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DAI was flawed from the beginning says DeFi founder

Press Releases Crypto News Crypto-News DAI was flawed from the beginning says DeFi founder

Andrey Shevchenko — the founder of decentralized finance (DeFi) protocol Zircon Finance — shared his view that MakerDAO’s (MKR) so-called “decentralized stablecoin” DAI’s (DAI) introduction of USD Coin (USDC) as collateral was an attempt to plug a hole in a flawed system.

In its original state, DAI was only backed by ethereum (ETH) which was on-chain meaning that the stablecoin’s backing was decentralized and the only centralized point of failure were the oracles providing the ETH-USD price.

While the DAI whitepaper published back in late 2017 mentioned that the stablecoin would soon see more collateral types be added, there is no mention of centralized-collateral tokens.

Shevchenko pointed out that in its first stage, DAI was unstable and reached about 8% discount compared to the U.S. dollar in 2019 then after so-called black Thursday it instead traded at a premium.

He explained that this is when USDC was introduced as a collateral option for minting DAI and it was hardcoded in a way that made one USDC equal to one DAI through the so-called “peg stability module.” This ensured price stability for DAI.

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The founder argued that the system is fundamentally flawed since DAI is created when users want to increase their exposure to crypto through margin, which means that there is little incentive to issue the stablecoin during bear markets.

Another factor he highlighted is that DAI issuance does not include an arbitrage mechanism, which means that it cannot be withdrawn unless you issued tokens yourself. While USDC solved the problem, it introduced a new set of issues.

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Author: Adrian Zmudzinski

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