The Aave DAO community has voted to delist Paxos-issued Binance USD (BUSD) from Aave V2 Ethereum market. The decision was preceded by a proposal submitted by Mark Zeller, founder of the Aave Chain Initiative, in early March, seeking to discourage the use of BUSD.
Mark Zeller’s concerns revolve around the regulatory risk associated with BUSD’s centralized structure. As a centralized stable coin, BUSD is vulnerable to regulatory scrutiny that could affect its supply over time. Zeller proposed raising the cost of borrowing BUSD while lowering the interest received from lending to the token, to incentivize users to switch to other stable coins.
The proposal garnered support from a majority of Aave DAO members, with over 99% of those who voted in favor of it. With the community’s approval, Zeller developed the Aave Improvement Proposal (AIP) to implement the changes, and the voting process is scheduled to start on March 10th.
This decision is a significant development in the DeFi space, where decentralized platforms continue to challenge centralized ones. DeFi protocols like Aave offer users a more trustless way to interact with the financial system while providing higher yields on assets. Delisting BUSD strengthens the decentralization of the Aave platform while reducing counter-party risks.
The Risks of Centralization in Stablecoins
Stable coins like BUSD play a crucial role in DeFi and crypto in general. They provide a stable medium of exchange and a store of value, allowing users to avoid the volatility inherent in cryptocurrencies like Bitcoin and Ethereum. However, stable coins pose unique risks that distinguish them from conventional cryptocurrencies.
Unlike Bitcoin, for instance, stable coins are usually centralized, with most of them being issued by a single entity that controls their supply. This centralization makes them vulnerable to regulatory scrutiny or even censorship risks, as the government can target the issuer to control or disrupt the supply of the stable coin.
Furthermore, stable coins are often backed by fiat currencies or other assets, requiring a level of trust in the custodian or issuer’s ability to maintain the peg. Centralized stable coins pose counter-party risks, where users must trust that the issuer has enough collateral to redeem the stable coin in case of a black swan event.
Aave’s decision to delist BUSD from its platform highlights the importance of decentralization in the DeFi landscape, where trust in counter-parties is minimized. Decentralized stable coins like DAI, which have their collateral backed by other cryptocurrencies and governed by a DAO, offer an alternative that mitigates some of the risks of centralized stable coins.
The Implications of BUSD Delisting on the DeFi Market
The delisting of BUSD from the Aave platform may have implications for the DeFi market. It could lead to a reduction in the supply of BUSD being used in DeFi protocols, affecting its liquidity and demand. This will negatively impact Paxos, which issued BUSD on the Binance Chain, leading to potential losses for the issuer and its users.
On the other hand, the delisting of BUSD could increase the demand for other stable coins, such as USDT, DAI, and USDC, which offer similar functionalities to BUSD. For instance, USDT, which is the most popular stable coin, has a market cap of over $36 billion, with over $12 billion being used in DeFi protocols. USDC is the second-largest stable coin, with a market cap of over $9 billion and $3 billion being used on DeFi platforms.
The increase in the demand for these stable coins is beneficial for the DeFi market by improving liquidity, reducing counter-party risks, and promoting the decentralization of the ecosystem. Additionally, it highlights the importance of maintaining a pluralistic approach to stable coins, rather than relying on a single centralized issuer.
Conclusion
Aave’s decision to delist BUSD from its platform exemplifies the risks associated with centralized stable coins and underscores the importance of decentralization in the DeFi ecosystem. The proposal submitted by Mark Zeller and its subsequent approval by the community highlights the democratic nature of DeFi and the benefits of community governance.
The implications of BUSD delisting on the DeFi market are mixed, ranging from negative impacts on Paxos and its users to potential benefits in improving liquidity, reducing counter-party risks, and promoting the use of alternative stable coins. Overall, the decision to delist BUSD from the Aave platform represents another milestone in the development and growth of DeFi, emphasizing the community’s commitment to promoting trustlessness and resilience in the face of centralization risks.
