Network Effect at Risk? Why 50% of DAI Locked in Compound Is a Concern
New data shows more than 50% of DAI is locked in Compound and this raises concerns about DAIâ€™s long term prospects.
Data from blockchain intelligence firm Flipside Crypto show that 50% of DAI, Makerâ€™s decentralized stablecoin, is now on Compound (COMP). While the figure seems a positive factor for COMPâ€™s growth, it shows a concerning trend for DAI.
Since June, the amount of DAI on the Compound Decentralized Finance (DeFi) protocol rapidly surged. As of August, nearly $800 million worth of DAI is on Compound.
Total value locked at Compound Finance (USD). Source: Flipside Crypto
Why it could be a troubling trend for DAI
DAI is the most dominant decentralized stablecoin in the cryptocurrency market. Unlike other widely-utilized stablecoins, like Tether (USDT), DAI is maintained by a peer-to-peer ecosystem.
According to researchers at Flipside Crypto, when such a substantial portion of DAIâ€™s supply is concentrated on one platform, it may lead to liquidity problems. Other users on other competing platforms might want to utilize DAI, but there could be a shortage of supply in the market.
In the last two months, the DeFi market has added more than $4 billion in value. That naturally led the demand for most DeFi-related projects and services to surge. Namely, the appetite for decentralized stablecoins, like DAI, and oracles noticeably increased.
Consequently, a large supply of the DAI flocked to dominant DeFi protocols. Current data from DeFi Pulse show that Compound has more than $790 million in total value locked, but the researchers emphasized that the mass inflow of DAI into Compound could become a problem. They explained:
â€œDAI is the only crypto-backed stablecoin. It is meant to be more decentralized and censorship-resistant than the fiat-collateralized USDC and USDT. But a lack of liquidity could translate into uncertainty around using DAI as a decentralized stablecoin in DeFi protocols.â€�
Flipside Crypto further explained that many DeFi teams are frustrated about DAIâ€™s limited liquidity and stability. These liquidity issues, which are inherently difficult to solve for any decentralized project, might be pushing users to centralized stablecoins.
In the immediate-term, the Maker and DAI ecosystem could address the issue to uphold liquidity. But if no solutions are presented, the researchers warned it could damage DAIâ€™s network effect. The researchers noted:
â€œAlready weâ€™re seeing a lot of DeFi teams express frustration over DAIâ€™s lack of liquidity and stability, with many opting to use USDC instead. This is likely to damage DAIâ€™s network effects in the long run if nothing is done to address the issue immediately.â€�
COMP and Maker continue to thrive
Despite the sharp market correction that took place on August 11, Compoundâ€™s COMP token increased by more than 41%. Maker, the network which DAI is based on, also recorded a 20% rise overnight.
The strong momentum of COMP and Maker are causing the prices of their native tokens to continuously increase. But the rapidly-increasing demand for both networks come with issues regarding scaling and liquidity.
Powered by WPeMatico