently decided to step in the matter and warrant the complete reimbursement of Circle’s funds that went down with the bankrupt banking enterprise.
Before government enterprises had offered the bailout to the depositors of Signature and SVB, USDC was looking at the issue of de-pegging. Therefore, Circle adopted emergency preventive measures by sending a considerable supply of the stablecoin to burn addresses.
Crypto firms have reported that USDC supply decreased by 5%, reduced from 41 billion to 38.6 billion. As a consequence, the supply of DAI was increased.
Also read:During the same period, the DAI token supply increased from 6.3 billion to 5.1 billion. These changes are corroborated by The Block. While USDC holders were burning their supply, they were also minting more DAI tokens.
It happened because most MakerDAO users can lock USDC as collateral to mint new DAI tokens in a 1:1 ratio. Around 50% of the DAI backup reserve is based on USDC tokens, as per DeFiLlama.
Peg Stability Module
Crypto analytic firms pointed out that during the period when USDC was facing the threat of de-pegging, the use of PSM was increased. USDC investors were seeking refuge in DAI tokens while hoping to diversify their stablecoin positions.
There are some suggestions that the USDC investors might be looking to switch their whole position on account of the danger of de-pegging of the Circle-issued stablecoin.
The main reason that many USDC investors flocked around DAI is that it has a well-diversified backup that is more stable and reliable. At the same time, when the users were minting DAI against USDC, it allowed them to move from one stablecoin to another without losing access to both. To remedy the issue of an unwarranted increase in the supply of DAI tokens, the project has decided to reduce the amount of DAI that was minted out of PSM.
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