Analysis

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

Key Takeaways

  • Terra is planning to launch a brand new, closely incentivized liquidity pool for its UST stablecoin on Curve Finance.
  • Versus the now largest stablecoin pool, 3pool, the 4pool, would exclude DAI and comprise UST, FRAX, USDC, and USDT.
  • The specific objective of Terra’s aggressive transfer is to “starve the 3pool” of liquidity, which may show a harmful blow to DAI’s stability and attractiveness.

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Terraform Labs CEO and founder Do Kwon has gone on an open offensive in opposition to 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 making 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 via 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 change 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 accessible for buying and selling on a specific buying and selling venue. Liquidity is important as a result of it determines how simply an asset could be traded for different property with out affecting its market value. Deep liquidity permits merchants to execute massive trades with out dropping funds to slippage, a phenomenon referring to the distinction between the anticipated and the precise value 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 value stability, successfully serving as a backstop to their peg. Stablecoins with decrease liquidity can extra simply lose their peg as massive merchants have an outsized affect over their value. 

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At present, the biggest stablecoin pool is the so-called “3pool” on Curve, which accommodates USDT, USDC, and DAI and custodies over $3.4 billion value of property. Thus far, 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.

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Curve Wars Warmth Up

As issues at the moment 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 change’s native governance token, CRV. By means of a course of often called “vote locking,” CRV token holders can take part in Curve’s governance and management the protocol’s token emissions, that means they will affect the allocation of rewards in order that it goes to particular swimming pools of their selection.

Terra has lately 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 might probably 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. 

Based on Kwon, the specific 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 “goal 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 just about no affect over the distribution of Curve rewards. To future-proof and safe enough liquidity for DAI in the long run, MakerDAO might have to enter the so-called “Curve Wars” by buying massive quantities of CRV, or go for different, costlier methods reminiscent of providing bribes or rewarding liquidity suppliers with its governance token MKR on different decentralized exchanges like Uniswap and Sushi.

Nevertheless 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 with a purpose to survive and keep related amid altering market situations. Though DAI was one of many first decentralized stablecoins to hit the market in December 2017, it has misplaced its market dominance during the last yr 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 writer of this piece owned ETH and a number of other different cryptocurrencies.

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