Exponential downgrades MakerDAOs DAI pool risk rating from low to average

Exponential, an investment platform for crypto holders, has downgraded MakerDAOs DAI pool risk rating from Low to Average, according to the latest information shared with Finbold on August 9.

The decision is in line with Exponential‘s recent collateralization strategy and increasing reliance on real-world assets (RWAs), and it is accompanied by the platform’s recent decision to downgrade the rating of the USDA stablecoin as well.

Crypto overcollateralized with MakerDAO

MakerDAO allows users to take loans by overcollateralizing with cryptocurrencies.

Initially, DAI was mostly backed by assets such as Ethereum (ETH) and Wrapped Bitcoin (WBTC), which offered an overcollateralized model and kept risks relatively low.

However, analysts at Exponential have expressed concerns with MakerDAOs shift toward incorporating RWAs into its collateral mix.

In an interview with Investing.com, Exponential co-founder Mehdi Lebbar summarized the concern, stating:

“Makers move towards incorporating real-world assets (RWAs) into its collateral mix represents a significant departure from its original single-asset model. This diversification, while appealing in a high-interest rate environment, introduces new layers of risk that must be addressed.”

Lebbar also emphasized the importance of making the decentralized finance (DeFi) community understand how these assets generate yield and the potential implications of RWA-backed vaults failing to perform as expected.

Increasing yield with RWAs

The introduction of RWAs has allowed MakerDAO to offer an 8% yield on its DAI Savings Rate (DSR).

However, it exposes DAI holders to greater counterparty risks, especially when it comes to legal arrangements and transparency.

A recent report notes that RWAs now make up nearly 30% of DAIs total backing, and even if they are a smaller portion of the overall collateral, there have already been four defaults in smaller RWA vaults.

Exponential analysts warn that similar issues in larger vaults could trigger a bank run, potentially destabilizing DAIs 1:1 peg to the US dollar.

Lebbar suggested that improvements in collateral quality could potentially mitigate some risks, but he cautioned against further reliance on lower-quality collateral without rigid risk control.

USDA stablecoin downgrade

The USDA risk rating has also been downgraded from Lowest to Low due to concerns about its collateral backing, specifically its heavy reliance on the Morpho Blue protocol.

Over 50% of USDAs reserves (around $17 million) are deposited in Morpho Blue, a relatively new and less-tested money market, a concentration of assets that introduces a significant risk.

This downgrade also comes in light of past issues, such as the March 2023 Euler hack, where $17.6 million of Angles USDC reserves were affected, which highlighted the risks of depending on external protocols for collateral management.

With the evolving nature of the DeFi space, new vulnerabilities can emerge, and Angles reliance on Morpho Blue increases the potential for loss, posing risks to USDA stability and liquidity.