Recessionary Endgame

June 13, 2022

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QT <Insert Yawn Here>

June 06, 2022

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Worse than 2008?

May 27, 2022

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G7 Communiqué

May 24, 2022

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digital daily: DeFi’s Dynamism

The weekend sojourn of the USDC stablecoin below par was a tremor at the heart of the DeFi ecosystem. But this tremor was caused by failures in traditional banking, failures swept under the rug last year when the digital ecosystem was tackling its adjustment head-on. The confrontation between DeFi and banking was inevitable given their shared vulnerability to high-velocity US dollar deposits. The absence of knock-on effects to broader crypto asset markets was notable, a reminder that excess speculation has been purged. There was no systemic risk, but there was notable stress. DeFi’s risk management response to last year’s volatility was one root cause to the weekend challenges. It centers on MakerDAO, creators of the DAI stablecoin. Unlike USDC, DAI is an algorithmic stablecoin, largely managed by overcollateralized deposits of ether. Last year was a stress test like none other – and DAI worked. But it came at a material cost. Mass liquidation of ether deposits shattered recurring revenues. To lessen the connectivity of DAI to volatile collateral, MakerDAO relied on its Peg Stability Module. DAI could be bought or sold at a fixed price of one US dollar worth of USDC. But as is often the case, the solution to yesterday’s problem is today’s problem. When USDC stablecoin traded down to $0.88, DAI followed to $0.89. The decline in DAI was greater last weekend than it was in all last year’s crypto carnage. MakerDAO became a dumping ground for USDC where arbitrageurs offloaded over $2 billion. In response, its adaptability was showcased. The stress led to immediate action by MakerDAO to reduce daily minting limits and exposure to other protocols that use a fixed one-dollar price for USDC, like Curve. DeFi’s dynamism was on full display, the dynamism that will drive the ascent of v2.0.