Thursday, December 8, 2022

Maker DAI Is Thriving After Terra’s Collapse, Why?

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Maker DAI is thriving after Terra’s collapse with UST biting the dust and USDT briefly losing its peg but not DAI. So what happened? Let’s find out in our latest cryptocurrency news.

It’s been wild on the crypto market recently and nothing has been worse than the collapse of Terra’s UST stablecoin which is now trading at about 6 cents. As the dust settled, things are not looking great for other stablecoins as well. Circle’s USDC seems to have come out as a key winner among the top stablecoin and as per the data from CoinMarketCap, the market’s second-biggest stablecoin increased from $48 billion to more than $53 billion today. The story looks quite different for Tether, however.

Over the same timeframe, USDT’s market cap dropped from over $83 billion down to $73 billion and there are 73,28 billion USDT in circulation. USDT also lost its dollar peg and dropped as low as $0.95 so this ticked a possibility for confusion with UST contributing to the billions of dollars in redemptions because of the drop in the market cap. The redemptions refer to any time a USDT holder requests to swap their holdings for the traditional dollar and investors were eager to do exactly this. Tether’s  CTO Paolo Ardoino said that the company redeemed $7 billion in 48 hours.

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As the centralized stablecoin giants managed it out, the maker DAI stablecoin was the first and biggest stablecoin that actually did better. Unlike USDC and USDT which are managed by centralized companies and collateralized by traditional financial assets, DAI is backed by cryptocurrencies like USDC, Ethereum, and Wrapped bitcoin. The market protocol manages DAI and leverages smart contracts whcih liquidate the debt positions which fall below the loan to value ratio. For each $1 of DAI minted on Maker, you would have to deposit $1.70 worth of ETH and if this ratio comes out of whack because of a price drop in the ETH Deposited, then you would need to top out the collateral position, or risk getting liquidated.

Despite DAI’s mechanism’s ability to navigate the market volatility and 257 liquidations in the past two weeks, it wasn’t the main choice for the investors last week. The charts show a steep drop off similar to the USDT move but DAI found a floor of sorts. Another key piece of data shows that at least some investors are buying up tons of DAI with a premium emerging amid the collapse of the UST. USDC, Binance, and DAI all enjoyed a 1% to 2% premium as the demand for each of the tokens increased dramatically.

While everyone is sounding the alarm on stablecoins, DAI survived and it didn’t fall apart due to the harsh volatility.

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