MakerDAO, the protocol behind the decentralized stablecoin DAI, intervened and saved its stablecoin from de-pegging following the collapse of Silicon Valley Bank (SVB).
The failure of the tech lender significantly affected Circle’s fiat-backed USDC. DAI fell to as low as $0.88 versus the dollar on March 11 before recovering to trade at $0.99 on March 13.
MakerDAO Implements Emergency Measures
Over the weekend, the Risk Core Unit of MakerDAO submitted an emergency proposal for an Executive Vote to limit MakerDAO’s exposure to “impaired” stablecoins and reinforce the DAI peg. The majority of the community backed the proposal, with 88,767 supporters in approval. Only 47 MKR holders were against this idea.
To address the uncertainty surrounding the centralized stablecoin market, the Risk Core Unit has submitted an emergency proposal for Executive Vote to limit Maker’s exposure to impaired stablecoins and reinforce the DAI peg.
— Maker (@MakerDAO) March 11, 2023
The proposed changes include reducing the daily mint limit (gap) to 250 million DAI and increasing the USDC to DAI swap fee (tin) to 1% to discourage swapping USDC for DAI via the PSM. The PSM is a Maker Vault that maintains 100% collateralization and a 0% stability fee. Reducing the gap parameter from 950 million DAI to 250 million DAI will reduce daily minting limits to 250 million DAI.
Within 24 hours, 736 million DAI were minted through USDC using PSM, and the net supply for DAI increased by 296 million. The increase in the tin parameter prevents excessive dumping of USDC into the PSM, incentivizing users to dispose of USDC via other methods and ensuring it is only used if the DAI price significantly diverges upwards.
In the last 24 hours, a total net of 736 million DAI has been minted against USDC through the PSM.
→ https://t.co/brBzEorsc1 pic.twitter.com/LagDeVBKU0
— Maker (@MakerDAO) March 11, 2023
In addition to limiting Maker’s exposure to potentially impaired stablecoins, the proposed changes aim to maintain enough liquidity to prevent DAI from trading significantly above $1 if conditions change. It also ensures adequate market liquidity to process potential liquidations of crypto-collateralized vaults.
Limiting Exposure To Protect DAI Peg
The proposed changes are not restricted to USDC. It would also affect the PSM-GUSD-A gap, which was reduced from 50 million to 10 million DAI to limit potential losses if Gemini faces contagion risk from its bank deposits.
On the other hand, with Paxos Dollar, USDP, the maximum debt ceiling line was increased to 1 billion from the current 450 million in PSM-USDP-A. Meanwhile, the PSM-USDP-A gap increased from 50 million to 250 million DAI. This proposal enables Paxos to provide necessary backstop liquidity to prevent DAI from trading over the $1 target price. Subsequently, this cushions against any impact on liquidation safety in the event of a crypto market crash like it did happen last week.