MakerDAO founder, Rune Christensen, plans to uproot all the USDC from the protocol’s US$10.9 billion treasury and swap it into ETH.

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

This move came after the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned virtual currency mixer Tornado Cash.

Also Read: Tornado Cash Sanctioned By U.S. Treasury After $7B Laundered

Centre, the consortium behind USDC, has banned 38 addresses linked to Tornado Cash. The USDC tokens in those addresses will be frozen and cannot be moved.

This caused worry within the MakerDAO community as they hold a large amount of USDC as collateral on DAI, its own over-collateral stablecoin.

It is estimated that over 80% of DAI is backed by stablecoins, of which USDC is in the majority.

“yolo USDC into ETH”

And Rune might want to "yolo" the PSM $USDC into $ETH lmaooo pic.twitter.com/tVugbNlyaj

— Westie 🟪 (@WestieCapital) August 11, 2022

On MakerDAO’s discord, Rune said the sanctions are “a lot more serious than I first thought.” He also floated the idea that DAI “should seriously consider preparing to depeg from USD.”

He then mentioned his grand scheme to “yolo USDC into ETH“. As MakerDAO relies on USDC arbitrage to hold DAI USD peg, moving away from USDC would increase the chance of depegging from USD.

“obviously suicide to yolo it all, but I think the risk/reward of a partial uprooting may be acceptable.” Rune adds.

Community backlash

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

Many community members took to Twitter to voice their worries. Some even referenced DAI to the failed algo-stable, UST.

Vitalik Buterin, co-creator of Ethereum, also say that it is a “risky and terrible idea”. As the whole reserve would be made out of mostly ETH, if ETH drop in value “the whole system would risk becoming a fractional reserve.”

Closing thoughts

The main selling point of DAI is that it is an overcollateralized decentralized stablecoin. To many, the focus is that it is a stablecoin and the value of DAI is tied to the value of USD.

By moving DAI away from a stable value, it would have adverse implications for the DeFi space and it would ruin DAI as a whole. It would also make DAI less desirable and I wouldn’t be surprised if there is a mass redemption of DAI.

Also Read: The Future Of Money; What Stablecoins Needs For Mainstream Adoption

[Editor’s Note: This article does not represent financial advice. Please do your own research before investing.]

Featured Image Credit: Chain Debrief