The dollar-pegged Dai stablecoin has become one of the most promising projects in the blooming Ethereum ecosystem, and the stablecoin’s ascension is poised to continue, too, if its unique yield mechanism can continue to offer impressive returns.
Indeed, in what’s become the latest brow-raising thread around the Dai, Maker (MKR) token holders — the stewards of the Dai — just voted to increase the Dai Savings Rate, or the DSR, from 6 percent to 7.75 percent.
The spell has been cast🧙♂️
— Maker (@MakerDAO) January 26, 2020
Introduced last November, the DSR is a novel mechanism for the Dai that gives its backers another monetary lever through which to maintain the stablecoin’s $1 peg.
How’s it work? Simply put, users can lock their Dai into a special smart contract to automatically start collecting interest. This system affects demand, which in turns affects the peg.
As for what we’ve seen so far, the DSR has steadily been on the rise since last fall, making it increasingly attractive to investors. Of course, that rate can go up or down and is decided on a rolling basis by MKR voters. But if it stays this high or goes higher, Dai adoption — and Ethereum adoption in extension — could see a boon.
The Early Killer Ethereum Use Case?
There’s nowhere in the world today you can take a small amount of money into a traditional, brick-and-mortar bank to open a savings account that’d fetch 7.75 percent in annual interest.
The Dai and its DSR does make that kind of yield possible, and furthermore it does so digitally and permissionlessly — avenues that offer major user experience (UX) advantages over key aspects of mainstream banking.
“This is an asset that’s pegged to the dollar, earning about 4x what US banks offer on savings accounts, accessible to anyone, anywhere,” Camila Russo, creator of The Defiant newsletter, recently noted.
That’s impressive stuff. And while there are certainly various risk considerations at work, for Ethereum proponents it’s hard seeing the DSR hitting 7.75 percent as anything other than a big success that’s worthy of some evangelizing. Even when the DSR was sitting lower at 6 percent, community chatter was already growing with regard to highlighting the rate’s acutely attractive yield.
Billboards all over San Francisco.
— Alex Masmej ☄️ (@AlexMasmej) January 26, 2020
More attention and more demand means more users will be onboarded, suggesting the DSR — if it stays high — should become more popular and thus an increasingly looked-to possibility for investors, first in the cryptoeconomy and then later maybe beyond.
“An increase in the Dai Savings Rate will increase the demand for buying Dai at an exchange, depositing the purchased Dai in the DSR contract and earning interest,” Ethereum Price creator Nick Cannon has aptly explained.
60% of all DAI is locked in a DeFi savings account
Let me convert to normal speak:
DSR = savings w/ the Fed (lowest risk)
Compound = savings account w/ commercial bank
DyDx = savings account w/ a specialty bank
— Ryan Sean Adams – rsa.eth (@RyanSAdams) January 24, 2020
Variety Is the Spice of DeFi
The most interesting thing about Dai is that it’s a non-sovereign programmable dollar built on top of Ethereum. That means it can be experimented with and extended in all kinds of interest ways.
For instance, consider just how many versions of Dai there already are, and things are still quite early. Courtesy of an excellent list put together by ConsenSys’s Jordan Lyall, there are presently almost 30 existing Dai varieties, e.g. Dai, Sai, cDai, aDai, rDai, and so forth.
Each of these varieties bring something different to the table, and decentralized finance projects can leverage and iterate on their unique use cases in practically endless ways.
One of the newest additions to the Dai arena is “Chai,” which tokenizes the DSR so that users don’t have to directly lock up their own Dai to directly capitalize on whatever the DSR is at any given time.
It’s just one interesting and fresh example of how Dai is now at the center of a boom in DeFi innovation, which generally bodes well for Ethereum going forward.