MakerDAO Adopts Contingency Actions to Reduce USDC Exposure

The proposal increases support for the Paxos stablecoin.

MakerDAO, the issuer of the DAI stablecoin, will implement emergency governance actions on Tuesday to de-risk the protocol against USDC after bank failures highlighted the risk of centralized stablecoins over the past week.

MakerDAO has lowered the debt cap on USDC liquidity pools to 0, meaning liquidity providers cannot borrow DAI against these pools. The governance proposal behind the changes was released and passed on Saturday after the USDC suffered a heavy beating.

“The proposed changes are intended to limit the Maker’s exposure to potentially impaired stablecoins and other risky assets,” the proposal reads.

Centralized Risk

The move highlights the risk of backing stablecoins with assets that need to be held with banks. In that case, USDC slipped below its peg over the weekend after its issuer Circle said it owns about 8% of the assets backing it at Silicon Valley Bank, which failed on Friday. USDC, in turn, accounts for 40% of DAI’s collateral.

Maker reduced the debt cap on four Uniswap vaults backing USDC to 0 because “this collateral is exposed to potential USDC tail risk,” the proposal reads. The move would effectively reduce the amount of USDC used to collateralize DAI.

Extension of Paxos support

While reducing USDC exposure, the protocol expanded support for Paxos’ USDP stablecoin, raised the debt ceiling on its USDP vault to 1 billion from 450 million, and cut USDP swap fees from 0.2% 0%

The proposal argued that compared to other centralized stablecoins, Paxos has stronger reserves composed of U.S. Treasury bills, reverse repurchase agreements backed by U.S. Treasuries, and insured bank deposits, with a relatively small proportion of uninsured bank deposits.

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GUSD exposure reduction

The opposite is true, according to the proposal for Geimini’s stablecoin GUSD, which argues that Gemini “has a large uninsured bank deposit exposure that could potentially be associated with vulnerable institutions.” To limit potential losses, Maker is reducing the Mint daily limit on GUSD from 50M DAI to 10M Dai.

The proposal also aimed to limit the potential for DAI to trade above its peg by lowering the daily coin limit on the stablecoin from 950 million to 250 million and increasing USDC exchange fees from 0% to 1% to make it more expensive for investors to offload their USDC for DAI.

Finally, the proposal also advocated temporarily withdrawing all funds from Aave and Compound to reduce overall risk.