MakerDAO Pauses DAI Deposits, Cites Adverse Market Conditions

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MakerDAO Pauses DAI Deposits, Cites Adverse Market Conditions
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MakerDAO, one of the oldest DAOs, has suspended the minting and deposits of its DAI stablecoin to Aave’s lending platform.

The MakerDAO suspension comes as crypto lender Celsius borrowed 100 million DAI against stETH collateral for every 200 million DAI borrowed from Aave’s Ethereum V2.

Aave’s platform allows users to lend, borrow, and generate interest on digital assets. People need to provide collateral for a loan to borrow digital assets from Aave. Collateral in DeFi works much like traditional finance, albeit more technically.

For example, when buying a home with a mortgage, borrowers often put the home they intend to buy as collateral. Their agreement with the bank allows the bank to repossess the home if they cannot repay the loan.

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DeFi is no exception. Suppose the user does not repay the loan, or the value of their loan exceeds their collateral. In this case, the collateral will remain in the protocol and used to repay their loan to the liquidity pool.

Third parties will be able to bid on the collateral in much the same way that a home is repossessed at auction and sold to the highest bidder. Ultimately, the smart contract that manages the transaction will “sell” or “liquidate” the collateral to pay the loan.

Celsius exposes DAI lenders to stETH instability

Borrowing 100 million DAI by depositing stETH (a derivative of ETH), it exposes the lender of DAI to the instability of the derivative token.

After the Ethereum 2.0 upgrade is complete and withdrawals are enabled, 1 stETH will be exchangeable for 1 ETH. Many holders have been selling their stETH at a lower price than ETH due to the recent market crash that caused ETH to drop significantly. Therefore, the moratorium on DAI deposits effectively prevents borrowers from lending against stETH.

stETH makes headlines this week

Celsius recently faced liquidation of stETH collateral with a suspension of withdrawals last week. Last week, crypto hedge fund Three Arrows Capital withdrew 80,000 stETH from Aave and then exchanged 39,800 ETH for 36,700 ETH in a rumored “bid” to shore up ETH’s liquidity.

MakerDAO will meet in two weeks to discuss the possibility of reactivating DAI deposits.

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