Yesterday, two hacks on decentralized finance (DeFi) protocols netted a total of over $5 million, with a further $5 million siphoned off from compromised wallets on Wednesday.

While the founders of two OG protocols, Aave and Maker (now Sky), bro’d down over Starcraft while basking in a “DeFi renaissance moment,” some of the sector’s less well-established projects were going down in history for the wrong reasons.

Repeat DeFi hack or a new bug?

First up was Onyx Protocol whose $3.8 million loss was first thought to be a repeat of the well-known bug that drained $2.1 million from the project toward the back end of last year.

Read more: Compound DAO asleep at the wheel as $25M governance ‘attack’ passes

Onyx is a fork of Compound Finance, which contains an infamous vulnerability in which freshly-launched, empty lending markets are briefly left open to a price manipulation attack, if not handled correctly.

Given the popularity of Compound’s v2 codebase with fast-forking DeFi devs, the bug is exploited with alarming regularity across the sector, and was initially identified as having been the cause of Onyx’s latest loss.

However, as the team pointed out in a ‘post-mortem’ thread on X (formerly Twitter), this time the vulnerability also lay in the platform’s ‘NFT Liquidation contract.’ The attacker was able to drain the vUSD stablecoin which was then sold off, causing it to depeg.

Something’s not adding up

Next came ‘bitcoin restaking’ protocol Bedrock which appeared to be overly bullish on ETH, costing it around $2 million.

Read more: ‘Cryptographic performance art’ drains contract one block after launch 

The faulty code allowed users to mint Bedrock’s uniBTC token at a 1:1 ratio with staked ETH tokens, not taking into account the price difference between the two assets (valued at the time at approximately $65,000 vs $2,650, respectively).

The uniBTC tokens were then sold off for an alternative wrapped bitcoin token, for a return of almost 25x.

Crypto security auditor Dedaub claims to have identified the vulnerability in advance, stating that such a simple bug could be discovered and exploited automatically by ‘fuzzing bots.’

Despite warning the Bedrock team two hours before the attack, there was no response due time zone differences. However, by raising the issue separately with Pendle, a platform with $30 million of exposure to uniBTC, further losses were successfully averted.

The Bedrock team responded to the incident, reassuring users that all uniBTC collateral remains intact. It estimated the losses at “approximately $2 million (mostly in DEX LPs),” adding that a “comprehensive reimbursement plan is being finalized.”

Compromised keys?

On Wednesday, real-world-asset-focused Truflation warned of “some abnormal activity,” which it attributed to a malware attack.

Read more: Chelsea FC sponsor BingX tried to hide $40M hack behind ‘wallet maintenance’

Blockchain investigator ZachXBT traced total losses of over $5 million from addresses identified as the project’s “treasury multisig and personal wallets,” providing a list of addresses via his Investigations Telegram channel.

While the initial disclosure was scant on details, it does mention a reward to any whitehats able to aid the investigation. This was followed up with an on-chain message to the hacker, offering a 10% ‘bounty’ for the return of the funds.

Assuming funds aren’t returned before 8am (UTC) on Saturday, the bounty will be opened up to the public in return for information leading to a conviction.

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Maker, the organization that has been issuing so-called stablecoin DAI since December 2017, has decided to introduce the ability to remotely freeze some of its stablecoins. It is incentivizing users to convert DAI into a new stablecoin, USDS, which will grant Maker insiders the ability to remotely freeze coins.

For years, the self-described decentralized autonomous organization (DAO) has described DAI as a “decentralized currency that is not influenced by any entity or factor.” Now, its team has replaced that description at the top of its homepage — still cached at search engines like Google — with the much briefer “A better, smarter currency.”

USDS’ freeze function “is generally expected to follow rule of law from jurisdictions where Maker needs a high level of certainty that the legal system will enforce recourse against real-world asset collateral.”

Maker insiders noted that although the intention is to activate the remote freeze function, the exact timeline for activating it on-chain might be months or even years.

For years, Maker distinguished itself from centralized stablecoin issuers like Tether that openly admit their ability to remotely freeze coins. Despite Tether’s USDT stablecoin existing on blockchains like Ethereum or Solana and generally trading for $1 apiece, Tether executives have the discretion to devalue the backing of particular USDT to $0 no matter where they are circulating in the world.

