Terra’s foremost leader, Do Kwon, once said that “By my hand, $DAI will die.”
Ironically, it is $UST that is dead. And $DAI? Well, they’re reaping the benefits of its death.
For the unacquainted, $DAI is a stablecoin — just like $UST was supposed to be. However, unlike $UST, $DAI is backed by real assets.
$DAI is the brainchild of MakerDAO, which was one of the earliest DAOs formed in the world of crypto. In December 2017, MakerDAO launched $DAI on the Ethereum mainnet — making it one of the first DeFi apps on Ethereum, as well as one of the first DAOs and dapps on the chain.
In the modern crypto ecosystem, projects and protocols resembling MakerDAO’s foundational product are not uncommon. Dozens of stablecoins and lending/borrowing products are modeled after the $DAI ecosystem. However, many new crypto natives are unaware of the outsized impact that they had on the scene.
That’s why MakerDAO being back on top of the crypto TVL leaderboard is a pleasant surprise for long-term believers (and especially for long-term HODLers of the DAO’s $MKR token.) According to DeFi Llama, MakerDAO is once again on top. It boasts a TVL of $10.5 billion as of this writing. Thanks to this newfound leader status, $MKR became the only asset in the top 100 cryptos that is up on the week.
So, what does that mean? Well, it means that $DAI is sitting on $10.5 billion worth of deposits — which span asset types such as Ethereum, USD Coin, Uniswap, and Wrapped Bitcoin to name a few. Users deposit these assets into a vault to create something called a Collateralized Debt Position — which is just a semantically fancy way of saying that investors are creating “a loan against their crypto assets.”
As you’ve probably guessed by now, that loan is handed to the investor in $DAI, which is minted against a portion of the value of those deposited assets.
The loan is unlike a loan you would get on your car or house — that’s considered “unsecured credit.” Instead, in the world of $DAI, the borrowing you’re doing is a form of “secured credit.” That’s because you can only take out a portion of the value of the assets you’ve provided. If the value of the asset you’ve borrowed against falls below a certain price, a portion of it will be sold to cover the debt you borrowed from Maker.
As you’d expect, MakerDAO charges an interest rate — and it also has different rules (e.g: the liquidation ratio) for different collateral types, which are set in-part by the volatility and “predictableness” of the asset. You can see the finer points of the asset types on MakerBurn, a platform which shows various stats on the Maker-$DAI ecosystem.
Maker’s serendipitous hip and hop to the top is no coincidence given the timing of the Terra-$UST collapse. In fact, it’s almost certainly the cause: whereas $UST was backed using an algorithm and the value of various assets, $DAI has been built to last.
That’s one sign that investors might be shifting away from algorithmic stablecoins in the vein of $UST and headed towards decentralized alternatives which are sitting on assets of real value.