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MakerDAO Regains Popularity After Terra UST Collapse

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The collapse of Terra LUNA caused notable losses for investors across the cryptocurrency space. However, the collapse of the token seems to have caused notable benefits for the Maker protocol, with the project recording notable gains over the past week.

Maker makes slight gains amid UST collapse

MKR is the governance token for the Maker ecosystem. During the past week, the token was trading in the green zone. This was contrary to what was happening with other decentralized finance (DeFi) projects that were tanking following the collapse of the Terra network.

The resurging popularity of the MKR ecosystem could be attributed to the increased demand for DAO’s decentralized stablecoin, DAI. Maker prides itself as an original decentralized autonomous organization. The organization has a solid framework that controls decentralized decision making and other functions.

The Maker network is currently being praised for its focus on decentralization, following what happened with the Terra network. The crypto community has pointed to the high level of centralization in the now collapsed Terra network. The community believes that most decisions made within the Terra ecosystem were influenced by Do Kwon and the Luna Foundation Guard (LFG).

The Terra network comprises the LUNA token and the algorithmic stablecoin, UST. The supply of UST was maintained through an algorithm seeking to maintain the peg of the stablecoin to $1. The LFG had even bought Bitcoin reserves to back the UST stablecoin and stabilize its peg.

However, the dynamics of the UST stablecoin failed, and the algorithm failed to preserve the peg. The peg started a downward spiral on May 8, and LUNA tokens increased in supply to maintain the peg. However, with the value of LUNA falling to $0, the peg could no longer be maintained, rendering the entire UST algorithm non-functional.

Maker is now finding favour in DeFi and the entire crypto ecosystem due to its focus on decentralization and the dynamics of the DAI stablecoin. DAI has maintained its peg over the past few weeks, making it a reliable decentralized stablecoin in the DeFi community.

The head of decentralized finance at Wave Financial, Henry Elder, commented on the resurgence of Maker, saying, “This is directly related to UST blowing up. UST imploded pretty much the moment demand flattened out, leaving Maker as the undisputed king of decentralized stablecoins for the time being.”

DAI’s focus on over-collateralization

The debate surrounding stablecoins has been determining whether there is enough collateral backing every stablecoin that will ensure they maintain their pegs. The UST and the DAI stablecoins have very different dynamics that have seen the latter maintain stability over the years.

DAI relies on the concept of over-collateralization using Ethereum-based tokens. For instance, a user who wants to receive $100 worth of DAI must deposit $150 worth of Ether. Moreover, when the value of Ether drops, users will also be required to increase their collateral or be liquidated.

DAI was created in 2017, making it the oldest decentralized stablecoin. The stablecoin has survived some of the toughest times in crypto, including the crypto winter of 2018. With the crypto space expanding, there is a high demand for projects that have stability and moderation. DAI has performed well over the years. While the peg has been stress tested before, it has always managed to reclaim its peg, and it is among the few decentralized stablecoins operating in the sector.

The value of assets within the MakerDAO ecosystem is also maintained by other mechanisms. Part of the fees collected within the network is used to buy extra MKR tokens on secondary markets. These tokens are burned to sustain MKR’s value.

To learn more visit our Investing in Maker guide.

Ali is a freelance writer covering the cryptocurrency markets and the blockchain industry. He has 8 years of experience writing about cryptocurrencies, technology, and trading. His work can be found in various high-profile investment sites including CCN, Capital.com, Bitcoinist, and NewsBTC.

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