Read more: Moody’s reports 600 stablecoin depegs in 2023

The end of Maker’s “not influenced by any entity” era has arrived. Although it’s keeping certain DAI tokens circulating that don’t have the ability for a remote freeze function, it’s rebranding DAI entirely and emphasizing its new stablecoin, USDS.

During a phase-out period that is presently underway, Maker will enforce a 1:1 convertibility peg between DAI and USDS. Furthermore, it’s incentivizing users to leave DAI for USDS with a suite of financial rewards at Sky.money, its new application for “native token rewards.”

Maker is also introducing a new governance token, SKY, that’s apparently superior to Maker’s prior governance token, MKR. Founder and leader Rune Christensen assures his fans that all of these changes will attract vast sums of capital to Maker that will somehow, in his view, match Tether’s reserves within three years.

A better, smarter currency — with a remote freeze button

Crypto veterans immediately criticized Maker for introducing its remote coin freeze capability, claiming it simply allows executives to comply with international banking regulations — anathema to the crypto ethos.

Indeed, Maker backs its stablecoins with many real-world assets, including instruments benefiting from the yield of US treasuries.

All of these changes follow Christensen’s occasionally bizarre string of promises to ultimately make DAI a non-stablecoin for the benefit of the world. He has promised to tackle climate change, use AI to govern Maker, abandon Ethereum for Solana’s blockchain, introduce “metaDAOs” or “subDAOs,” and abandon seven years of DAI’s $1 peg entirely for a free-floating exchange rate.

As a waypoint along this circuitous path toward whatever future Maker is heading toward, Christensen is putting financial incentives on USDS to encourage DAI holders to convert to USDS — with its remote coin freeze ability — and SKY.

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MakerDAO, the lending protocol that operates the popular Dai stablecoin, has passed an executive vote that will disable future borrows against wrapped bitcoin (WBTC) after it was announced the asset was transitioning to a new joint venture that would involve BiT Global, BitGo, and Justin Sun.

The changes don’t affect current borrows of WBTC but will prevent users from making new borrows against it. 

There’s currently approximately $466 million in WBTC value in MakerDAO, according to data from makerburn.com.

This proposal also reduces stability fees for several assets, including ETH and WBTC, and reduces the Dai Savings Rate to 6%.

Read more: Justin Sun has 99 problems and WBTC is two of them

This change comes after BitGo, the custodian that has traditionally held the bitcoins associated with WBTC, announced it was transitioning WBTC to a joint venture between itself, BiT Global, and Sun.

Initially, BiT Global, which is advised by Sun, was going to hold two of the keys, but following community backlash, the model has changed so that BitGo will hold two of the keys.

BitGo has emphasized that this change will result in greater jurisdictional decentralization, but the community has raised concerns about the involvement of Sun and the less well-known BiT Global. 

Unchained has reported that Aave, another lending platform, is preparing to onboard TBTC, another bitcoin collateralized token, following these changes to WBTC. 

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Yesterday’s MakerDAO proposal to mint up to one billion Dai via Ethena’s USDe and sUSDe collateral is proving controversial.

Coming just three days after a $100 million trial run was rapidly snapped up by users looking to ‘loop’ leverage and multiply Ethena’s (already outsized) yields, concerns have been raised over the speed at which Dai itself would become exposed to a brand new asset.

Skeptics say the move will port the underlying risks of Ethena’s new ‘synthetic dollar’ to Dai, which is widely used across decentralized finance (DeFi), leading to worries of a potential depeg which could create systematic risk throughout the sector.

Read more: Ethena offers 27% on stablecoins but where is the yield coming from?

As stated by Maker delegate and risk consultant monet-supply, the vault would start with a cap of 600 million Dai, which could be adjusted up to 1 billion according to demand and risk assessments.

Despite the staggered approach, 600 million Dai isn’t exactly small change with the total amount of Dai minted from USDC currently totaling approximately 600 million according to data from MakerBurn. Others have called the move “reckless,” especially given how recent Ethena’s product is.

Shortly after posting the above, Aave governance delegate Marc Zeller went on to author a proposal on Aave’s forum citing “the unpredictability of future governance decisions by MakerDAO” as a worry concerning Dai’s future potential impact on Aave. 

