MakerDAO Implements LitePSM to Mitigate Custodial Risks for USDC Portfolio
On the evening of July 8, MakerDAO officially approved the LitePSM proposal, aimed at minimizing custodial risks associated with the USDC backing its DAI stablecoin.
MakerDAO Implements LitePSM to Mitigate Custodial Risks for USDC Portfolio
Following the approval on July 8, and adhering to the 30-hour delay period, MakerDAO will officially transition the collateralized USDC to the LitePSM mechanism on July 11.
The latest out-of-schedule Executive Vote has been approved by the Maker Governance.
— Maker (@MakerDAO) July 8, 2024
→ https://t.co/HZCeMgDAsx
The proposal detailed below was deployed within the Maker Protocol on July 7th at 20:47 UTC.
📜 LitePSM (LITE-PSM-USDC-A) DAO Resolution
The DAO Resolution… https://t.co/w8Ijvqdsrj pic.twitter.com/SqRiFfSLuo
The Peg Stability Module (PSM) is a 1:1 swap mechanism between DAI and USDC. This mechanism encourages users to buy back DAI when there is an exchange rate discrepancy, helping the stablecoin maintain its 1:1 peg with the USD.
Previously, the USDC held in the PSM portfolio was custodied by a third party (specifically, Coinbase Custody). Additionally, through the Coinbase Prime incentive program, this USDC provided significant yields for MakerDAO. However, the risks associated with relying on a single custodian and related legal issues led MakerDAO to move the PSM on-chain under the new name LitePSM.
The LitePSM mechanism will allow USDC to be stored in the Coinbase Web3 Wallet (W3W). The new mechanism will also optimize gas fees (by pre-minting a certain amount of DAI to lock in the wallet) compared to the previous PSM-USDC-A solution (which involved burning and minting DAI according to specific swap needs).
Phase 1 of the transition from the old storage to LitePSM will take place on July 11. The transition will occur in three phases, estimated to take about two months to complete safely.
Once completed, MakerDAO can reduce its dependency on Coinbase Custody for its USDC collateral. Previously, in November 2023, MakerDAO had to urgently withdraw 250 million USDC from Coinbase Custody to inject into the PSM liquidity pool. This step aimed to alleviate liquidity pressure on DAI amid soaring demand for swaps to other stablecoins.
In related news, MakerDAO has recently been embroiled in a new dispute with Aave concerning the profit-sharing of DAI and the Spark Protocol (a lending branch of MakerDAO).
