MakerDAO Weighs Using Emergency Switch to Prevent Future DAI Depegging

The community behind MakerDAO, the issuer of the $6.3 billion market cap DAI stablecoin, is considering emergency measures to protect DAI from slipping beneath the dollar mark as a nationwide banking crisis threatens crypto.

Under the proposal, the community would adopt an emergency switch that would pause peg-stability-module (PSM) swaps on its protocol, freezing the token purchases required to mint new DAI tokens, Sam MacPherson, a protocol engineer at MakerDAO, told CoinDesk.

“That [PSM pause] would prevent DAI from following the price of any depegging stablecoin,” MacPherson said.

The proposal comes just two days after DAI, a so-called decentralized stablecoin backed by many assets including USDC, fell to an all-time low of 88 cents. DAI’s depegging occurred after Circle, the issuer of USD coin (USDC), revealed it had billions of dollars of its stablecoin’s collateral at the failed Silicon Valley Bank, sending the price of USDC tumbling. On Monday, USDC regained its dollar peg.

DAI’s reliance on USDC for roughly 52% percent of its reserves rendered it vulnerable to losing its dollar peg. The protocol uses PSM swaps, a vault that permits users to “swap a given collateral type directly for DAI at a fixed rate, rather than borrowing DAI,” according to MakerDAO.

The emergency measure would allow the protocol to circumvent its normal 16-hour waiting period, which was already shortened from two days, on freezing PSM swaps, intended to allow DAI’s issuer to act swiftly enough to prevent the token’s price from following in the same direction as other stablecoins such as USDC. It's not clear how much time it would take for DAI to begin depegging if one of the tokens by which it is collateralized starts depegging.

The pause switch for PSM swaps isn’t automatically triggered when one of the assets that backs DAI begins depegging, so the MakerDAO community would have to vote to use the tool.

“The TLDR is that an emergency switch is being added to pause PSM swaps. Normally there is a two-day delay on any action, so this bypasses that delay,” MacPherson said in a Telegram message. “It’s not being planned to be used, but it’s there if governance needs.”

Read more: MakerDAO Founder Calls for Rebranding of DAI Stablecoin