He proposes reducing Dai’s loan-to-value (LTV) to zero, making it unable to be used to borrow on Aave, as well as exempting Dai from Aave’s rewards program, Merit. Recognizing this may be polarizing, the resulting vote may contain both conservative and aggressive options.

However, Zeller’s criticism may also be influenced by the protocol via which the Dai is being issued, Aave-competitor Morpho. In February, Zeller proposed cutting certain Morpho users out of Merit rewards. The following week, long-time Aave risk advisors Gauntlet Network jumped ship to Morpho.

Zeller was even accused of hypocrisy, given that Aave governance is in the process of discussing onboarding sUSDe collateral. However, the ‘differentiators’ are elements of risk management and the size of the caps, according to Aave founder Stani Kulechov and Zeller, not the use of Ethena’s collateral in itself.

Other key figures have commented on the issue, with Alchemix’s @scupytrooples pointing out the damage a USDe depeg could do to all the DeFi products relying on Dai.

Read more: Advisors leave Aave as protocol punishes competitors 

Inverse Finance founder Nour Haridy also points out that Maker may be shooting themselves in the foot by pushing the risk profile of Dai.

But last month, Maker’s founder Rune Christensen defended the idea of using Ethena assets as collateral. Christensen is seemingly willing to write off the risk of centralized exchanges (CEX) blowing up, a la FTX, and instead rely on the use of custodians. 

Ethena currently has 49% of its collateral being used to trade on Binance, almost certainly custodied at Binance-affiliated Ceffu. Binance and its chief exec, Changpeng Zhao, recently pleaded guilty to felony financial crimes. The remainder is being used at ByBit, Deribit, and OKX, custodied at Copper and COBO.

BlockTower has a separate MakerDAO proposal for it to deploy USDC into the Ethena ecosystem. However, GFXLabs pointed out that the fee BlockTower proposed it should be paid seems to be against Maker policies.

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DeFi has had a rough two years. During the halcyon days of DeFi Summer 2020, it promised to build an alternative to banks and the traditional financial system. Two years later, bad actors have stolen billions of dollars through a series of hacks, scams, and pyramid schemes and many are questioning how decentralized DeFi really is — or ever was.

Returning to the word “decentralized,” many critics now view the descriptor as misleading. Is a DeFi protocol actually decentralized if it has, say, fewer than 50 liquidity providers, fewer than 50 controlling voters, or fewer than 50 Discord participants? What about if it has fewer than 50 GitHub commits or fewer than 50 administrators selecting governance topics and tabulating Snapshot.org votes?

By any of those standards, only a small handful of DeFi protocols would qualify.

Maker’s leadership team makes the important decisions

Most DeFi protocols don’t actually satisfy the definition of their leading descriptor: decentralized. Central development teams still control most DeFi protocols.

For example, $7.8 billion in value is locked within the ecosystem of Maker’s “Decentralized” Autonomous Organization (DAO). Maker backs one of the world’s most popular stablecoins, DAI, which has a market capitalization of more than $5 billion.

Rather than keeping the liquidity that backs DAI on public blockchains, MakerDAO instead pays centralized asset managers who are signatories to off-blockchain investments. These include an expansive bond portfolio, real estate, and an assortment of commercial contracts. As signatories to these assets and the proposers of other investments, Maker’s leadership makes critical investment decisions on behalf of the community’s treasury.

What’s more, approximately half of Maker’s collateral is USDC which is a permissioned stablecoin redeemable at only one issuer, Circle, that has unilaterally censored particular USDC tokens. USDC and its variants like PSM-USDC-A make up approximately one-third of its collateralization. Maker’s collateralization chart divides things by asset, debt ceilings, and stability fee. It has “ETH-A,” “ETH-B,” and “ETH-C” categories that all use ETH but have different stability fees and debt ceilings.

Frax fails an audit, appears barely decentralized

Another allegedly decentralized stablecoin, the $1 billion FRAX, also has a large bag of USDC. Indeed, USDC comprises an overwhelming 93% of the assets locked in Frax’s smart contracts and liquidity protocols.

