DAI's 8% Yield Is Sweet, But Soon It's Gone

With the activation of the Enhanced Dai Savings Rate (EDSR), the high yield of 8% has helped DAI attract massive capital inflows in the past few days, and a large number of giant whales (representative Sun Ge) and retail investors have rushed to try to divide up A rare low-risk, high-yield "cake".

But unfortunately, although the 8% rate of return is delicious, but combined with the current data on the chain and the wishes of the MakerDAO community, this number will most likely become a thing of the past soon.

Short term adjustment possible: 8% > 5.58%

Makerburn data shows that as more and more DAI is deposited into the DSR contract, the overall utilization rate of the current DSR contract (the amount of DAI in the DSR contract / the total supply of DAI) has exceeded the threshold of 20%, and the current value is 22.5%.

According to the previous MakerDAO community's design plan for EDSR values, the EDSR multiplier will change dynamically with the four different situations of DSR utilization, as follows:

• When the DSR utilization rate is lower than 20%, the EDSR increase rate is three times the base DAI savings rate (that is, what we most often call "DSR"), but the upper limit is 8%, since the current base DSR value is 3.19% , so the EDSR value in this range will only be 8%;
• When the DSR utilization rate is in the range of 20% - 35%, the EDSR multiplier is 1.75 times the base DAI savings rate, so the EDSR value in this range will be about 5.58%;
• When the DSR utilization rate is in the range of 35% - 50%, the EDSR multiplier is 1.35 times the base DAI savings rate, so the EDSR value in this range will be about 4.15%;
• When the DSR utilization rate exceeds 50%, EDSR will no longer take effect, and the contract will only use the basic DSR value, which is 3.19%;
• All the dynamic changes mentioned above will take effect only after the DSR utilization rate stays within a certain range for 24 hours.

Combining the above design, it can be seen that since the DSR utilization rate has currently risen to the range of 20% - 35%, if it lasts for 24 hours, the EDSR is expected to drop from 8% to 5.58% soon.

Long term adjustment possible: 8% > 5%

As for why there is another potential adjustment in the long-term, it is because Rune Christensen, the founder of MakerDAO, released a proposal on August 9 (currently in the early stage of discussion), saying that he hopes to change the original EDSR numerical design scheme.

The reason for this change is that Rune and other community users found that although the 8% rate of return did effectively increase the demand for DAI, it also created a large amount of loan arbitrage, which made most of the benefits flow to the giant whale address , not ordinary DAI holders.

The specific arbitrage operation involves Spark Protocol, MakerDAO's first SubDAO project.

Spark Protocol is a decentralized lending protocol forked from Aave, which supports users to make loans with the basic DSR value (ie 3.19%). Obviously, there is a lot of room for arbitrage between the 8% rate of return in the DSR contract and the 3.19% loan cost in the Spark Protocol. As a result, a large number of giant whale addresses began to choose to borrow DAI from the Spark Protocol to deposit in the DSR contract , thus magnifying its own earnings.

In response, Rune proposed three improvements.

• One is to lower the upper limit of EDSR from 8% to 5%, and at the same time change the dynamic adjustment scheme of EDSR with DSR utilization. The new scheme is as follows:

When the DSR utilization rate is in the range of 0% - 35%, the EDSR will increase by 3 times, but will not exceed 5%;

When the DSR utilization rate is in the range of 35% - 50%, the EDSR increase rate is 1.3 times;

When DSR utilization exceeds 50%, EDSR will no longer be effective.

• The second is to increase the loan interest rate in the Spark Protocol (except the three pools such as ETH-A, ETH-B, and ETH-C) from the basic DSR value to the real-time EDSR value (according to the current usage rate, it is estimated that after the adjustment will be a maximum of 5%), thereby curbing potential lending arbitrage activities.
• The third is compensation measures. Since increasing loan interest rates will inevitably increase the cost of lenders, Rune proposes to provide lenders with a potential retroactive airdrop of Spark Protocol tokens (SPK).

Talk about SPK more

Let me say a few more words about the potential airdrop mentioned above.

On August 10th, Rune published an article in the community again introducing Spark Protocol's potential SPK pre-mining airdrop plan. He pointed out that the airdrop statistics should start when the loan interest rate is increased to 5% (that is, the maximum value of EDSR), and the specific share will be based on The amount and duration of the user's loan assets are calculated comprehensively.

In addition, Rune also supplemented the article with the economic model design of all SubDAO tokens including SPK.

The article points out that each SubDAO will issue 2 billion tokens through liquidity mining within the first ten years of the token TGE, of which 500 million tokens per year in the first two years, 250 million tokens per year in the next two years; 125 million per year; 62.5 million per year for the last 4 years.

According to the Endgame Plan disclosed by MakerDAO last year (not sure whether it will be changed in the future), the liquidity mining of SubDAO (also called MetaDAO at that time) tokens will be distributed to three pools, of which 20% will be allocated to DAI Pool, 40% will be allocated to the ETHD (the LSD token that MakerDAO plans to make) pool, and 40% will be allocated to the MKR pool.

Considering the growing business scale of Spark Protocol, perhaps SPK will be launched as the first SubDAO token soon. Whether it's an ambush airdrop or grabbing the first mine, it's probably time to make some preparations in advance.