MKR, the governance token of the MakerDAO, was the only cryptocurrency of the top 200 cryptos by market capitalization to post gains for the week, despite the massive selloff in the cryptocurrency space that saw Bitcoin and other cryptocurrencies trade at prices not seen since January 2021.
The cryptocurrency space saw a massive selloff during the week. This sell-off was a reaction to the U.S. increasing interest rate by 0.50% to 1%, the largest increase since 2000, as it handed down its policy decision earlier in the month. While this is a major factor, another factor also weighing on the market was the LUNA and UST situation which also saw many flee the market due to lack of confidence.
The cryptocurrency market capitalization almost lost its trillion-dollar status as it traded as low as $1.15 trillion, level not traded since the May 2021 market crash that saw Bitcoin and other cryptocurrencies lose more than 50% of their value.
Why is MKR rallying?
Maker is the DeFi token behind the DAI stablecoin a major competitor of Terra’s programmable stablecoin, UST.
- It is an Ethereum-based DeFi protocol that lets investors mint the collateralized stablecoin DAI. It allows users to lock up a range of crypto such as Bitcoin, Ethereum, or liquidity positions on other protocols such as Curve to mint DAI stablecoins.
- Because the platform is behind Terra’s known competitor, there is speculation from the cryptocurrency community that the platform and its token will replace Terra’s dominance in DeFi.
- MakerDAO has proven to be more stable than Terra thanks to having a more effective risk framework for managing stability. Its decentralized risk management is coordinated by the first risk team, a template model team, and the internal risk team of the Maker Foundation.
- Maker’s price has gained over 27% for the week and it indicates investors prefer DAI’s safety against UST’s risk of holding.
- In the midst of Terra’s LUNA token falling to trade at the same decimals as the Shiba Inu token and its stablecoin still depegged, MKR price skyrocketed above $2000 momentarily. The price has since retreated and is currently trading at $1,580.
- The spike appears to be a result of Terra’s investors jumping into an alternative, Maker, as LUNA price sinks below $0.1.
- In fact, the depegging of UST stablecoin led to DAI becoming the fourth-largest stablecoin with a market capitalization of $6.4 billion.
- Previously, Maker’s DAI stablecoin had lost significant market share to UST stablecoin. Surprisingly, Terra’s co-founder, Do Kwon, confidently stated that the death of DAI stablecoin with the increased popularity of UST.
Maker is one of the oldest DeFi projects. It allows users to have exposure to assets such as Bitcoin with backing from the DAI loan. During falls in positions below collateralization thresholds, the DeFi token liquidates the positions. Thus, it allows DAI to maintain its peg with the US dollar even during periods of extreme volatility. Unlike UST, DAI is not an algorithmic stablecoin, but uses a collateralized reserve to maintain its peg.