50% of IAD is blocked in Compound, why is this a concern?
Data from the blockchain company Flipside Bitcoin Circuit show that 50% of DAI, Maker’s decentralised stablecoin, is now in Compound (COMP). Although the data seems to be a positive factor for the growth of COMP, it shows a worrying trend for DAI.
Since June, the amount of IAD in DeFi’s protocol, Compound, has increased rapidly. In August, almost $800 million of IADs are in Compound.
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Why might this be a worrying trend for DAI
DAI is the dominant decentralized stablecoin in the cryptcoin market. Unlike other widely used stablecoins, such as Tether (USDT), DAI is maintained by a peer-to-peer ecosystem.
According to the Flipside Crypto researchers, when such a substantial part of the supply of IAD is concentrated on a single platform, it can lead to liquidity problems. Other users of other competing platforms may want to use IAD, but there may be a shortage of supply in the market.
In the last two months, the DeFi market has added over $4 billion in value. That naturally led to increased demand for most DeFi related projects and services. In particular, the appetite for decentralized stablecoins, such as DAI, and oracles increased significantly.
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As a result, a large number of IADs were directed to the dominant DeFi protocols. Current data from DeFi Pulse show that Compound is insured for a total value of more than $790 million, but investigators emphasized that the massive influx of IADs into Compound could become a problem. They explained:
„IAD is the only stablecoin with a backup. It is supposed to be more decentralized and resistant to censorship than USDC and USDT. But the lack of liquidity could translate into uncertainty about the use of IAD as a decentralized stablecoin in DeFi protocols.
Flipside Crypto further explained that many DeFi teams are frustrated by the limited liquidity and stability of IADs. These liquidity problems, which are inherently difficult to solve for any decentralised project, could be pushing users to centralised stablecoins.
Tether and USDC valuations have increased significantly since April. Now, Tether, the largest stablecoin in the world’s crypto market, is valued at more than $10 billion.
In the short term, the Maker and DAI ecosystem could solve the problem of maintaining liquidity. But if solutions are not forthcoming, researchers warn that it could damage the effect of the IAD network. The investigators pointed out:
„We have already seen many DeFi teams express frustration with the lack of liquidity and stability of IAD, and many choose to use USDC instead. This is likely to damage the effects of the IAD network in the long term if nothing is done to address the problem immediately.