• DeFi Token Gains 30% as Users Turn to DAI Stablecoin in the Wake of Terra’s Collapse

  • While crypto markets recovered Friday morning, the MakerDAO governance token, MKR, was up 30% as investors bet on its DAI stablecoin in the midst of Terra’s continued collapse.

    According to CoinMarketCap, MKR was the eighth-largest DeFi (decentralized finance) token early Friday, with a market cap of $1.4 billion. Meanwhile, with a market cap of $6.47 billion, DAI has risen to the fourth-largest stablecoin.

    According to DeFi Llama, the rise in interest was enough to propel MKR to the second-largest DeFi token, representing 7% of the $146 billion total value locked in decentralized protocols as of Friday, overtaking Curve, SushiSwap, and Lido in the process.

    DAI’s market capitalization has also climbed by nearly 2% in the last 24 hours, climbing from $6.34 billion to $6.47 billion. This tiny uptick suggests that consumers have recently turned to Maker to mint additional DAI.

    As Terra continues to crater, there has been a lot of interest in MKR and its DAI stablecoin.

    Terra validators shut down the blockchain for roughly two hours yesterday, restarted transaction validation, and then shut it down again a few hours later.

    Since then, the LUNA token has dropped 99.9% to $0.0000353, a loss of 99.9% from yesterday. Meanwhile, the TerraUSD algorithmic stablecoin, UST, has dropped 69 percent in the last 24 hours to $0.19. Binance followed through on its promises to cease trade and delist the token and stablecoin as they dropped in value.

    What exactly is Maker?

    Maker is a lending and borrowing protocol for DeFi. Users deposit their cryptocurrency, such as Bitcoin or Ethereum, as collateral in a Maker Vault and manufacture DAI against it. Their assets are kept in the vault until they have paid off their DAI.

    DAI, like UST, is an algorithmic stablecoin. However, unlike UST, it is overcollateralized. That means that when customers lock up their crypto and borrow against it, they can borrow DAI worth 55% to 75% of their collateral. According to some experts, this model is significantly safer.

    “Partially collateralized stablecoins have consistently failed,” said Nik Kunkel, former Maker head of backend services, earlier this week. “When the peg is under strain, they cannot fix the basic problem of bank runs.”

    MakerDAO detailed how the vaults work and why bearish markets push collateral liquidations to maintain those overcollateralized ratios in a Twitter conversation yesterday.

    “The Maker Protocol is healthy, liquid, and solvent with a 164% collateralization ratio and billions in liquidity reserves,” MakerDAO wrote in a tweet. “All DAI is overcollateralized, and its peg is as strong as this Decentralized Protocol.”

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