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07/27/2023

Community Reactions to MakerDAO’s Plan to Raise DAI Interest Rate to 8%

Overview of the Proposal The new proposal, named "Enhanced DSR," was introduced by MakerDAO founder Rune Christensen in the forum. Here are the key points to avoid confusion and controversy: * Interest Rate Structure: The proposal does not fix the DAI interest rate at 8%. Instead, as users deposit DAI into the DSR contract, the interest rate will gradually decrease based on the utilization rate. Notably, this decrease is one-directional, meaning the rate won’t increase if the DAI deposit rati

Community Reactions to MakerDAO’s Plan to Raise DAI Interest Rate to 8%

Overview of the Proposal

The new proposal, named "Enhanced DSR," was introduced by MakerDAO founder Rune Christensen in the forum. Here are the key points to avoid confusion and controversy:

  • Interest Rate Structure: The proposal does not fix the DAI interest rate at 8%. Instead, as users deposit DAI into the DSR contract, the interest rate will gradually decrease based on the utilization rate. Notably, this decrease is one-directional, meaning the rate won’t increase if the DAI deposit ratio falls.
  • Utilization Rate: This can be understood as the ratio of DAI locked in DSR to the total DAI supply in the market. Thus, the 8% interest rate will likely remain until 20% of the total DAI supply is locked in DSR.
  • Trial Basis: Rune mentioned that this proposal could be trialed and, if it fails, the Stability Advisory Council could immediately vote to terminate the program.

Community Reactions

Previously, MakerDAO approved a proposal to use revenue to buy back MKR tokens, contributing to a recent surge in MKR’s price by 25% over the past week.

Mixed Opinions:

  • Cost Concerns: Some in the community, like PaperImperium, expressed skepticism about lending DAI at around 3.5% and offering 8% on it, suggesting it might merely benefit large trading desks and yield farmers, thus impacting the funds available for MKR buybacks.
  • Risk Management: A forum member raised concerns about the multiplier coefficient in Rune’s proposal, emphasizing the need for a safety margin to guard against bad debt scenarios.

Competitor Commentary:

  • Curve Finance: The competing DeFi platform questioned MakerDAO’s ability to generate the yield necessary to support an 8% interest rate.

Supportive Views:

  • Selective Yield Application: Some believe that since the 8% interest only applies to a portion of the total supply, the remaining DAI can generate sufficient yield to cover the 8% cost for the 20% of the total supply.
  • Declining Market Cap: Over the past three months, DAI’s market cap has decreased from approximately $4.7 billion to $4.2 billion. This proposal aims to incentivize users to hold DAI, thereby stabilizing its market cap.
  • Recent Rate Adjustments: Despite recently raising the DSR to 3.49%, MakerDAO quickly reduced it to 3.14%. Additionally, the platform has been lowering liquidation thresholds, reducing the risk of liquidations for borrowers, in line with the strategy to encourage DAI loans.