The case of the missing USDC

USDC’s size as a collateral asset in MakerDAO’s Vaults has collapsed more than 80%. Here’s why.

Something very interesting has happened in the last 10 days that has gotten very little coverage: USDC’s size as a collateral asset in MakerDAO’s CDPs (Vaults) has collapsed more than 80%.

Compare these two screenshots taken from https://daistats.com/:

May 22nd, 2020

June 2nd, 2020

The culprit is to be found in the relative attractiveness of DAI vs. USDC in the lending markets. DAI used to routinely command yields 30% to 50% above USDC yields. As a result, USDC holders could deposit their USDC in a CDP, generate DAI, lend DAI and capture this yield differential.

With:

Collateral ratio = X

Yield differential = (DAI APR – Stability fee) /USDC APR

If Yield differential > X, then you should open a CDP with your USDC, generate DAI and lend the DAI out. Otherwise, just lend out your USDC directly. (X depends on your risk appetite: USDC-backed CDPs liquidation ratio is 120%.)

So where are we now? This is the current market on dYdX:

Yield differential = 1.10% – 0.75% /1.85% = 19%. This says it all: why would you deposit USDC in a CDP, run the risk of getting liquidated in a massive DAI rally scenario, all that to receive an asset (DAI) that yields LESS than your USDC? Market participants were quick to realize the yield landscape had shifted, and as a result closed out of their USDC CDPs in droves.

Where did the money go?

Those CDPs re-emerged as ETH-backed CDPs (+5M DAI) and WBTC-backed CDPs (+0.5M DAI). Readers of The Defiant have been following the dramatic growth of WBTC since it got added as a collateral asset for CDPs: the asset is so popular that it has almost reached its debt ceiling in just 30 days since its addition.

Some keen observers might point out that the vast majority of WBTC locked up in CDPs come from a single CDP (#9167). This, in my opinion, is the best vote of relevance for the existence of WBTC in Maker: an institutional-sized user is willing to risk more than $25M of its BTC holdings to get access to the world’s most prominent decentralized stablecoin.

We should probably see an executive vote in the near future to raise the WBTC debt ceiling and allow more users to put their idle WBTC to work to unlock more of DeFi.

[This story was written and edited by our friends at The Defiant, and also appeared in its daily email. The content platform focuses on decentralized finance and the open economy, and is sharing stories we think will interest our readers. You can subscribe to it here.]