Could Terra’s New Curve Pool Kill MakerDAO’s DAI?

Terraform Labs CEO and founder Do Kwon has gone on an open offensive towards MakerDAO’s DAI, vowing to starve the competing stablecoin from liquidity and overthrow it for good. Will he succeed? 

Terra to Launch an Open Offensive In opposition to DAI

After UST’s market cap grew to nearly twice its measurement, Terra is getting ready to ship one other blow to MakerDAO’s DAI.

“By my hand $DAI will die,” Terraform Labs CEO and founder Do Kwon tweeted on Mar. 23. Per week later, he adopted by way of on his open-ended menace by introducing the so-called “4pool.” The proposed pool would take the type of a liquidity pool on the biggest decentralized trade for like-valued property, Curve Finance, and comprise 4 stablecoins: Terra’s UST, Frax Finance’s FRAX, Tether’s USDT, and Circle’s USDC.

Its objective is to make sure deep liquidity for the now-allied algorithmic stablecoins UST and FRAX and starve the competing decentralized stablecoin DAI for liquidity. In finance, liquidity refers back to the amount of crypto property obtainable for buying and selling on a selected buying and selling venue. Liquidity is important as a result of it determines how simply an asset might be traded for different property with out affecting its market worth. Deep liquidity permits merchants to execute giant trades with out shedding funds to slippage, a phenomenon referring to the distinction between the anticipated and the precise worth of a commerce. 

Shallow liquidity makes buying and selling inefficient and costly, which repels merchants and more and more dries up liquidity by making liquidity provisioning much less worthwhile for market makers. For stablecoins, liquidity is essential as a result of it performs a job of their worth stability, successfully serving as a backstop to their peg. Stablecoins with decrease liquidity can extra simply lose their peg as giant merchants have an outsized affect over their worth. 

At present, the biggest stablecoin pool is the so-called “3pool” on Curve, which incorporates USDT, USDC, and DAI and custodies over $3.4 billion value of property. To this point, the 3pool assured deep liquidity for so-called “whales” or high-net-worth people in order that they might execute large swaps between DAI and different stablecoins with out incurring slippage or destabilizing its peg. 

Terra’s newly proposed 4pool, nonetheless, threatens to disrupt this.

Curve Wars Warmth Up

As issues at present stand, decentralized exchanges guarantee liquidity by rewarding liquidity suppliers with token emissions. In Curve’s case, rewards for liquidity suppliers come within the type of the trade’s native governance token, CRV. By way of a course of generally known as “vote locking,” CRV token holders can take part in Curve’s governance and management the protocol’s token emissions, which means they’ll affect the allocation of rewards in order that it goes to particular swimming pools of their alternative.

1/ Introducing the 4pool – between @fraxfinance, TFL and @redactedcartel we just about personal all of the cvx

UST-FRAX-USDC-USDT

Curve wars are over, all emissions are going to the 4pool https://t.co/LNJs7CAfcV

— Do Kwon 🌕 (@stablekwon) April 1, 2022

Terra has not too long ago secured a majority management over Curve’s governance by partnering with Frax, BadgerDAO, OlympusDAO, Tokemak, and the influential meta-governance protocol Redacted Cartel. This implies it may affect CRV token emissions and redirect liquidity rewards away from the 3pool towards its personal 4pool. Because the 3pool is important for DAI’s liquidity, that’s a nasty factor for DAI. 

In response to Kwon, the express objective of this aggressive transfer is to accumulate liquidity for Terra’s flagship stablecoin UST, additional assuring its peg along with the Bitcoin reserve fund it’s been constructing. Kwon has gone so far as saying that the “objective is to starve the 3pool.” If profitable, that might threaten DAI’s stability and make it much less interesting to high-net-worth merchants.

MakerDAO, the entity controlling DAI, holds nearly no CRV in its treasury and subsequently has nearly no affect over the distribution of Curve rewards. To future-proof and safe adequate liquidity for DAI in the long run, MakerDAO might have to enter the so-called “Curve Wars” by buying giant quantities of CRV, or go for different, dearer methods resembling providing bribes or rewarding liquidity suppliers with its governance token MKR on different decentralized exchanges like Uniswap and Sushi.

Nonetheless issues develop, one factor is for certain: Terra has pressured MakerDAO on the defensive. The once-largest asset in DeFi is now propelled to innovate in an effort to survive and keep related amid altering market circumstances. Though DAI was one of many first decentralized stablecoins to hit the market in December 2017, it has misplaced its market dominance over the past 12 months to UST. At press time, UST’s market capitalization is round $16.8 billion, nearly double that of DAI’s $9 billion, and that’s earlier than 4pool has launched. 

Disclosure: On the time of writing, the creator of this piece owned ETH and several other different cryptocurrencies.