MakerDAO Endgame Tokenomics Attracts LUNA, UST Comparisons – Here’s Why

Correction: The article now clearly indicates that users can not currently borrow DAI against any MKR asset unless the proposal passes as it is.

The monumental restructuring proposal by the MakerDAO co-founder continues to attract criticism.

An excerpt from the MakerDAO Endgame tokenomics has caused a stir on crypto Twitter today, attracting comparisons to the mechanism many believe led to the downfall of the Terra ecosystem.

PaperImperium, a pseudonymous crypto Twitter account dedicated to happenings in decentralized finance, drew attention to a part of the document today, which discloses that users could borrow DAI on their delegated MKR tokens should the proposal pass as it is. PaperImperium expressed the view that MakerDAO risked repeating the mistakes of the last market cycle.

It’s devastatingly disappointing to see @MakerDAO’s co-founder pushing this plan. It’s as if nothing was learned this cycle. pic.twitter.com/XQq8NydHqb

— PaperImperium (@ImperiumPaper) February 23, 2023

The pseudonymous DeFi commentator posited that in the event of a liquidation spiral, delegated tokens would come back into circulation, tanking the value of MKR and opening up the protocol to attacks from malicious actors who can easily hijack governance, citing the Mango DAO attack. In addition, he points out that in the case of a bad loss, it is DAI holders that suffer, as a part of the documentation reads:

“Additionally, Maker Governance may now opt to interrupt the automatic use of MKR as a backstop for Dai value in the event of bad debt in the Maker Protocol. Instead, Maker Governance may choose to modify Dai’s Target Price, resulting in a loss of value for all Dai holders.”

Pundits like BitMEX’s Arthur Hayes have compared the feature to the Terra ecosystems backing of TerraUSD (UST) with LUNA, which through a mint and burn mechanism, saw the minting of excess LUNA as UST lost its peg leading to a death spiral. Others have described it as a potential exit liquidity scam that allows users to exit the ecosystem through DAI without selling their MKR tokens while still having a say in protocol governance.

Meanwhile, not all users are pessimistic, describing comparisons to the Terra Ecosystem as overblown. It is worth noting that, unlike the Terra ecosystem with a mint burn mechanism between LUNA and UST, there is no such mechanism for DAI.

Ignas, a prominent DeFi researcher, asserted that the market cap disparity between DAI and MKR made the perceived risks to DAI small. As explained, DAI’s $5 billion market cap compared to MKR’s $670 million meant that using all the MKR to mint DAI with a 250% collateralization ratio would create only 263 million new DAI.

Dai is a $5B market cap stablecoin and MKR's MC is just $670m.

Assuming a 250% collateral ratio, and if ALL MKR was used to mint DAI, it's just 268m new dai.

Small risk to DAI.

— Ignas | DeFi Research (@DefiIgnas) February 24, 2023

For context, DAI is an overcollateralized stablecoin backed by a mix of fully collateralized centralized stablecoins and other crypto assets like Bitcoin and Ethereum. 

Last year, MakerDAO Co-Founder Rune Christensen posited that in the wake of the Tornado Cash sanctions, it was only a matter of time before government authorities attacked MakerDAO as a decentralized stablecoin. Consequently, he proposed Endgame, a grand restructuring plan to make MakerDAO and DAI more censorship resistant.

The plan proposes to break the DAO into smaller units called MetaDAOs with unique tokens, each with specific goals while introducing a 25% limit on centralized assets backing DAI in addition to negative interest rates. Christensen suggests that DAI holders can yield farm the new MetaDAO tokens as an added incentive.

In total, Christensen’s Endgame consists of 8 proposals. A controversial majority vote in October allowed for these proposals to be introduced for voting. It has faced resistance in the community for several reasons, including the potential to make DAI a free-floating asset unpegged to the dollar.

A MakerDAO communications representative reached out to The Crypto Basic to point out that the Endgame plan remains a set of proposals in the community feedback phase of the governance process and is subject to change. Consequently, as the proposal is yet to pass, users can not borrow DAI against any MKR tokens.

“Currently it is NOT possible to borrow DAI against any form of MKR tokens,” the representative wrote in an email.

At press time, DAI is trading slightly below its peg at $0.9997. DAI Stats data shows about 5.2 million DAI in circulation, backed by assets worth about $6.96 million.

Updated to include comments from a MakerDAO communications representative.