MakerDAO founder proposes converting $3.5B USDC reserve to Ethereum

MakerDAO (MKR) founder Rune Christensen has asked DAO members to consider converting its $3.5 billion USDC reserves to Ethereum (ETH) because of the extent of the Tornado Cash sanctions.

MakerDAO is considering a $3.5 billion ETH market buy, converting all USDC from the peg stability module into ETH.

— banteg (@bantg) August 11, 2022

Christensen made this suggestion via the DAO Discord group stating that additional research has shown him that the consequences of Tornado Cash sanction are more severe than initially thought.

rune: we should seriously consider depegging from usd pic.twitter.com/HBMrPH7LrW

— banteg (@bantg) August 11, 2022

“I think we should seriously consider preparing to depeg from USD. It is almost inevitable it will happen and it is only realistic to do with huge amounts of preparation.”

Meanwhile, Christensen later clarified that he intended a “partial Yolo” in which Maker buys ETH with some of its USDC collateral. He believes it is an option worth considering following the Tornado Cash embargo.

Yes, I think slowly DCA’ing some collateral into ETH is an option that can be considered depending on the severity of the blacklisting risk, which I personally think is much higher after the TC blacklist… it would exchange blacklist risk for depeg and haircut risk

— Rune (@RuneKek) August 11, 2022

Circle blacklist function fears

With about 40% of DAI reserve held in USDC, the protocol fears a situation where it could be affected by Circle’s sanctions.

In light of the recent blacklistings of USDC addresses there is no surprise that they're considering de-risking and decentralizing by dumping their USDC holdings

Their potential approach of YOLO buying $3.5B worth of ETH seems crazy though

— Lucky (@Lucky_2147) August 11, 2022

However, converting $3.5 billion worth of its reserves into Ethereum also presents a risk of DAI de-pegging from USD — given the volatile nature of ETH and other cryptocurrencies.

Circle had blocked the 44 wallets sanctioned by the US Office of Foreign Assets Control.

The stablecoin issuer conceded that its action was against the ethos of an open internet. However, it had to make a move to comply with existing laws.

Crypto community compares the idea to Terra

Crypto community members are already comparing MakerDAO’s idea to Terra ecosystem Bitcoin (BTC) purchase.

if true, this is Do Kwon level

you don't announce a buy like this and then do it all at once

— DCinvestor.eth ⌐◨-◨ (@iamDCinvestor) August 11, 2022

Remember Terra / ust and btc collateral

— JamieD’s BitcoinFraud (@ElPako81465943) August 11, 2022

pic.twitter.com/i69urmdqGH

— Dylan LeClair (@DylanLeClair_) August 11, 2022

Why does this immediately remind of when and where (price action wise) of LFG's BTC purchase?

— Tasal (@0xTasal) August 11, 2022

Buterin rejects the $3.5B ETH purchase idea

Ethereum co-founder Vitalik Buterin does not think Maker’s idea is good. According to Buterin, it “seems like a risky and terrible idea” because it places the whole system at risk, especially if the value of ETH drops.

Errr this seems like a risky and terrible idea. If ETH drops a lot, value of collateral would go way down but CDPs would not get liquidated, so the whole system would risk becoming a fractional reserve.

— vitalik.eth (@VitalikButerin) August 11, 2022

Instead, Vitalik suggested a diversification of stables as collateral. According to him, non-ETH collateral should not exceed 20% of the total or possibly limit the collateral to a maximum of 20% in each jurisdiction.

Personally I think no single type of non-ETH collateral should be allowed to exceed 20% of the total. Maybe even limit to max 20% in any single jurisdiction.

And if you can't do that, put a limit on DAI's growth (eg. by adding a negative interest rate) until you can.

— vitalik.eth (@VitalikButerin) August 11, 2022

Buterin continued that the reserve diversification could be “19% USDC, 19% some euro thing, 19% something out of Singapore?”