Exponential has downgraded the Maker DAI pool rating from Low risk to Average risk, reflecting a reassessment of the risks associated with Maker’s collateralization strategy for DAI.
MakerDAO is a lending platform that supports a decentralized stablecoin called DAI. The latter is pegged to the U.S. dollar, providing a stable value when users exchange more volatile cryptocurrencies.
The protocol allows anyone to take out loans in DAI by using other cryptocurrencies as collateral. These loans are overcollateralized, meaning you need to deposit more assets than you borrow.
The lender-borrower structure seems to be great for MakerDAO, but Exponential analysts say a thorough review of its evolving collateral strategy justifies the downgrade to an Average risk rating.
Initially, DAI was backed entirely by on-chain assets like ETH, WBTC, and a few centralized stablecoins, providing DAI holders with a straightforward, overcollateralized model.
"Maker’s move towards incorporating real-world assets (RWAs) into its collateral mix represents a significant departure from its original single-asset model. This diversification, while appealing in a high-interest rate environment, introduces new layers of risk that must be addressed,” Exponential co-founder Mehdi Lebbar told Investing.com.
Lebbar pointed out the recent defaults in smaller RWA vaults as a reminder of the risks associated with integrating traditional financial instruments into decentralized systems.
"It’s essential for the DeFi community to understand how these assets generate yield and the potential implications if key RWA-backed vaults were to underperform or default," he said.
Discussing the potential for future upgrades, Lebbar said, "the potential for an upgrade exists if Maker can remove the lower-quality collateral and strengthen governance mechanisms around the protocol's decision making."
He also warned of the risks associated with further expansion into lower-quality collateral without robust risk controls, saying "our focus remains on ensuring that the protocol’s financial health and governance practices align with the interests of DAI holders."
Over time, MakerDAO has diversified its collateral, particularly focusing on real-world assets (RWAs), which now account for nearly 30% of DAI’s total backing. This shift has added new complexities and risks, leading Exponential to reassess the situation.
According to Exponential, the reliance on RWAs has allowed MakerDAO to raise the DAI Savings Rate (DSR) yield to 8%, capitalizing on the current high-interest rate environment in the US. While this generates decent revenue for MKR holders, it also brings about greater counterparty risks for DAI holders related to legal arrangements and transparency.
“Questions arise such as: How does each RWA generate yield? Who are the counterparties involved in these transactions? Would MakerDAO 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 would destabilize DAI’s 1:1 USD peg, the report warns.
Exponential analysts argue that 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.
“Improvement in the quality of collateral could reduce protocol risk. Additionally, enhanced governance mechanisms that effectively manage the risks associated with new collateral types could also lead to an upgrade.”
Exponential warned that further expansion of lower-quality collateral without adequate risk controls could lead to another downgrade.
