MakerDAO Set To Convert USDC Funds To ETH, Is This A Good Idea?

The crypto community has been on alert since the crash of LUNA, ETH, and USDT. Investors depend on stablecoins to hedge against price volatility in the crypto market. These stablecoins are pegged to USD, meaning each coin is worth the same as 1 USD. So, for instance, holding 1USDT or USDC is the same as having 1USD.

Stablecoins don’t fluctuate in price like other cryptos. But if they depeg from the US dollar, holders will lose funds as it’ll no longer be worth the same as the fiat currency.

This is why the latest report about MakerDAO has put everyone on edge. The members of the peer-to-peer organization have received notifications to expect a Tether-like situation. This information came from the MakerDAO founder Rune Christensen.

According to the Rune, DAI, the MakerDAO stablecoin might soon depeg from USD just like USDT in May. This comment took place on the P2P discord channel on August 11 following the sanction placed by the US Treasury on Tornado Cash, a crypto mixer.

Affected by the tornado sanctions, MakerDAO founder Rune Christensen said that he is seriously considering moving away from using USDC as collateral and converting USDC into ETH. Vitalik said non-ETH collateral should be allowed to exceed 20% of the total. pic.twitter.com/x3ocsCq6KH

— Wu Blockchain (@WuBlockchain) August 12, 2022

After the sanction, Circle froze the USDC addresses sanctioned. But Rune fears that this move might affect DAI and cause a depeg.

Tornado Cash Ban And Its Effects

Tornado Cash is a crypto mixer is a service that enables anonymity in the crypto community. It scrambles information and stops easy trailing on the blockchain. This service helps investors protect their digital footprint.

The Office of Foreign Assets Control (OFAC) banned the service in the United States, calling it a national security threat. The reason was the suspicion of aiding North Korean hackers in money laundering. But many people reacted against it, saying that it’s a planned move by the government to remove autonomy and privacy from crypto users.

In the ban, OFAC placed 44 USDC addresses on its list. This led Circle to freeze stablecoins worth $75,000 in those addresses. But the effect of this action might lead to a possible DAI depeg from USD, as feared by Rune.

MakerDAO is considering a $3.5 billion ETH market buy, converting all USDC from the peg stability module into ETH.

— banteg (@bantg) August 11, 2022

The MakerDAO founder suggested that the USDCs in the sanctioned addresses should be converted into ETH. That way, the MakerDAO community will not depend only on USDC.

ETH Creator Calls It A Bad Idea

Presently, 7% of DAI Stablecoins are backed by ETH. If the conversion takes place, above 50% of the stablecoins will be supported by ETH. These coins are now worth $3.5 billion, and Buterin is worried about doing such a thing.

The Ethereum founder fears that any value loss in Ethereum will plummet the collateral value. Apart from his comments, the MakerDAO community is worried that Terra did the exact conversion to BTC, which backfired.

But Rune has calmed the fears down by stating that the organization won’t carry out a complete transfer to avoid such risks. But he believes that a partial transfer might be the best idea to hedge against a possible depeg.

Featured image from Pixabay and chart from TradingView.com