Paolo Ardoino said the DeFi space faced systemic risk when it only leveraged value from the digital asset space during the CryptoCompare Digital Asset Summit held in London.
“You cannot have algorithmic stablecoins relying only on the crypto-assets themselves,” Ardoino said. The whole value of the DeFi space, a mass of complicated financial products, can not be entirely based on the value of a volatile asset class without the very real possibility that at any moment it could all go up in smoke, he suggested.
MakerDAO came dangerously close to an emergency shutdown earlier this month after a sudden spike in demand for dai stablecoins and activity created a $4 million debt bubble as users tried to shore up undercollateralized loans.
Attracting Institutional Investors
To grow and attract institutional investors the DeFi space has to leverage value elsewhere to properly diversify risk.
“You can say anything you want about tether, but it’s resilient,” Ardoino said, adding that centralized US dollar collateral can, in his view, provide the DeFi ecosystem with a “safe set of shoulders.”
Tether has already made its first foray into the DeFi space, announcing it has partnered with ethereum-based lending protocol Aave in early March.
Aave CEO Stani Kulechov said integration with tether, which he said was a popular fiat gateway through OTC desks for institutional investors, could also help “inject liquidity into DeFi space.”
This means that tether is not expected to fall from its dollar peg and, he added, can act as collateral for DeFi products with less risk of a sudden price drop sparking an increase in liquidation.
“We need to keep evolving,” Ardoino said. Tether has to look to its strengths: “If the EU launched a global stablecoin tomorrow, of course [tether] cannot compete in market cap.”
Moving into DeFi allows the stablecoin provider to adapt the hedging characteristics of its volatility to a brand new use case.