As the USD peg of the popular Dai stablecoin has slid beneath $1 in recent weeks, the Maker community, creators and users of the dual-token MKR and DAI ecosystem, are considering a new governance proposal aimed at correcting the stablecoin’s dollar peg.
Dai, a rising token star in the Ethereum space, can be self-lent using Collateralized Debt Positions, or CDPs, through the Maker team’s CDP Portal dapp. These positions allow users to take out decentralized loans using ether (ETH) as collateral. Maker collects a so-called “Stability Fee,” currently 1.5 percent, on all Dai generated via CDPs.
Governance Proposal to Raise Dai Stability Fee
On Monday, March 4th, the Maker Foundation Interim Risk Team, which Maker community development director Richard Brown has said “craft[s] proposals that allow the community to implement a healthy monetary policy to keep the supply and demand of Dai in balance,” introduced a governance proposal to raise the Dai Stability Fee to 3.5 percent.
— Maker (@MakerDAO) March 4, 2019
A Governance Poll voting period will run until March 7th. During this time, MKR token holders can vote on a resolution in support or against the fee increase. The resolution will be used to guide a final Executive Vote on March 8th.
In a community announcement, Maker’s Brown said the Risk Team’s latest analyses indicated acute action needed to be taken in order to return the Dai peg to $1:
“An examination of the available data strongly suggests a Stability Fee increase is warranted. The exchange price of Dai across several major exchanges, such as Coinbase Pro and Bitfinex, has been consistently hovering in the $0.975 to $0.985 range for 1-2 months. Decentralized exchanges with sufficient volume/liquidity, such as Eth2Dai, also confirm the same discrepancy.”
Brown said large Dai inventories “among market makers and prop desks” and lackluster impact “from the previous Stability Fee increases” were at the crux of why a further fee increase was needed.
“Incentivizing CDP closures through a Stability Fee increase (thereby reducing outstanding Dai) is strongly viewed as the appropriate action,” he added.
Close Your CDP Out, Why Don’t You!
The Dai Stability Fee is generated over the lifetime of a CDP, so the longer you have your position open, the more debt you accrue.
A fee increase of 1.5 percent will ensure that CDPs become that much more expensive, with the idea being that some users will naturally close their positions — and thus reduce the amount of Dai in existence — to avoid the price hike.
Recently, MakerDAO is being truly tested.
DAI value is averaging under 1$ and might continue to since too many DAIs are created. This is likely caused by people creating DAI to lend/margin via Defi tools (e.g. Compound).
Solution? Increase the stability fee significantly. https://t.co/KUD580IZ2F
— Philippe Castonguay (@PhABCD) March 4, 2019
Of course, it remains to be seen if a 3.5 percent Stability Fee will be enough to right the Dai peg in short order, as two previous fee hikes proved ineffective as yet.
In the very least, the proposal’s introduction highlights that the Maker community is currently grappling with how best to return stability to its increasingly popular stablecoin.
Thinking About Interest Rates
As the Ethereum ecosystem’s vision of open finance marches forward, a series of permissionless lending platforms have risen up in its purview.
The one we’ve been discussing so far has been Maker CDP Portal dapp, which is eyeing an interest rate hike to 3.5 percent. It’s not yet clear if that raise will be voted into action, but there appears to be a groundswell of support around the hike.
Two other contenders for Ethereum’s stablecoin lending mantle are Compound and Dharma Lever. Compound uses variable interest rates, which slide up or down continuously. And Dharma Lever, a crypto borrowing and lending platform, is presently in its alpha stage and has a tentative interest rate of 0.1 percent, though Dharma’s Max Bronstein has said that rate “is subject to change based on market demand.”
How all three of this platforms fare in the years ahead is an open question for now, but cryptoverse users are sure to watch their interest rates closely going forward.