MakerDAO Supports Chainlink (LINK) as Collateral to Stabilize the DAI Peg
MakerDAO, one of the world’s leading decentralized autonomous organization built on Ethereum and solely reliant on smart contracts to effect trustless borrowing, saving, and lending of ETH and its tokens, now supports Loopring (LRC), Compound (COMP), and Chainlink (LINK) as collateral after a proposal was passed on Sep 30.
MakerDAO Enables Trustless Borrowing and Lending
There are two aspects of MakerDAO. On one end, the protocol allows ETH and token holders to lend their assets. On the other, there is an opportunity for borrowers to access loans without paperwork.
This is possible because the platform combines lending with a stablecoin, DAI, together with a governance token called MKR. By introducing DAI to the mix, MakerDAO can instantaneously predict how much the borrower can pay back within a given time frame.
Every borrower must over-collateralize their loans by locking ETH in a smart contract to receive DAI. A liquidation mechanism keeps the system stable, preventing borrowers from drawing more DAI than they can afford to pay. Effects that can be consequential and consequently force MKR holders—the lenders of last resort, to step in and pay the difference.
Stabilizing Peg by Onboarding More Collateral
LINK, LRC, and COMP are now the latest tokens which the protocol accepts as collateral by borrowers wishing to receive loans in DAI. MakerDAO has added 11 new vaults in the last 10 months alone. However, this is a development borne out of necessity.
Rune Christensen, the founder of MakerDAO, told CoinDesk that the protocol had no option but to onboard as many collaterals as possible to keep the DAI peg at parity with the USD in the long term.
At the height of the DeFi craze, the peg was destabilized, ticking to around $1.10 to the USD. The board intervened by voting for the reduction of the collateralization requirement of the USDC vault. This way, more DAI would flow into the market and keep the USD-DAI rate at near $1.
Centralized Assets Dominate Maker Vaults
An observation by the Block Research indicates that centralized digital assets like USDC, wBTC, and PAX now make up over 35 percent of MakerDAO vaults, placing the DeFi protocol in a precarious position.
Meanwhile, Ethereum miners collected 6.3X in transaction fees than in Bitcoin in September. According to GlassNode, the smart contracting network raked in $166 million in transaction fees while Bitcoin only had $26 highlighting the level of demand thanks in part to DeFi in Ethereum.
On Sep 30, BTCManager reported that Coinbase held 3X the amount of Ethereum (ETH) than Binance.