Worse, a September audit turned up major trust issues with Frax’s leadership, including administrators having special, little-known powers. Their elite privileges include the ability to mint unlimited amounts of frxETH, change the state of the frxETHminter protocol, and withdraw funds from frxETHminter. (Frax’s frxETH is a proprietary version of Ethereum whose liquidity and peg underpins the peg of FRAX.)

Administrators could also set any address as a validator — even their own. They also flagged potential security flaws that could lead to a malicious validator using a front-running attack.

All of these findings highlight the centralized decision-making and trust needed for an ostensibly decentralized stablecoin to maintain its peg. Auditors rated admin privileges for Frax Finance as “Medium Risk.”

DeFi darling Aave doesn’t look any better

Some DeFi apps like Aave might get around the risk of a single rogue admin by requiring multiple parties with access to a multi-signature wallet to agree to make changes. Aave currently has nine owners of its multi-signature wallet, however, just three can approve a change. Moreover, multi-signature wallets are not foolproof, especially if a few owners collude to make a change without permission from others.

Uniswap pretends to be community-governed

Many DeFi protocols have governance tokens distributed to multiple voters. However, DeFi apps like UniSwap use a voting model that gives more power to entities that hold more tokens (or at least, can convince token holders to delegate their tokens to the voting pool that they control). This wealth-based voting model allows entities that can afford to buy more tokens to have a controlling influence over the protocol.

Administrators can also make decisions without consulting voters. For example, UniSwap removed 100 tokens from its website without any public vote at all. It insisted that the tokens were only being removed from its website interface and not the protocol, yet almost all UniSwap users interact with the protocol from the website.

Read more: Explained: MakerDAO’s plan to break the dollar peg

How much is decentralized in DeFi?

DeFi uses branding to distract retail investors — promising decentralized governance that rarely exists in practice. Typically, a very small group owns multi-signature wallets, controls admin functions, leads code development, and selects the issues that are put up for vote. The ICO craze might have died down years ago, but governance token issuances are remarkably similar. DeFi promoters still entice retail investment by promising high returns or pitching visions of a better future with bank-free decentralized finance.

Most of these protocols will likely fail to become truly decentralized, however. The developers will likely still control them or give most of the power to big investors. Auditors could even find flaws in the code that could give administrators control of the smart contracts. In all, it seems that the many shortcomings of DeFi turn the promise of decentralization into a disingenuous branding exercise.

For more informed news, follow us on Twitter and Google News or listen to our investigative podcast Innovated: Blockchain City.

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MakerDAO, the protocol that issues the Dai stablecoin, has passed a governance proposal beginning the transition to its “Endgame Plan.” This plan fundamentally changes many aspects of MakerDAO.

Here’s a breakdown of the proposal’s main points:

Clean Money

In October of 2021, MakerDAO founder Rune Christensen unveiled his new vision for what Maker was to become, and it all centered around a concept he called Clean Money. It was a way to take the collateral backing Dai and use it to tackle catastrophic climate change. This was to be the vision that would unite the Maker community and bring its together with a common purpose.  

This isn’t actually a new belief within the MakerDAO community, with its sustainable finance principle, passed in 2018, saying: “that governance of the collateral portfolio take long-term societal, environmental, and sustainability impact into account.

The Maker project as a whole must keep the principles of sustainable finance as a core value, and always include negative externalities as a key factor in risk assessments of collateral. This means that Maker will be biased towards, for example, renewable energy that provides a long-term global benefit, while being biased against funding fossil fuels and other assets that create long-term risk.”

Rune hoped that “within a year we can allocate 3 billion or more of our USDC exposure into ESG corporate bonds protected by a world-class trustee in the UK or another Super Country.”  One year later, MakerDAO has invested $0 of its collateral into ESG corporate bonds protected by a world-class trustee in the UK or another Super Country.

USDC and “real world assets”

USDC is specifically referenced by Rune because it represents one of the largest potential risks to the Dai stablecoin. According to makerburn.com 81% of Dai in circulation was minted from ‘stable collateral,’ dominated by USDC. This does somewhat exaggerate the scale of the problem though as, unlike other vaults, the stablecoin vaults are not over-collateralized. USDC and USDP together make up approximately 42% of the total collateral locked for Dai. These stablecoins are such a meaningful risk to Dai because the issuers can choose to blacklist those tokens and make them valueless at any time, but many parts of Maker either explicitly or implicitly assume they will continue to have the value of a dollar. This was one of the motivators behind trying to reduce that exposure in favor of US Treasuries. 

