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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 (COMP). 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 (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 DAI’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:

“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.”

Flipside Crypto further explained that many DeFi teams are frustrated about DAI’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.

The valuations of Tether and USDC have increased significantly since April. Now, Tether, the largest stablecoin in the global cryptocurrency market, is valued at over $10 billion.

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 DAI’s network effect. The researchers noted:

“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.”

COMP and Maker continue to thrive

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.

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.



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