Chainlink: Ethereum DeFi Community Weighs Addition of LINK to MakerDAO
Over the past few weeks, Ethereum-based MakerDAO has been subject to an interesting phenomenon: the DAI stablecoin, minted through Maker’s collateralized debt positions (CDP), has been trading at a slight but constant premium to $1.00, the price it is built to trade at. The premium is only a cent or two most of the time, but those cents add up when you take DAI’s nearly $100 million market capitalization into account.
It’s an issue that needs to be fixed, for the sake of the health of Ethereum’s DeFi ecosystem. And according to some, the best way to fix DAI’s dollar peg is to introduce Chainlink (LINK) into the Maker ecosystem.
Ethereum’s Flagship DeFi App, MakerDAO, May Soon Support Chainlink
Unlike traditional stablecoins like Tether’s USDT and Coinbase and Circle’s USD Coin (USDC), MakerDAO’s DAI operates on a decentralized system where there is no dollar backing each stablecoin. The market rate, instead, is controlled by manipulating supply and demand by changing a number of factors, namely the interest rates that CDP holders need to pay or how much DAI holders get as interest.
Although not perfect, the system has worked rather well, with DAI trending around $1.00 for a majority of its lifetime. The below chart depicts this.
But ever since the Bitcoin and Ethereum market crash in the middle of March, the peg has been thrown off to the point where there’s a consistent premium, with DAI trading at $1.02 as of the time of this article’s writing. ParaFi Capital, a crypto fund, recently wrote:
“Just 10 days ago, we saw CDP 3931 purchase ~5MM DAI, pushing DAI prices to over $1.04. The fact that a top 10 CDP holder was willing to pay 4% above the peg to exit the system is a negative signal.”
To resolve this, a number of solutions have been proposed: a decrease to the interest rates CDP holders pay to 0%, which would result in an influx of DAI creation, and onboarding other cryptocurrencies into the collateral pool to promote DAI creation.
ParaFi Capital suggested the addition of LINK, the native token of the Chainlink project — a project focused on connecting smart contracts to real-world events and data — because it is the 11th largest cryptocurrency and because LINK has already seen mass support by the DeFi community.
The addition of the popular cryptocurrency to MakerDAO would likely result in an influx of demand for the token.
Case in point: the discussion of Chainlink’s LINK being added garnered much steam with MakerDAO forum users. In fact, Rune Christensen, founder of MakerDAO, wrote:
“Even assets that are correlated with ETH, like LINK, would help to source more Dai generation and help with restoring the peg and DSR.”
Not All Ethereum Users Want LINK on MakerDAO
Notably, this move isn’t popular all across the Ethereum community, despite its support on the MakerDAO forums.
Crypto trader and DeFi connoisseur “DegenSpartan,” remarked that MakerDAO introducing “even more and lower grade collateral” could open itself up to “the worst of both [the] centralized and decentralized aspects” of the industry. It wasn’t clear if he was referring to Chainlink in particular, but he did seem somewhat discontent with more assets being added to MakerDAO as a whole.
This has been echoed by Adam Cochran, a partner at Metacartel Ventures and a professor at a Canadian IT college.
The Ethereum investor explained in a recent analysis published to Medium that one of the reasons why he is bearish on DAI is because of the tokens being proposed to be added to the multi-collateral setup. He specifically cited DigixDAO and Golem, which were proposed but still have “huge volatility and could fail,” thus acting as a risk for the rest of the Maker space.
Move Not Yet Confirmed
It’s important to note that the addition of LINK into the inner mechanisms of MakerDAO is not yet confirmed, as it’s the holders of MKR, which includes venture capitalists, Maker Foundation, and others, that get the last say.
But as a note, Chainlink has garnered so much support as of late that Tyler Winklevoss, co-founder of crypto exchange Gemini, said:
“I really appreciate the passion of the LINK Marines. Their fervor and dedication reminds me of the early Bitcoin and Ethereum communities. Unlike many other crypto armies, they are dedicated to a project that has real promise and technical merit.”
I really appreciate the passion of the $LINK Marines. Their fervor and dedication reminds me of the early Bitcoin and Ethereum communities. Unlike many other crypto armies, they are dedicated to a project that has real promise and technical merit.
— Tyler Winklevoss (@tylerwinklevoss) April 15, 2020
The tweet subsequently went viral, garnering over 2,500 likes on Twitter as of the time of this article’s writing in a poignant reminder of the size and strength of the Chainlink community.
Whether or not that strength translates into LINK being added to Ethereum-based MakerDAO remains to be seen, though.