- MakerDAO has approved plans to make a big bet on USDe.
- The move comes days after an initial $100 million DAI move.
- The MakerDAO move comes despite pushback from members of the crypto community.
Since breaking into the scene in February 2024, Ethena Labs’ “synthetic dollar” offering USDe has garnered significant attention and adoption, largely driven by its high yield and the promise of airdrops. This raging interest shows no signs of slowing and has not been doused by concerns over the stablecoin’s backing mechanism.
In the latest instance, MakerDAO, the decentralized autonomous organization (DAO) governing the DAI, the largest decentralized stablecoin, has approved plans to back about $1 billion in DAI with Ethena’s USDe and sUSDe despite significant pushback from the broader crypto community.
MakerDAO Approves up to $1B DAI Allocation to USDe Pool
On Monday, April 8, MakerDAO disclosed that it had passed a proposal to allocate up to $1 billion in DAI to its USDe and sUSDe paired lending pool on Morpho Blue, up from an initial $100 million on March 29. Following the approval of the proposal, MakerDAO SubDAO Spark has disclosed that $100 million from this tranche has already been allocated to the pool with a recommended maximum infusion limit of $600 million “for now.”
The $1 billion DAI allocation comes from DAI’s Direct Deposit Module (D3M), a tool MakerDAO uses to manage lending rates on decentralized lending protocols by reducing or increasing the DAI supply to protocols. As a result, the D3M can be used to manage DAI’s collateral exposure, in this case towards more USDe, in light of the high demand and yield opportunities.
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MakerDAO lists BlockTower Capital Advisors as arrangers, Coinbase as the custodian, and Ankura Trust Company as the paying agent in its big USDe bet.
The MakerDAO move comes despite significant pushback from many in the crypto community who have highlighted potential risks.
MakerDAO’s USDe Bet: A Risky Move?
Many in the crypto community have described MakerDAO’s USDe move as aggressive and reckless. These criticisms come amid concerns over the sustainability of USDe’s backing model.
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Unlike traditional decentralized stablecoins, which utilize an overcollateralized model to hedge against crypto volatility, USDe users can mint 1 USDe for 1 ETH. How, then, does USDe maintain its peg when the price of ETH fluctuates? Ethena Labs opens short ETH futures positions on centralized exchanges to correspond to user deposits.
Through this model, Ethena Labs asserts that it could scale beyond most overcollateralized stablecoins. At the same, it can earn high yields due to positive funding rates, which it shares with users who agree to lock up their tokens. At the time of writing, this yield sits at 37.1%.
While Ethena’s USDe model appears to be working perfectly now, several analysts have argued that it is unlikely to hold up in a bear market where funding rates turn negative. In perpetual futures markets, funding rates are fees exchanged between short and long positions to incentivize market participants to drive the futures price down or up to the spot market price.
In the current bull market conditions, futures prices tend to exceed the spot price. As such, longs typically pay fees to shorts like Ethena to incentivize the selling of futures contracts to bring the futures price down to the spot price. In the reverse, however, Ethena will have to pay fees to longs.
At the same time, analysts have questioned what would happen if the centralized trading venues used by Ethena Labs collapsed during an extended bear market. Despite these fears, some contend that USDe’s high yields are too good to pass up in the near term due to concerns that may be far-flung.
In response to MakerDAO’s plans, however, Aave has reduced its DAI exposure, citing contagion fears in the event of a USDe collapse.
On the Flipside
- In just over a month of its launch, USDe has amassed $2.3 billion in market capitalization.
Why This Matters
DAI is the most widely used decentralized stablecoin. MakerDAO’s decision to back $1 billion in DAI with USDe could have broad implications for DeFi.
Read this for more on MakerDAO’s USDe move:
MakerDAO Bashed as “Reckless” for Planned $1B DAI Bet on USDe
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