Ethereum Founder Kicks MakerDAO Proposal to Use Ethereum As Major DAI Collateral

Ethereum founder Vitalik Buterin says using ETH as the main collateral for DAI is a terrible idea.

With MakerDAO’s founder, Rune Christensen proposing that its stablecoin – DAI – may be collateralized by ETH, Vitalik Buterin, the co-creator of Ethereum, is strongly against the move. 

According to Yearn Finance core developer @banteg, MakerDAO is considering converting $3.5 billion worth of USDC to Ethereum (ETH). 

“MakerDAO is considering a $3.5 billion ETH market buy, converting all USDC from the peg stability module into ETH,” @banteg tweeted. 

MakerDAO is considering a $3.5 billion ETH market buy, converting all USDC from the peg stability module into ETH.

— banteg (@bantg) August 11, 2022

MakerDAO believes the move will help it move away from heavily using a centralized asset like Circle’s USDC as collateral for DAI stablecoin. 

Buterin and MakerDAO Community Against the Proposal

However, the proposal to depeg DAI stablecoin from the U.S. dollar has been heavily criticized by members of the MakerDAO community. 

They fear a repeat of the Terra incident, which could be disastrous not only to the MakerDAO ecosystem but to the entire crypto market. 

Interestingly, Buterin also thinks using ETH as collateral for DAI is a terrible idea. Per Buterin, DAI may lose its collateral value if the price of ETH coin drops massively. 

Errr this seems like a risky and terrible idea. If ETH drops a lot, value of collateral would go way down but CDPs would not get liquidated, so the whole system would risk becoming a fractional reserve.

— vitalik.eth (@VitalikButerin) August 11, 2022

Ethereum Co-Creator Proposal to Rid MakerDAO’s USDC Dependence

Additionally, Buterin proposed that MakerDAO can proffer solutions to its USDC dependence issue by placing a max limit on non-ETH collateral. 

“Personally, I think no single type of non-ETH collateral should be allowed to exceed 20% of the total. Maybe even limit it to max 20% in any single jurisdiction,” he said. 

Buterin further added that MakerDAO might consider distributing DAI collateral into different assets. 

“19% usdc, 19% some euro thing, 19% something out of Singapore?”

Why MakerDAO Wants to Convert Its USDC Funds to ETH

Recent developments in the cryptocurrency market have prompted Christensen to consider moving away from USDC as DAI collateral and converting its existing USDC holdings to ETH. Thus, making Ethereum the major collateral of DAI stablecoin.

Following the OFAC sanction of crypto mixer Tornado Cash and the subsequent freezing of funds sanctioned by Circle, MakerDAO expressed concerns over its heavy dependence on Circle’s stablecoin USDC.  

It is noteworthy that over 50% of MakerDAO stablecoin is collateralized by USDC. Based on this, Christensen fears that if its USDC address is sanctioned and Circle is forced to freeze the funds, the DAI stablecoin may lose its peg to the dollars. 

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