Terra Founder Do Kwon Targets Stablecoins Wars; But is DAI at risk?
Terraform Labs CEO Do Kwon has announced a new alliance with Frax Finance and Redacted Cartel, a move aimed at winning the so-called “curve wars” while also dealing a fatal blow to the DAI stablecoin.
The DeFi protocol OlympusDAO is also joining the ‘4pool‘ Alliance, according to a tweet by Kwon on April 2.
“Curve wars are over, all emissions go to 4pool,” he claimed, referring to the often heated race between protocols competing for higher rewards on Curve Finance, the popular DeFi platform built on Ethereum.
What is 4pool?
Comprised of USDC and USDT stablecoins, 4pool is a new four-token liquidity pool on Curve that also includes Terra’s UST and Frax Finance’s FRAX decentralized stablecoins. It aims to dominate the Curve stablecoin market with more than $21 billion in assets under management.
With this, Kwon intends to dissuade investors from 3pool, an existing stablecoin pool on Curve, by offering them incentives that will drive more liquidity into his new coalition pool.
“In the future, we will also direct issuance to other stablecoins that pair with the 4pool, not just the 4pool itself,” Kwon said. “The goal is to starve the 3pool. [It] won’t be long now,” he added.
Kwon also hopes that Terra, Frax, Redacted and Olympus will use their significant holdings in Convex’s CVX, a token that grants holders the power to vote on major decisions on Curve, to bring more liquidity to 4pool.
Convex allows users to access liquidity and earn fees on Curve. According to some analysts, it accounts for about 40% of the voting rights of the protocol. Other say it’s far less, just 14 percent.
“I encourage every CVX owner and Curve user to join the 4pool,” urged Terra’s CEO. Ultimately, this gives Convex Finance significant leverage in deciding which pool will receive more liquidity and therefore the greater reward on Curve.
To date, 3pool has raised over $3.3 billion dominated by DAI. According to observers, however, the 4pool alliance could change that.
“If UST and FRAX become more liquid than DAI, that means their usefulness as stablecoins increases over DAI,” explains crypto analyst Erica Wall. wrote on twitter.
“Each of these coins still have their own native stabilization mechanisms, but running greatness through Curve Finance is a big deal.”
Analysts say the new coalition could see DAI lose its peg to the US dollar as liquidity is withdrawn from 3pool into 4pool. Conversely, the scenario could strengthen the stability of UST, which has historically faced serious risks with its peg.
Kwon has fantasized about DAI’s demise in the past, stating: “[b]y my hand dai will die.”
“DAI will not die”
While this seems promising for the Terra founder, there are some who question his beliefs.
DeFi investor and analyst Korpi argued that 4pool “will not turn 3pool over” even if the cartel has “substantially” grown and drawn more liquidity.
“I don’t see how a drop in liquidity at 3pool, which is likely to happen, could cause DAI to lose its peg,” assured Korpi.
“DAI is a debt-based stablecoin. In order to mint DAI, users must lock collateral in MakerDAO vaults, which are worth much more than those issued by DAI. As long as collateral [exceeds the] DAI issued, DAI does not lose $1 peg. It may become more volatile with less liquidity, but Depeg is highly unlikely.”
Korpi continues: “There are examples of over-collateralized stablecoins that are below peg for longer periods of time, but that is not because of their low liquidity, but because of their low utility in DeFi. DAI as the first DeFi stablecoin has been used in many projects and this risk is extremely low. DAI will not die.”
However, Frax Finance founder Sam Kazemian plans to add additional incentives to bring liquidity providers to 4pool while DAI-related pools are starved.
“Any stablecoin that uses 4Pool for its base liquidity is directly supported by both Terra and Frax,” he says said in a tweet. “Frax will immediately propose a veFXS meter that issues additional FXS tokens on top of your pool’s CRV+CVX tokens,” he added.
Frax’s native token, FXS, has doubled in price over the past 48 hours, up 3% to $40 in 24 hours at press time. Redacted Cartel’s BTRFLY fell 6.6% to $302, but the token is up more than 300% in 30 days. Terra’s LUNA and Olympus’ OHM are down 2.2% and 1.2%, respectively, to $112 and $35, respectively.
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