Why Maker Is Up Over 30% Today

Maker's DAI stablecoin proved itself in turbulent times.

Maker (MKR) is one of the few cryptos that's been in the green in recent days. Not because of any major announcements -- though it did demonstrate real world utility as part of a smart contract payment for a shipment of Australian beef. But what's been driving Maker's price up is the fact that its main rival Terra (LUNA) is on the edge of collapse.

MakerDAO is the protocol behind the Dai (DAI) stablecoin, and Maker is the governance token. Stablecoins are a type of cryptocurrency that peg their value to another commodity, in this case the U.S. dollar. They are popular with crypto traders as they provide an easy way to move in and out of volatile markets. They also often pay high yields on deposits.

The trouble is, stablecoins are not exactly stable. Decentralized stablecoin providers are competing to find the holy grail: A stablecoin that holds its value no matter what is happening in the rest of the market. And the failure of a rival is why Maker is up over 30% today. 

How Maker's DAI stablecoin works

DAI has leapfrogged into position as the fourth biggest stablecoin in circulation. Fiat-backed Tether (USDT) and USD Coin (USDC) are now in third and fourth places in the crypto market cap charts. However, instead of keeping $1 in reserve for each token issued as USDT and USDC should, DAI uses a mix of other cryptocurrencies to support it. This makes DAI the only major decentralized crypto-backed stablecoin. 

Maker uses a system of vaults, where investors deposit crypto as collateral, including Bitcoin (BTC) and Ethereum (ETH). It can then generate DAI and use it to earn yield or even spend it. Maker over collateralizes what are essentially loans to ensure the system doesn't collapse even when major cryptos plummet.

Terra's model also involved crypto reserves. TerraUSD (UST) worked in tandem with the platform's LUNA token. It had a system to burn or mint UST or LUNA to increase or decrease the prices as needed. Its non-profit, the Luna Foundation Guard also had a reserve fund in place to prop up UST's price at times of extreme volatility. But as LUNA plummeted and UST repeatedly lost its peg, the foundation's efforts were a drop in the ocean. 

Maker beats rival Terra

Terra may find a way to rise from the ashes, but it is extremely unlikely. LUNA is down 98% in seven days and its UST stablecoin touched $0.30 again this morning, according to CoinMarketCap data. Just a few months ago, Do Kwon, the CEO of Terraform Labs tweeted: "By my hand, $DAI will die." His aggressive words ring hollow today as it was UST that died and Maker surged as a result. 

Maker's DAI maintained its price even as the crypto market crashed around it. As a result, it validated its model and inspired confidence. However, Maker has had problems maintaining its peg in the past and its recent success does not guarantee it won't stumble again in the future.

For crypto investors, recent events show how precarious even established stablecoins can be. They may offer ways to earn APYs of upwards of 10%, but there's also a risk of complete collapse. They carry a lot more risk than dollar deposits kept in a traditional bank account. Don't be deceived by the name, stablecoins have yet to prove they are as solid as they sound.