MakerDAO, the decentralized autonomous organization (DAO) behind the DAI stablecoin, has taken a significant step to bolster the stability of its flagship asset.
By transferring $250 million from its Coinbase custody account to DAI’s peg stability module (PSM), MakerDAO has effectively doubled its reserves, bringing the PSM’s total holdings to $500 million.
Protecting the DAI Peg
The PSM serves as a collateral pool that enables users to mint USDC for DAI at a 1:1 ratio. This mechanism, known as arbitrage, ensures that DAI’s value remains stable within a narrow range around the US dollar.
With its increased reserves, MakerDAO aims to strengthen the peg, ensuring that DAI maintains its stability even in volatile market conditions.
Industry Leaders Join MakerDAO’s Initiative
The importance of MakerDAO’s PSM and DAI stability has not gone unnoticed by industry heavyweights.
- BlackRock
- DTCC
- OCC
- State Street
- Société Générale
- Hedera
- Citi
- BMO
- Northern Trust
- Citibank
- Amazon
- S&P Global
- Invesco
- Moody’s
These institutions will be present at the upcoming Fintech Deal Day on November 13th and Future of Digital Assets on November 14th.
Ensuring Reserve Stability
DAI’s USDC reserves are required to remain above $200 million for the stablecoin to be considered safe.
On Tuesday morning, the reserves dipped below $60 million, prompting MakerDAO’s management to transfer half of its holdings to the PSM. This move effectively replenished the reserves, bringing them above the safety threshold.
If the reserves were depleted, DAI’s price could fluctuate significantly above or below one dollar, potentially destabilizing the stablecoin ecosystem.
Automating PSM Functions
MakerDAO is actively working to automate PSM functions using smart contracts.
According to Allan Pedersen, CEO of Monetalis, the PSM funds had previously dropped below $300 million, prompting concerns about the stability of the module.
Pedersen emphasized that current automation processes involving trustees, administrators, and centralized entities provide a safe and stable framework until smart contract automation is fully implemented.
Diversification Debate
In March, MakerDAO members voted against diversifying DAI’s primary reserve stablecoin asset backing.
Despite the significant drop in Circle’s USDC, MakerDAO chose to maintain its exclusive reliance on the token, citing concerns about potential risks associated with diversifying the reserve.