The Battle of the Crypto Banks
A few weeks back we discussed “The clash of the Stablecoin Titans”. That article referenced the impressive emergence of Ethena’s USDe and the competition it could pose to the defacto yield-bearing stablecoin sDAI (issued by Spark/MakerDAO).
While USDe has continued its relentless march upwards (recently breaching 2 billion in total supply), the clash of the stablecoin titans has emerged less so between Ethena and Maker but instead between the two largest Crypto Banks, Maker and Aave...
Via Maker’s DAI Direct Deposit Module to Spark's markets on Morpho Blue, MakerDAO have enabled sUSDe and USDe as collateral for DAI minting. This began as a $100m allocation which was quickly changed to a debt ceiling of $1bn with an initial allocation of $600m as the initial $100m allocation was taken within just a few hours. This debt ceiling puts the total possible exposure to USDe and sUSDe at 20% of DAI supply.
The exposure to USDe and sUSDe is currently quite small given the youth of the Morpho markets but at the limit of 20%, the exposure becomes significant and the DAI risk profile is altered. DAI holders become exposed to Ethena-related risks such as LST peg risk, Custody risk etc. While it is fair to claim that the risk profile is altered, the extent to which it is altered is nuanced...
Despite this there are numerous risk management practices in place on both the Ethena and MakerDAO sides to mitigate against potential losses. Ethena have a large and growing insurance fund ($27.5m). Equally, MakerDAO has a large Surplus Buffer of 61 million DAI, the MKR token backstop and overcollateralisation of the Morpho markets in question. Considering these various risk management factors in place, Ethena would have to sustain very signifiant losses before MakerDAO even begins to take losses to the Surplus Buffer let alone the MKR token backstop.
Meanwhile, by onboarding a form of collateral which gives exposure to the current high funding rate environment, MakerDAO are able to generate higher revenues and build reserves. From my perspective the decision makes sense and concerns about risk are overstated, especially given that the 600m DAI allocation won’t be taken immediately but rather over time in tranches of 100m.
Prominent governance participants of the AAVE DAO (read: Marc Zeller) disagree fervently with this take and deem the risks to be so severe that they propose a delisting of DAI as collateral effective immediately:
The basic logic is that a $1bn debt ceiling to allow DAI minting from “a non-battle-tested” protocol is aggressive and reflective of a “hands off risk management ethos and no safety module risk mitigation feature”. Given my commentary above I feel as though this is somewhat overstated, surely there is a happy medium which does not involve completely delisting DAI as collateral - the proposal does beg the question of whether there is some deeper political game in motion. Stani also came out in support of the decision:
Ultimately whether the decision to “minimize potential risks associated with the DAI stablecoin issuance policy” is truly risk-driven or politically-motivated is unknowable but it is certainly a shame to see DeFi legos being deconstructed on the Aave side. Equally, it is encouraging to see the dynamism on display from MakerDAO - adapting quickly to emerging collateral types to maximise revenue generation and DAI yields.
For further reading, I recommend Sébastien Derivaux’s Money view of the MakerDAO/Morpho/Ethena drama.
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