- MKR, the governance token of the Maker protocol, has risen 11% Tuesday.
- Maker appears to be benefitting from UST’s recent de-pegging event which saw the dollar pegged asset slip to lows of $0.66.
- Maker’s price jump may indicate that for some investors, the safety of DAI is preferable to the increased risk of holding UST.
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Maker is one of only a handful of crypto assets in the green today. The protocol behind the DAI stablecoin appears to be benefitting from the downfall of its closest competitor—Terra’s UST.
Maker Defies the Market
As UST struggles to regain its peg and LUNA plummets, one token is climbing higher.
MakerDAO’s MKR token is up 11% today, standing out as one of only a handful of crypto assets to register gains amid a turbulent market. The early DeFi asset’s rise comes as its largest competitor, Terra’s algorithmic UST stablecoin, has been struggling to maintain its dollar peg. UST dropped as low as $0.62 on Binance Monday following another depeg event over the weekend and subsequent emergency plan from the Luna Foundation Guard to deploy $1.5 billion to market makers to protect the stablecoin’s peg. Although it’s slightly recovered in the last few hours, it’s not yet returned to $1 at press time.
Maker is an Ethereum-based DeFi protocol that lets users mint a decentralized stablecoin called DAI. Users can lock up a range of volatile assets such as Bitcoin, Ethereum, or liquidity positions on other protocols such as Curve to mint DAI stablecoins. All DAI loans must be overcollateralized, with the ratio varying depending on the deposited asset.
Maker is seen as one of DeFi’s most powerful projects as it allows users to unlock liquidity while maintaining exposure to the assets backing the DAI loan. If positions ever fall below collateralization thresholds, Maker liquidates the positions. Because all DAI in circulation is overcollateralized, DAI has maintained its dollar peg even during periods of extreme volatility.
Over the past year, DAI has steadily lost market share to Terra’s UST stablecoin. Instead of achieving its dollar value by collateralizing other assets, UST algorithmically maintains its peg, relying on market forces to dictate its price. One of UST’s core value propositions is Terra’s biggest DeFi application, Anchor Protocol, which pays UST holders a yield rate of about 18% APY to lend out their stablecoins to other users. Terraform Labs, the company behind Terra and UST, partly subsidizes the Anchor yield rate, which has raised concerns about the Terra ecosystem’s degree of centralization in the past. Nonetheless, Anchor’s lucrative yields have caused demand for UST to soar in recent months, leading the amount of UST in circulation to surpass DAI in late 2021.
The competition between DAI and UST has been fierce. Prior to Terra’s recent downfall, Terraform Labs CEO Do Kwon had previously mocked DAI during UST’s rapid ascent. “By my hand $DAI will die,” he tweeted on Mar. 23. Now, in the aftermath of UST’s recent depeg event, it appears DAI and Maker are instead benefitting UST’s expense.
Whether UST will be able to regain its dollar peg is not yet clear. Even if it eventually does, Anchor’s yields may not be enough to offset the risk of another de-pegging event in the future. Maker’s price jump may indicate that for some investors, the safety of DAI is preferable to holding UST.
Disclosure: At the time of writing this piece, the author owned ETH, LUNA, and several other cryptocurrencies.