Ethereum yield farming change could "sharply break" DAI's $1 peg: analyst

Published on by Cryptoslate | Published on

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Yield farming has arguably been a good thing for the Ethereum blockchain.

A proposed change to the Compound DeFi protocol purportedly threatens to upset the stability of the DAI stablecoin and the MakerDAO ecosystem.

Compound may soon change how COMP is mined - and DAI could be affected.

As it's somewhat complicated, the long and short of the change is that it is implemented, it will remove leverage from yield farming while also aiming to more equally distribute the altcoin.

According to Cyrus Younessi, a risk analyst at Maker, this change could have a disastrous effect on the stability of the DAI stablecoin, algorithmically pegged to the U.S. dollar.

As it stands, DAI has been largely kept out of the yield farming equation due to the low yields offered when using this market.

With the patch, which has been unanimously agreed on by COMP holders, Younessi believes that DAI will become one of the most important assets to Ethereum yield farmers.

"Due to the high APY for COMP farming, there is a chance that we see an unprecedented demand for Dai. Much of the natural supply for Dai could also be locked up in COMP farming, thinning out sell-side orderbooks."

That's to say, DAI could lose its peg to $1. Younessi further explained that DAI could break its "Peg sharply," forcing the cryptocurrency further off its peg as DAI demand explodes due to the Compound's incentive structure.

With Compound incentivizing users to take DAI off exchanges and use it to yield farm, liquidity dries up, prices are likely to rise, and a series of second-order effects appear for Ethereum users.