Liquidity vs. Ideology

The decision to semi-centralizing the decentralized stablecoin.

Hey Web 3ers! I hope you’re all having a great weekend. For those starting to get stir crazy here are some ideas to pass your time:

Black Thursday

Admits a global pandemic(coronavirus), the crypto ecosystem recently experienced a day that will forever be recorded as “Black Thursday” – the day that Bitcoin, Ethereum, and other cryptoassets witnessed one of the most significant price decreases in history.

The selloff on March 12th resulted in ether’s price dropping from $200 to just above $80 in about 12 hours This, in turn, caused multiple Maker Vault liquidation events for owners that were unable to add collateral fast enough to save their accounts. In the end, a lot of Vault owners experienced significant losses from having their underlying collateral (ether or bat) liquidated.

Here’s a great summary of some of the events and fallout:

  1. ETH holders started selling into DAI to hedge against tanking crypto prices

  2. Gas prices on the Ethereum network spiked

  3. Vaults were liquidated and more DAI was purchased to ensure the system remained over-collateralised

    Which resulted in:

  1. MakerDAO liquidation bots weren't configured to dynamically adjust gas prices in the case of network congestion.

  2. As a result, when Vaults were under-collateralised, they weren't any participants in the auction to purchase DAI to pay back the debt.

  3. Due to low competition in the auctions, one lucky liquidator walked away with 30,000 ETH for $0.

- Kerman Kohli

Overall, this proved a test for the Maker protocol – one that the team ultimately failed and had to choose between shutting down the protocol or issuing more MKR tokens – they’ve obviously chosen to live to fight another day.

Additionally, a few days after the Black Thursday, the executive team at Maker approved a proposal to add Coinbase’s USDC stablecoin to the MakerDAO protocol as another form of collateral for DAI.

This decision was approved by the Maker community to.. well, let’s call it, mixed reactions.

Twitter avatar for @allilulllcAllison Lu @allilulllc
1/9 I do not support the MakerDAO executive vote to add USDC as collateral in vaults. I'm going to go over some additional risk considerations not mentioned in @cyounessi1's forum post (…). (These are my personal opinions & I'm not a MKR whale)

Maker @MakerDAO

The Maker Foundation Interim Governance Facilitator has placed an Executive Vote proposal for collateral onboarding of USDC. MKR holders can vote here: More info: and

Ideology versus Liquidity

Building a new financial system is hard. People don’t agree with each other. There are always tradeoffs – the greatest of which comes down to ideology versus liquidity.


Suffice it to say that many early adopters in the crypto ecosystem do not agree with the decision to add USDC – a centralized fiat-backed stablecoin – to the Dai collateral pool.

And sure, it’s pretty understandable that many people – who were interested in self-sovereign financial mechanisms like Bitcoin and Ethereum – are not interested in decreasing the decentralization of Dai.

Many people entered crypto because they:

  • despise the crony capitalism of modern financial systems

  • want to end the mindless printing of fiat currencies

  • seek to prevent black-swan financial events like the 2008 financial crisis

  • hold a variety of other well-intentioned and ethical reasons for entering crypto

With the new addition of centralized stablecoins (USDC), many individuals have shared their opinion that a decentralized stablecoin should only rely on democratized assets like ether and bitcoin. Metacoin is one such recent attempt to create a Maker like protocol that only accepts ether.

Relying on a fiat-backed stablecoin (USDC) introduces the same risk parameters that come with using fiat (even top-notch fiat like USD). Honestly, it makes logical sense to try and prevent adding uncontrollable risk to a protocol aiming to become a global collateral deposit and loan provider. Imagine in 20% of the Maker protocol was denominated in U.S. dollars before the recent coronavirus pandemic occurred and then the government said they were going to issue billions in new fiat currency. That would probably have a deeper impact on the Maker protocol than if it didn’t directly rely on fiat currency. This is an incredibly valid concern for those who care about the future of the Maker protocol.

Personally, I’d argue that Maker was never completely decentralized to begin with because of the few majority MKR token holders that exist or the ever-present oracle problem but those are tangents for another Sunday.

Anyhow, I’m interested to see if people stop using Dai in response to USDC’s addition although I find that unlikely in the short term. Why? Because people like liquidity.


If cash is king, liquidity is divine. If you need any evidence of that statement, just look to the Federal Reserve. The Fed is printing money and promising to purchase securities because they’re concerned about a liquidity crisis. If markets stop functioning for a long time, stuff gets really bad, like worse than people hoarding toilet paper bad. As an aside – remember, most of your daily life is built by social constructs (dollars, laws, religion). When shit hits the fan, social constructs start to deteriorate (hyperinflation, looting, etc). Now, I’m not saying that’s where we are going, I’m just highlighting the sliding scale that is our society and why liquidity is important. On the bright side, at least this time we have Bitcoin.

