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digital daily: Survival

Surviving is alpha. The lesson isn’t subtle in digital asset markets, with protocols and intermediaries having gone from visionaries to extinction in short order. But surviving isn’t enough. Take MakerDAO, the highest valued DeFi protocol in the digital ecosystem. Maker worked in the downturn. Its math-based Dai stablecoin held a 1:1 peg to the US dollar with austere risk management algorithms and a dynamic governance structure. Proposals and votes are available for all to see. Maker “working” meant cannibalizing its short-term book of business for its long-term survival – there was a rapid liquidation of collateral and loans to protect capital. January 2022 revenues were a record, led by one-time liquidation income. Ether and Bitcoin were more than 50% of MakerDAO collateral assets at the start of the year; they are less than 25% now, with fiat-based stablecoin playing a greater role. A smaller loan book, larger capital buffers, and lower-risk collateral have all challenged the business. Maker is on track for its fourth-consecutive loss in October. And its future state of being is called into question by the regulatory environment. When the US Treasury's Office of Foreign Assets Control targeted Tornado Cash in August, tens of thousands of USDC stablecoin wallets were elected to be frozen. This poses an untenable risk to MakerDAO. USDC is a material part of its collateral. The inability to liquefy that collateral means the 1:1 peg of its Dai stablecoin to the US dollar cannot be ensured. Wholesale changes to the protocol’s architecture – including a move away from a strict USD peg to other real-world assets – are under consideration. MakerDAO survived. It now confronts an existential battle of whether decentralized finance can scale into the regulatory mainstream at all.