MakerDAO mulls over an emergency proposal to lower exposure to USDC

MakerDAO mulls over an emergency proposal to lower exposure to USDC

MakerDAO, one of the leading decentralized finance (DeFi) platforms, is currently discussing an emergency proposal aimed at addressing its $3.1 billion exposure to USDC stablecoin. The proposal, which was brought before the community on March 11, came on the heels of the depegging of the USD Coin stablecoin that began on March 10.

MakerDAO, also the issuer of the U.S. dollar-pegged Dai stablecoin, argues that the recent collapse of crypto-friendly banks Silvergate and Silicon Valley Bank could have an adverse effect on centralized stablecoins due to their “high exposures to impacted banks.”

The emergency proposal, titled “Risk and Governance Parameter Changes,” recommends several measures to mitigate risks to the protocol. Firstly, the group will consider reducing the debt ceiling of UNIV2USDCETH-A, UNIV2DAIUSDC-A, GUNIV3DAIUSDC1-A, and GUNIV3DAIUSDC2-A liquidity provider collaterals to zero. There is an argument that these LP collaterals are susceptible to a potential USDC tail risk.

A second proposed line of action is to lower the daily minting limits of the protocol’s USDC peg stability module (PSM) from a current 950 million DAI to 250 million DAI while increasing the fee from 0% to 1%. The increase in fee is expected to prevent excessive dumping of USDC into the PSM. Meanwhile, although the GUSD stablecoin module has not had any direct exposure to the banking crisis, the DAO is looking to also reduce its daily minting limit from 50 million DAO to 10 million DAI.

Other proposed solutions include temporarily eliminating exposure to DeFi protocols Curve Finance and Aave, as well as increasing the protocol’s debt ceiling for the Paxos Dollar (USDP) stablecoin from 450 million DAI to 1 billion.

Paxos has relatively stronger reserve assets versus other available centralized stablecoins, consisting primarily of U.S. treasury bills, reverse repurchase agreements collateralized by U.S. treasury bonds. They face relatively lower potential for impairment versus other available stablecoins.

Trouble began on Saturday morning after Circle revealed that about $3.3 billion worth of funds used to collateralize the USDC stablecoin was stuck in the now-defunct Silicon Valley Bank. USDC plunged to around $0.9025, losing its peg to the U.S. dollar. However, as of press time, the stablecoin was trading at $0.99 after news broke that its USDC reserves will be fully available when the bank resumes on Monday.

It is currently unclear whether MakerDAO will follow through with the emergency proposal.

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