So why does Maker care about liquidity?

Maker views liquidity as a mechanism to increase their protocol’s and subsequently Dai’s usefulness as a global stablecoin. Liquidity is similar to the concept of network effects – it’s really hard to get going at first.

Here is the short story of how you create a liquid market:

  1. Nobody wants this thing you sell.

  2. Somebody wants the thing you sell and is willing to pay you for it.

  3. More people want it, some people also start selling the thing.

  4. Lots of people want it, and lots of people are selling the thing.

  5. Everyone wants it, there’s now a robust market of sellers and buyers.

  6. Your thing has great liquidity, don’t mess it up.

  7. You messed it up, it’s the one thing I told you not to do and now nobody wants the thing you sell.

More or less, that’s the story of liquidity. Maybe less. Anyway…

…making your market liquid is challenging. In this case, the market for stablecoins is highly competitive with various designs and go to market strategies.

One way that marketplaces or financial products can increase their liquidity is by selling something people can’t get anywhere else. This is how Coinbase succeeded. People couldn't buy bitcoin. Coinbase created a place to buy and sell bitcoin and over time attracted millions of people to buy/sell/trade bitcoin. Today, they’re worth billions of dollars and have issued a stablecoin –USD Coin– that is backed 1:1 with U.S dollars.

The USDC stablecoin can be used:

  • to buy and sell crypto

  • as a hedge against bear markets

  • as an interest-bearing asset. Coinbase will pay about 1.25% interest if you hold USDC on its platform.

Today, USDC has just under a billion dollars is 24hr trade volume and a circulating supply of around $670 million.

Maker currently maintains around $100 million in circulating supply and dominates the DeFi market. Granted, most individuals are using Dai to leverage long Ether rather than buy stuff, but at least there is a market for Dai. Now, Maker aims to leverage USDC’s liquidity to increase the strength of Dai and the amount of collateral in the Maker protocol. The Maker team currently capped USDC collateral at $20 million so that the Maker protocol doesn’t become dependent or overwhelmed by USDC. Maintain ether as the majority collateral will remain one of the last instances for the Maker team to claim the protocol is decentralized/democratized. While the addition of a fiat-backed stablecoin will semi-centralize the protocol, the Maker team believes that adding different forms of collateral will make the protocol stronger and is the path towards global adoption. The Maker team likely envisions a world where Maker holds a meaningful portion of the world’s collateral assets and democratizes access to capital.

Frankly, it’s understandable. If the goal is to attract the greatest amount of users, different forms of collateral will be required to grow the protocol. If anything, Black Thursday has shown that ether is still too volatile to act as a world reserve asset for the new financial system. Adding new forms of collateral that already have markets and liquidity will bring in more users and help the Maker team create a more utilized product. The counter-argument is that is will also make the protocol susceptible to systemic market risk. That’s probably true.

So the question becomes, how much better is Maker than the current system?

Unfortunately, I don’t have an answer as it remains to be seen. My initial hunch is that liquidity will beat ideology as many individuals will forgo complete decentralization in favor of accessibility and utility. That’s just my initial assumption and it may be incorrect.

In the meantime, I look forward to seeing if the Maker team increases the collateral limit for USDC within the coming months as well as how many new Maker vaults are collateralized primarily using USDC versus ether. This may help show whether individuals truly want to obtain loans and use a stablecoin or just want to speculate on their ether. Either way, I’m excited to watch and see how this social experiment plays out.

Until next week,


Advancing Web 3.0 is a weekly newsletter about cryptocurrencies, decentralized finance (DeFi), and technologies that are shaping the next era of the Internet. Welcome to the bleeding edge. Welcome to Web 3.

About the Author: I’m Mason Nystrom, a writer and aspiring angel investor. Previously I worked for ConsenSys as a marketer focused on marketing strategy for ConsenSys and its portfolio companies. Prior to joining ConsenSys, I worked as a Business Analyst at Gatecoin, the first cryptocurrency exchange to list ether, Ethereum’s native cryptocurrency.

I’m passionate about Bitcoin, Ethereum, DeFi, Web 3.0, and all things crypto. When I’m not writing or heads down in crypto, I’m learning to become a developer at Lambda School.

The views, information, and opinions expressed are solely those by the author and are meant for informational purposes only and are not intended to serve as a recommendation or investment advice to buy or sell any securities, cryptoassets, or other financial products.