Decentralized finance (DeFi) has been one of the used buzz-words within the crypto trade final yr. The rise of purposes constructed on the Ethereum network was adopted by an equally excessive rise of the expectations folks had from the newly created trade—a decentralized reply to the issues with the present monetary system.
One of many tasks which have led the DeFi evolution was MKR, a undertaking that used Ethereum’s native cryptocurrency ether (ETH) to again a stablecoin that would facilitate quick cash transfers and varied different monetary purposes.
Nonetheless, one analyst believes that MKR and its DAI stablecoin shouldn’t be the DeFi darling that it’s, because it poses an enormous risk to your complete DeFi ecosystem. Adam Cochran, a professor of knowledge science at Conestoga School and companion at Metacartel Ventures, stated that DAI has gone astray up to now yr and laid out several reasons for this.
Firstly, he stated that the majority DeFi protocols rely, at the least considerably, on all the tokens of their system not breaking, which signifies that they should switch correctly, be really price their worth, and are available from a trusted origin. This is applicable to Compound, Fulcrum, SET, Aave, Uniswap, and all different related protocols that depend on collateralization or liquidity pooling.
Nonetheless, the interconnectedness of DeFi purposes has induced them to behave extra like a home of playing cards as a substitute of a layer of structurally sound blocks, Cochran defined.
“This connectivity is our greatest profit and our best danger,” he stated.
As there’s no card that seems in additional DeFi merchandise than DAI, it turns into clear that it sits on the base of a lot of the ecosystem.
This wasn’t that massive of an issue for many, Cochran stated till DAI started exhibiting very critical vulnerabilities. The primary drawback he highlights is the truth that DAI isn’t really ruled by all MKR holders, however slightly a small group of highly effective entities—the MakerDAO group, MKR, and enterprise capital agency A16z led by Andreessen Horowitz. Cochran identified that the highest 50 pockets addresses have greater than 50 p.c of all voting authority within the protocol.
Due to this fact, with the vast majority of the vote belonging to a number of main entities, its customers can’t depend on them doing what’s greatest for the system. Cochran stated that the MakerDAO group had a historical past of withholding precious data from the general public, in addition to forcing out a lot of its executives attributable to “directional variations.”
Aside from that, the corporate secretly tried to trademark the time period “DeFi,” which Cochran believes was the ultimate nail within the coffin for MKR governance. He defined:
“DAI is just not decentralized, as a result of MKR is just not decentralized. MakerDAO makes the choices, and it’s clear they’ve a historical past of constructing unhealthy ones.”
All of this results in Cochran’s last level, which is MakerDAO’s plan to modify from a single-collateral DAI to a multi-collateral DAI. Which means that as a substitute of simply ETH backing the coin, DAI shall be backed with a basket of various ERC-20 tokens. This main resolution was made by solely 54 folks, as that they had the vast majority of the voting energy on the community—these 56 folks solely represented 7.56 p.c of the full MKR circulating provide.
It’s attention-grabbing to notice that 100 p.c of votes had been in favor of the choice.
For now, this basket solely contains the Fundamental Consideration Token (BAT) and USDC, however the checklist may very well be expanded to incorporate extra property with ease. Cochran wrote:
“These property had been added with out massive wallets voting, however what occurs when a16z decides that one of many tasks they’ve invested in ought to change into a part of the MCD? They vote for it, they put stress on MKR to vote for, and different traders comply with swimsuit.”
Due to this fact, DAI has the potential to change into an extremely dangerous basket of property, which might take your complete DeFi ecosystem down with it if it experiences even the slightest volatility.
