MakerDAO Announces Further Interest Rate Adjustments

After two days of implementing the 8% interest rate, the MakerDAO - DAI community has proposed new adjustments to adapt to the current market conditions.

New Proposal "Adjustment GOV12.1.2"

In the new proposal titled "Adjustment GOV12.1.2," founder Rune Christensen highlighted the positive reception of the EDSR (Enhanced Dai Savings Rate) approach, which set an 8% interest rate for DAI. However, the project needs some tweaks to adapt to the market.

According to Rune's initial EDSR proposal, the 8% interest rate would be supported for DAI if the proportion staked in the DSR (Dai Savings Rate) was less than 20% of the total supply. However, within just two days, this 20% threshold was quickly exceeded due to two main reasons:

1. High Interest Rates Attracting Capital: The high interest rate drew significant capital into the DSR. ETH whales tended to stake ETH, borrow DAI, and deposit it into the DSR to enjoy the high returns.
2. Interest Rate Disparity Among Lending Platforms: The borrowing cost for DAI on lending platforms was only 3.19%, while the deposit interest rate in the DSR was already 8%.

Upcoming Changes to the EDSR Model

Due to these limitations, Rune has announced three main changes to the EDSR model:

1. Maximum EDSR Value: The maximum EDSR will be reduced from 8% to 5%. Additionally, the threshold to start reducing the interest rate will be 40% of the total supply staked in the DSR, instead of the previous 20%.
2. Second Interest Rate Framework: This will activate in the 40-55% range of the total supply staked in the DSR, with a lower multiplier of x1.3 instead of x2.5.
3. Minimum Borrowing Rate for DAI: The minimum borrowing rate for DAI will be set at 5%. This change aims to curb borrowing at low rates and reaping the difference through the DSR. However, MakerDAO's ETH vaults and DAI borrowers will still enjoy preferential rates.

Challenges and Considerations

Rune acknowledged that these changes might introduce some barriers, particularly as higher DAI borrowing rates could reduce user demand on other platforms. However, he suggested that a 5% rate is reasonable, especially given the high global interest rate environment.

Regarding DAI lending rates, Rune mentioned that the Spark Protocol wouldn't be able to lower interest rates as it might again encourage "arbitrage" actions from the DSR difference. Instead, this solution might consider offering airdrop rewards for product usage to compensate users.

At the time of writing, these drafts from Rune Christensen are still in the proposal phase and have not yet been voted on by the DAO. Previously, in his EDSR draft, the founder also admitted that increasing the DAI interest rate to 8% was an experiment and could face limitations. However, the project always has a risk limit and an emergency cutoff to address arising issues.

Additionally, the account banteg has provided updated data on the DSR and the amount of DAI staked in the protocol. The data clearly shows the correlation between the DSR interest rate and the proportion, and the demand to lock DAI in MakerDAO to earn interest.