Besides the stablecoins, Maker has increasingly relied on other real-world assets, bridged assets, and other assets that could come under pressure from regulators and law enforcement.  

Maker’s critics have suggested for years that this represents an untenable situation, with these assets fundamentally undermining Maker’s goal to be a censorship-resistant stablecoin.

Rune hoped when he announced the Clean Money initiative that Maker would be able to shift assets from USDC into other bonds that would increase the yield that it was earning. This would arguably make it harder for regulators or law enforcement to quickly disable Dai.  

Maker’s Endgame Plan

The Endgame Plan is a fundamental re-working of many parts of the Maker protocol that changes some of the expectations people have of it.

One of the changes is an intent to create a variety of MetaDAOs – smaller communities that own parts of Maker functionality or growth. Nominally MetaDAOs are supposed to help manage some of the political and interpersonal issues that Maker governance has struggled with, but they’re incredibly complex. Each MetaDAO will have its own treasury, which the MetaDAO will not control, and will instead be under the control of the Maker Core DAO.

Each MetaDAO will also have its own token, operate its own front end, and will have yield farming. MakerDAO will be moving from a two-token system (plus collateral) to a many-token system, with a complex system of token economics that will hopefully allow MetaDAOs to create their own value while still returning value to Maker Core.  

The intention is for there to be GovernorDAOs who “are responsible for organizing the Decentralized Workforce of Maker Core,” CreatorDAOs who “focus on growth and innovation in the Maker ecosystem,” and ProtectorDAOs who focus on “intermediating Maker Cores interaction with the physical world.”  The plan is to start with two of each for six MetaDAOs in total.

At all times, Maker Core, which will still be managed by MKR holders instead of MetaDAO token holders, will maintain control of all the MetaDAOs and their treasuries. The votes in MetaDAO are signaling and will still require Maker Executive Votes to be executed.  

The ability to create sustainable communities and values surrounding managing individual aspects of a broader community has yet to be proven and will likely be an ongoing challenge for the MakerDAO community. Many DAOs see very low participation and even Maker’s recent important governance vote to see if the pre-Endgame Maker Improvement Proposals (MIPs) should be passed only saw approximately 16% of governance token voted.

Besides breaking up the current organizational structure of Maker, the Endgame Plan also intends to fundamentally change the type of collateral and stance that MakerDAO takes.  

Rune now believes that a “physical crackdown against crypto can occur with no advance notice, and with no possibility of recovery even for legitimate, innocent users. This violates two core assumptions that we used to understand RWA risk, making the authoritarian threat a lot more serious.”

This was the motivating factor behind many of the changes that he hopes to have incorporated into Maker. Broadly, these changes are motivated by a desire to have Maker become more censorship-resistant and harder for regulators to pressure. This is clearly noted by the three phases that Rune describes for Maker.

The first is called “Pigeon Stance” and is basically where Maker is now. During this phase, which is intended to last the first two and a half years, Maker is focused on earning income and storing ether for the next phase.  

After two and a half years, unless delayed or begun early, the goal is to enter “Eagle Stance” and reduce the seizable assets to less than 25% of the total. If necessary, this is when they intend to break Dai’s peg to the dollar to achieve this goal.  

Finally there’s “Phoenix Stance,” which is only meant to be activated in times of global instability or if an attack on collateral is expected. Remember, this can come at any time with zero warning. In this phase, all remaining seizable assets are sold to acquire more staked ether.  

The other change related to stages is trying to increase the amount of staked ether that the protocol controls, in the hope that it will continue to increase the amount of ether the protocol controls.  

Finally, historically the assumption has been that if vaults cannot be liquidated for sufficient value to cover the debt, and the protocol surplus was not adequate, then MKR would be sold off into the market to keep the protocol solvent. It has always been possible for that process to be interrupted by governance, but the explicit assumption is now that this backstop is entirely optional and “the possibility of passing on a loss to Dai holders through a haircut to the target price becomes explicitly possible.” This means while MKR holders will still have the ultimate say over the protocol, they’ll no longer be the ones assumed to be diluted to make others whole.

Read more: The supply of Ethereum will be 100M by 2027… or 2061

What’s actually changing?

