The MakerDAO community, which is part of the Ethereum-based ($ETH) decentralized finance (DeFi) ecosystem, is preparing to vote on a proposal that aims to increase the savings rate for its stablecoin, Dai (DAI), to 3.33%. If approved, this move is expected to have broader implications for interest rates across the DeFi market.
In a tweet on May 26, the Maker team announced the upcoming Executive Vote, which seeks to implement a raise in the Dai Savings Rate (DSR) from 1% to 3.33%, pending approval.
The DSR (Dai Savings Rate) plays a vital role within the Maker Protocol system by providing users with the opportunity to deposit DAI and earn a consistent interest rate. This interest is calculated in real-time and accumulates from the system's revenues, as stated by Maker.
The proposal was initiated by Block Analitica, a risk management firm specializing in DeFi, and submitted by a member of MakerDAO's risk core unit team.
The DSR, short for Dai Savings Rate, refers to the interest rate that users earn by depositing their DAI into MakerDAO's DSR smart contracts. By locking their DAI tokens in these contracts, users can accumulate interest over time based on the DSR.
The DSR's funding is derived from the stability fees charged to users when they borrow DAI by collateralizing assets such as Ethereum ($ETH) and Wrapped Bitcoin ($WBTC). In addition to the DSR adjustment, the current proposal also encompasses changes to stability fees for specific types of collateral. These adjustments in the latest proposal also aim to ensure the stability and effectiveness of the MakerDAO system.
According to a MakerDAO blog post from August 2018, the DSR serves as a crucial monetary tool that helps maintain the balance between the supply and demand of DAI by providing incentives or disincentives for users to lock up their DAI in DSR contracts. MakerDAO emphasizes that the DSR is a global parameter that requires frequent adjustments to address short-term changes in the market conditions of the Dai economy.
To provide additional context to the proposal, Primoz Kordez, the founder of Block Analitica, encouraged the community to “prepare for [a] rate hike in DeFi.” Also stating that “[the] New proposal at MakerDAO will increase DAI DSR to 3.33% which will set rates higher across the DeFi landscape. Keep in mind DAI in DSR is the benchmark for [the] safest DeFi stablecoin yield.”
How The DSR Interest Hike Could Impact The Market
When the interest rate was previously increased to 1% in December, it led to “more than 35 million DAI being deposited in a month”, according to MakerDAO. However, despite this, DAI holders depositing their stablecoins into DSR Contracts were still earning less than what stablecoin suppliers at lending protocols like Aave and Compound earn, with the suppliers earning 2.5% and 2% respectively.
So, if the MakerDAO proposal does get approved, we could see a significant amount of capital flow to DAI DSR and push supply rates to a range of “3.5%+” according to Primoz Kordez, the Founder of Block Analitica. This change in the DSR is likely to have broader market implications which could also result in higher borrowing rates for Stablecoins in the DeFi ecosystem, with Phoenix Labs co-founder Sam MacPherson also mentioning this possibility.
“Borrow rates at your favorite lending platforms are about to jump to ~4.5% as Maker drastically raises the cost of capital.” -Sam MacPherson
Put simply, if traders exchange their stablecoins for DAI and deposit it into the DSR to make the most of the increased rates, there will be fewer stablecoins available to borrow in overall DeFi. While the choice to deposit the DAI into the DSR is not an obvious one, at $6.75B, Maker is already the second-largest protocol in DeFi by value locked.
Maker governance is yet to approve the increase to the DSR, though it is expected that if the change is approved, it could be as early as the June 7th Executive Vote.
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