Today, we have revisited and downgraded the rating of the DAI stablecoin, which moves the Maker DAI pool from Low risk to Average risk, reflecting our reassessment of the risks associated with Maker’s collateralization strategy for DAI. This follows our prior downgrade of the same pool due to the introduction of Ethena’s USDe stablecoin as collateral.
Rationale
The downgrade to Average risk follows our detailed review of Maker’s evolving collateral strategy. When we first assessed DAI, it was backed entirely by on-chain assets like ETH, WBTC, and a few centralized stablecoins. This simpler model provided DAI holders with a more straightforward, overcollateralized model. Over time, Maker has diversified its collateral, particularly focusing on real-world assets (RWAs), which now nearly account for 30% of DAI’s total backing. This shift has introduced new complexities and risks, prompting our reassessment.
The reliance on RWAs has allowed Maker to raise the DAI Savings Rate (DSR) yield to 8%, capitalizing on the current high-interest rate environment in the US. While this generates substantial revenue for MKR holders, it also brings about greater counterparty risks for DAI holders related to legal arrangements, reliability, and transparency. How does each RWA generate yield? Who are the counterparties involved in these transactions? Would Maker be responsible for ensuring the execution of justice in the real world in case of default?
Although minor relative to DAI’s overall backing, there have already been four defaults on smaller RWA vaults. If larger RWA vaults were to see similar defaults, Maker could face a bank run that could potentially destabilize DAI’s 1:1 USD peg. Overall, the introduction of lower-quality collateral deviates from DAI’s original decentralized model and adds greater risks to the stability of DAI as a USD stablecoin.
Factors that could lead to an upgrade
- Improvement in the quality of collateral, reducing protocol risk.
- Enhanced governance mechanisms that effectively manage the risks associated with new collateral types.
Factors that could lead to a downgrade
- Further expansion of lower-quality collateral without adequate risk controls.
- Deterioration in Maker’s overall financial health or governance practices.
Methodology
The methodology applied in this rating action is based on our analysis of DeFi protocol risks, including lending design, collateral quality, and governance dynamics. For further information on our rating methodologies, please see our risk framework.