From prison, the creator of Silk Road said that the current Maker system emulates the bank model. He proposes a solution that would prevent a further collapse of the biggest DeFi protocol.
Ross Ulbricht, Founder of the dark web market Silk Road, predicts a collapse of MakerDAO, the protocol that enables the creation of the stablecoin DAI. From prison, where he is serving a life sentence, he suggests that a simple solution can prevent the system from failing, as on previous occasions.
On June 26th, Ulbricht published an article in which he analyzed the MakerDAO system, launching constructive criticism and suggestions for improvement. However, his comments focused on the crisis that the platform faced in March.
As part of the general collapse that the world stock markets suffered, the rapid drop that the crypto market suffered also affected MakerDAO, with a drop of about 50% in the price of Ether (ETH).
According to Ulbricht, MakerDAO faced the crisis in March while the drop in the price of ETH occurred. At that time, the price of DAI soared by more than 10%, which led many vaults to become under-collateralized and forced them to liquidate, even with extreme discounts, thus losing almost everything.
Identifying the Problem
Ulbricht considers the Maker protocol to be similar to the model that central banks used before the dawn of the modern era. These financial institutions used to print and lend fiat money, backed by the gold in their vaults.
Banks supposedly had enough gold to back the currency in circulation. However, the financial institutions began to lend more money than they had, which forced them to go to the government for a bailout to allow them to deal with emergencies.
The founder of Silk Road adds that, as with banks, MakerDAO vault owners place Ether in their vaults as collateral for DAI. In essence, vault owners borrow Maker protocol DAI and use Ether to back the loan.
He noted that the crisis that MakerDAO faced last March stemmed from the fact that the entire system is chronically under-collateralized. He believes that not only vault owners are penalized with a stability fee to guarantee the system, but the DAI burden is also constantly increasing.
For that reason, during the crisis, no one wanted to change from stable, high-performing DAI to crashing, negative-yielding Ether at liquidation auctions. In the end, DAI had to be backed by USDC, a stablecoin backed by the cash at a bank (hardly a decentralized solution), according to Ulbricht.
Ross Ulbricht proposes that MakerDAO remove the savings contract and stabilization fee. He adds that vault owners should receive a collateral or reward rate. It would be a fee that the system would generate and that would come from DAI owners.
According to Ulbricht’s upgrade proposal, vault owners would set their rates. Then they would compete for the lowest interest rates, which would ensure that they remain low. Market forces would automatically adjust these rates in the event of collateral shortages, thus discouraging DAI hoarding.
By Alexander Salazar
