Network Effect at Risk? Why 50% of DAI Locked in Compound Is a Concern

Data from blockchain intelligence firm Flipside Crypto show that 50% of DAI, Maker's decentralized stablecoin, is now on Compound.

While the figure seems a positive factor for COMP's growth, it shows a concerning trend for DAI. Since June, the amount of DAI on the Compound Decentralized Finance protocol rapidly surged.

As of August, nearly $800 million worth of DAI is on Compound.

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.

"DAI 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."

In the immediate-term, the Maker and DAI ecosystem could address the issue to uphold liquidity.

If no solutions are presented, the researchers warned it could damage DAI's network effect.

"Already we're seeing a lot of DeFi teams express frustration over DAI's lack of liquidity and stability, with many opting to use USDC instead. This is likely to damage DAI's network effects in the long run if nothing is done to address the issue immediately."

Despite the sharp market correction that took place on August 11, Compound's COMP token increased by more than 41%. Maker, the network which DAI is based on, also recorded a 20% rise overnight.