Maker DAO’s Existential Crisis – by Donovan Choy

It’s once in a lifetime. Celebrate the merger with a special ConsenSys NFT coin.🥳🎊

Celebrate the merger. Create a merge NFT.

dear bankless nation,

Here is a roundup of the biggest crypto news in the first week of September.

There is a nifty taxonomy for stablecoins that cryptanalysts like to use: 1) Fiat-backed stablecoins (We don’t like these because regulators can censor them); 2) Crypto-backed stablecoins (We like these because they are uncensorable); and 3) Algorithmic stablecoins (who fell out of favor with Terra’s crash).

The Maker’s stablecoin DAI is coupled to the “decentralized” stablecoin bucket as it is crypto-secured. But as they often say, decentralization is a spectrum and DAI is also backed by centralized stablecoins like USDC.

Source: Daistats, as of September 3, 2022

Now, DAI is still powered by smart contracts on the blockchain and is transparent, making it partially centralized or partially decentralized depending on whether you’re a glass-half full or glass-empty person.

Does the DAI make it good or bad? There are two types of reactions you can have at this point, depending on what hat you’re wearing.

The first is to put on a philosopher’s hat and do full moo decentralization. And indeed, this hat is easy to wear. There are many decentralized stablecoins to refer to, for example Reflexer Finance’s free-floating RAI, which is purely crypto-collateralized and not tied to the USD. But philosophers fail to think empirically and forget RAI’s circulating supply of 5.2 million is a handout from DAI (6.5 billion). So while RAI is close to crypto’s decentralized ideals, it doesn’t have the same scalability issues as Maker and doesn’t achieve user adoption at the same levels, which, um, is the whole point.

The second reaction to the partial centralization of DAI, of course, is to wear the pragmatic hat that prioritizes growth and user adoption over onerous, abstract philosophical ideals (until, of course, regulators remind you). DAI’s partial centralization is unfortunate, but it’s still a relative improvement over fiat money, which is good and is what brought us to crypto to begin with.

As usual, difficult trade-offs arise. Pragmatists want to grow, but that requires sacrificing decentralization. Philosophers want to maintain trustlessness and decentralization, but that comes with less scalability. A nice Twitter thread by Greg Di Prisco this week summarizes the various ideological camps that have emerged within Maker’s governance community over the past few months. This compromise is at the heart of the conflicts between these camps.

The indiscriminate and sudden element of the US Treasury Department’s tornado cash sanctions appears to have sparked a community-wide knee-jerk reaction within the maker community – what Jacek Czarnecki complains of being “reactive, ill-informed, sometimes ignorant” – to reconsider its regulatory compliance strategy.

Maker’s existential crisis brings into focus two main centralized vectors that Maker has embraced for the sake of growth over the past year:

1. The first, of course, is DAI’s heavy reliance on USDC collateral. Some context on how we got here: Maker launched its Peg Stability Module (PSM) in early 2021, allowing for the minting of DAI with dollar stable assets. This allows for greater scalability due to the low demand to mint DAI against decentralized collateral like ETH – users want to hold DAI, but they don’t want to short ETH-USD in the process. The downside here is that distrust is sacrificed as centralized USD-pegged assets increase regulatory risk, like Circle’s freeze of 75,000 USDC in OFAC-blacklisted Tornado Cash addresses earlier this month has clearly shown.

2. Second is Maker’s real-world asset (RWA) exposure, which includes secured real estate development loans, tokenized cash flow assets, US Treasury and corporate bonds, and more. The Maker’s RWAs are not trivial ~8-10% of the manufacturer’s annual revenue.

in one bomb thread this week under the title “The path of compliance and the path of decentralization: Why Maker has no choice but to prepare for Dai’s free float”Maker co-founder Rune Christensen proposes a way that will drastically limit its reliance on centralized assets, because well, see what happened to Tornado Cash?

At the heart of Christensen’s decentralized vision of Maker are two primary tools: MetaDAOs and Protocol Owned Vaults (see The Endgame Schedule for more details). A combination of these two tools would effectively reduce Maker’s existing regulatory risk over time and put it on a viable growth path.

1. MetaDAOs (aka Maker subDAOs) can issue their own token that provides users with yield farming rewards and offsets any declining value of a free-floating DAI. The key here is that, despite its free-floating volatility, MetaDAOs, with its heavy bias towards makers, can help stimulate some form of demand for DAI. (Of course, this depends on many unknowns, namely the value of these MetaDAO projects – Why are these MetaDAO tokens valuable for retail? Why should retailers buy them?)

2. Protocol Owned Vaults, on the other hand, is a strategy to capitalize on the Ethereum merger. This sees Maker launching his own version of synthetic ETH that can be used to issue overcollateralized DAI against it while earning the 4-5% annual return on ETH staked. While the merger is set to happen in a couple of weeks, beacon chain withdrawals will only be enabled after the planned network upgrade in Shanghai, which is around 6-12 months after the merger.

Finally, Christensen hangs up a timeline for makers.

Arbitrum this week launched its biggest network upgrade yet, promising lower fees and faster transaction speeds.

