The fun never stops in cryptocurrencies.

When they are not tilting at the windmills of a surveillance state, crypto purists are devising methods to escape it. The latest attempt comes from MakerDAO, a lending platform that is also home to Dai, the world’s fourth biggest stablecoin by market capitalization.

Rune Christensen, one of its founders, proposed an “endgame” for the stablecoin to convert it into a free-floating entity yesterday. His post was instigated by Circle’s blacklisting of Tornado Cash’s addresses to comply with the Treasury Department’s request. Circle’s USDC stablecoin, which is pegged to the US dollar, is the biggest collateral holding for Dai.

The endgame plan sketches an unlikely evolution from pigeon to phoenix and is meant to be accomplished in three years. In the first stage, called the “Pigeon Stance”, Christensen writes the protocol will use its existing assets to “maximize” profit potential. Presumably, this is a reference to the ways in which the coin earns profits, including fees from transactions and offering high interest rates on staking of Dai. He did not divulge how the stablecoin will increase profits amidst a scandal-ridden crypto winter and recession-inducing macroeconomic forces.   

In the next step, christened the “Eagle Stance”, the exposure to risk-weighted assets (RWA), such as USDC, will be cut down to 25% assuming that the “authoritarian threat” of crypto regulators and the US government grows over time. Again, the three-year timeframe might have been Christensen has borrowed a word – Difficulty Bomb – from Ethereum’s vocabulary to describe its implementation. According to him, the bomb will be “automatically triggered” in that stance. But he has not described the conditions and method for the trigger.

The breathless final stage is called the “Phoenix Stance”. Christensen says there will be “no sizeable exposure” to RWA and Dai will become a free-floating cryptocurrency. So the idea of the entire exercise is to move away from a dollar-pegged stablecoin and become a currency, like the dollar, itself.

A Centralized Decentralization  

Where to begin with Christensen’s supposed endgame?

For starters, it uses fancy terms but does not provide much detail about how it will accomplish those goals. There’s also the glaring inconsistency of a supposedly decentralized currency balking at centralized entities. Ethereum’s miner profile is fairly concentrated, opening it up to charges of being a centralized entity. Its move to a Proof of Stake (PoS) network will not change that dynamic since there are no limits on the number of nodes that a party can run.

Previous research has shown that MakerDAO’s claim to a decentralized governance structure is also suspect. In a 2022 paper, researchers at the University of Glasgow analyzed Maker governance polls from August 2019 to October 2021 and concluded that a centralized governance “very much exists” in the protocol. “By examining Maker governance polls, we find that voters are centralized in a small group, and voting power is unequally distributed among these voters. In most voting activities, the largest voters could account for a significant proportion of votes,” they wrote.

Their assessment is not surprising considering that protocols are, in the end, bankrolled by venture capital firms seeking profits. For example, Andreessen Horowitz, a Silicon Valley venture capital firm behind most major crypto companies, has a hand in MakerDAO and was awarded a significant number of Maker governance tokens as part of its investment.

A Profitable Switch

In a sense, the switch from USDC to ether is a homecoming for MakerDAO’s Dai, which began life as an asset backed by collateral consisting mainly of ether. The move from USDC to MakerDAO could also be a profitable one, if it succeeds.

The staking interest rate for Ether is expected to rise after its switch to a PoS consensus mechanism. If it accumulates a significant hoard of ether, Dai will likely become a valuable asset and investment play. The profits run both ways since ether will benefit from adoption as a staking asset. Of course, the entire plan will crumble if Ethereum fails to take off as a scalable blockchain since there is not much to recommend Dai besides its utility as a lending tool.