Having said all of that, the initial pre-Endgame MIPs do not make all of those changes. They create an emulation of the vault that will be controlled by the protocol and which will be used to hold stEth. It broadens the mandate for some core units, changes the collateral onboarding process, and removes some older MIPs. The process for launching the first MetaDAOs is beginning. 

The rest of the plan is still to come, but in a sense, it does start the clock. The Endgame Plan expects that in three years it will be time to move to “Eagle Stance” and potentially break the peg to the dollar, however, MKR token holders are still in a position where they can choose to indefinitely delay that transition. They’ll find this appealing due to the additional income from purchasing bonds and custodying USDC with Coinbase to earn yield, especially if the assumptions around them needing to provide a backstop are gone.  

MKR holders may end up incentivized to extend the “Pigeon Phase” indefinitely and continue to find ways to continue to increase the yield because it will primarily benefit them.

Consequences of peg breaks

If MakerDAO does choose to enter the “Eagle Phase” and break the peg then it will have second-order effects across the ecosystem. Any protocol that implicitly or explicitly assumes that Dai will be worth a dollar would have problems with this type of peg break, and so over the next couple of years it will be increasingly important for every protocol to make sure that assumption is not baked anywhere into the protocol. It’s also vital to have adequately tested and hardened solutions to manage a sudden peg break from Dai (a thing that most protocols should already have for all stablecoins).  

A previous peg break was the motivator for onboarding so much centralized collateral in the first place. Having Dai pegged to the dollar is one of the reasons that it has so meaningfully outperformed its competitors like Rai that allow the peg to float. Rai currently has a market cap of less than 0.25% of Dai. Shifting back towards a conception of Dai where the peg can break and with this type of change in collateral will also affect demand for Dai, which may have feedback loops as the protocol tries to adjust its collateral.

Read more: MakerDAO passes proposal to increase yield as stablecoin ban looms

What’s it mean?

I’ve referenced Rune’s communications repeatedly here, and that’s in large part because he’s been by far the largest voice advancing this change to the protocol.  

He’s correctly identified a risk to the protocol, came up with what he believes is a solution, and passed the signaling vote. But the very structure of the “Pigeon Phase” he designed may disincentivize MKR holders from dealing with the problem he identified, by allowing them to profit from inaction. A “solution” that disincentivizes solving the problem is not a solution.  

Then if the “solution” is advanced nonetheless, it will permanently alter the demand for Dai and its place in the ecosystem, and potentially harm or break other protocols.  

All with less than 20% of voters expressing their opinion.

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MakerDAO has passed a governance decision that will create new vaults where its native token DAI will be invested into treasuries and corporate bonds to earn yield.

As interest rates rise, increasing the amount of yield that MakerDAO is able to earn will likely help retain investors, who may seek to move funds elsewhere in a bid to earn more yield. The market cap of DAI has fallen from a peak of about $10 billion in February to $6.3 billion at press time.

Monetalis Clydesdale is the “DeFi asset advisor” assisting in the proposal, known as MIP65. Initially, one million DAI will be allocated to verify that Monetalis Clydesdale will be able to access it.

Once the one million is successfully withdrawn, 250 million DAI will be allocated to Bank Sygnum, which will help with the asset purchases and holding. At a later date, an additional 250 million DAI will be sent to investment management firm Baillie Gifford, which will also help with purchasing and holding the assets.

Read more: Comparing Binance Smart Chain and Ethereum

MakerDAO yield decision comes as legislation looms

The proposal comes at a precarious time for Tether-like assets such as DAI. Reports indicate a new bill may soon be proposed that could potentially ban stablecoins like DAI for two years.

According to Bloomberg, the latest version of the bill would ban the creation of new stablecoins “marketed as being able to be converted, redeemed or repurchased for a fixed amount of monetary value, and that rely solely on the value of another digital asset from the same creator to maintain their fixed price.”

It’s unclear whether such a ban would be placed on pre-existing stablecoins that fit the description, such as DAI. However, the bill would also prohibit the co-mingling of customer funds with company assets, in a bid to keep customers safe in the event of bankruptcy.

For more informed news, follow us on Twitter and Google News or listen to our investigative podcast Innovated: Blockchain City.

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