To learn more about Nitro, check out this week’s State of the Nation podcast with Arbitrum founders Steven Goldfeder and Harry Kalodner, and check out Ben’s article this week how to be exposed to Arbitrum.

Anonymous whistleblowers claim that Ava Lab’s founders organized a concerted effort with the law firm Roche Freedman to paralyze their market competition through class action lawsuits. You can check those insidious details of this conspiracy story for himself, which Avalanche founder Emin Gün Sirer has vehemently denied.

The largest US crypto exchange dives into the lucrative liquid staking market on the eve of the merger. Coinbase announced this week cbETHits staked ETH derivative token.

The move makes sense for Coinbase, which already accounts for ~15% of ETH2 Beacon chain deposits, compared to 31% for Lido and 5% for Rocketpool. Note, however, that Coinbase’s cbETH staking fee of 25% is significantly higher than that of its competitors Lido (10%) and Rocketpool (15%).

The tornado cash sanctions have recently sparked a flurry of talk about how vulnerable the second-largest blockchain is to censorship. It continues this week as cloud hosting provider Hetzner, which runs 10% of Ethereum threatened with a ban all crypto mining/staking.

vitalics starts a book; sudoswap announces its governance token; optimism Hits All-Time Highs in Transaction Count and Gas Consumption; Facebook and Instagram accelerates NFT integration; Orca Log renamed Metropolis; Michael Sailer is being sued for tax evasion.

Here’s what we have planned for next week.

1. Zooko and Arthur Hayes join us on the podcast!

2. Ben drops his monthly token ratings

3. William shows us how to use DeFi with privacy

Until next week.

– Donovan

🙏 Sponsor: Circle – use code bankless for $100 off Converge22 tickets 👀

🎙️ Listen to the podcast episode | iTunes | Spotify | youtube | RSS feed

1. 📘 A rebuttal by Jordi Alexander & The Merge

2. 📘 The 5 best ways to earn OP with optimism

3. 📘 The decentralized identity revolution

4. 📘 How to expose yourself to Arbitrum

5. 💬 Ever felt like quitting crypto?

1. 📺 Ethereum uncensored with Justin Drake

2. 📺 Objecting to China’s Censorship with Jiajun Zeng | level zero

3. 📺 Arbitrum Nitro Launch with Steven Goldfeder & Harry Kalodner

4. 📺 THE ETHERUM MERGE! Everything you need to know

5. 📺 The Bull Case for Rocketpool starring Marceau & Ken Smith

1. 📘 A new way to sell Metaverse land 🏞️

2. 📘 NFT analysis summary 👁️

3. 📘 On-Chain Games 🕹️

1. 📘 VaynerSports Expands Sports NFT Utility | Decentralized Art

2. 📘 Tokenization | Decentralized Law

3. 📘 The Fusion (Part I) | DeFi download

4. 📘 WildFireDAO sparks a conversation | BanklessDAO Weekly Rollup

1. 📺 DeGods/y00ts, avalanche scandal, FuturePROOF & More with Madi Lieber

2. 📺 Part 2: IP Attorneys Answer Your NFT Questions

1. 📺 The evolution of Chainlink with Sergey Nazarov

2. 📺 Effective altruism with SBF

Bankless Premium members get access to benefits like these:

Start your own sweepstakes for Bankless Badge holders! Continue. We can’t stop you.

Obtain the Bankless Badge

🗞️ Latest Weekly Rollup! Download the week in crypto into your brain in one show.

Listen to the podcast episode | Apple | Spotify | youtube | RSS feed

✨See all offers on the Bankless job board✨

1. Silent Log: Full Stack – Smart Contract Engineer

2. Superform: Senior Backend Engineer

3. Bitgreen: full stack developer

4. Messari: Software Engineer (market data)

5. Messari: software developer (media)

6. dYdX: Software developer (backend)

7. stakefish: HR Business Partner

8. stakefish: Back-End/Full-Stack Software Engineer

9. stakefish: front-end software engineer

10. stakefish: DevOps engineer

11. Bankless: Media Operations

walk bankless. $22 / month. Contains Access to the archive, Inner circle & badge—(pay with crypto)

Come to us converge22Circle’s first annual crypto ecosystem conference September 27th to 30th in San Francisco! Featuring extensive demos and developer workshops, as well as top-notch guest speakers like Vitalik Buterin from Ethereum, Stani Kulechov from Aave, Mary-Catherine Lader from Uniswap Labs, Anatoly Yakovenko from Solana and many more.

Sign up with code Bankless to get $100 off your ticket!

Would like to be introduced on bankless? Submit your article to [email protected]

Write for Bankless

No financial or tax advice. This newsletter is for educational purposes only and is not investment advice or a solicitation to buy or sell any assets or make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.

disclosure. From time to time I may include links to products I use in this newsletter. I may receive a commission if you make a purchase through one of these links. Additionally, the bankless scribes hold crypto assets. See ours Investment information here.

Learn Crypto Trading, Yield Farms, Income strategies and more at CrytoAnswers
https://nov.link/cryptoanswers