Why did the increase in DAI deposit rate to 8% split the MakerDAO community?

By Tim Craig, DL News

Compiled by: Felix, PANews

DeFi users have flocked to DAI after MakerDAO increased the yield on its stablecoin earlier this month. Since the community raised the DAI yield to 8% on August 6, DAI’s market capitalization (the circulating supply of stablecoins pegged to the U.S. dollar) has increased by 25% to $5.2 billion. While some members of the DAO behind Maker applauded the increase in yields, others disagreed.

PaperImperium, a MakerDAO community member and GFX Labs governance liaison, said: “This move will only allow the whale to continue to drain the treasury.”

But the rise in DAI yields has had a wider impact, with several other DeFi protocols also benefiting from the rise.

origin

The split began on August 4, when MakerDAO token holders voted to increase the yield offered to DAI holders from around 3% to 8%, as proposed by MakerDAO co-founder Rune Christensen as part of its endgame plan.

According to the proposal, Rune Christensen hopes to increase the yield of DAI, "stimulate the demand for DAI and Maker, and promote the sustainability of capital inflows."

Shortly after the vote, DAI market capitalization jumped to $5.4 billion as DeFi users rushed to take advantage of the higher yields.

While the stablecoin market capitalization has continued to decline, from a peak of $124 billion in early 2022 to around $74 billion today, DAI has seen a surge.

Doo Wan Nam, co-founder of DAO research and consulting firm StableLab and a former MakerDAO representative, said that DAI savings yield increased to 8% and deposits increased by 300%* (Nam refers to deposits in Spark Protocol, which is created by MakerDAO launches**, a lending protocol operated by blockchain research and development company Phoenix Labs. It allows users to deposit DAI to receive sDAI - a type of token with earnings Receipt tokens, similar to Lido's stETH and other liquid pledge tokens)*, the move is correct and reasonable.

Tom Wan, a crypto analyst at 21.co, said that the possibility of a potential airdrop for the Spark Protocol project has also stimulated demand for DAI. Many users arbitrage the difference between the DAI borrowing rate and the 8% DAI saving rate, with a yield of approximately 4%.

But the 8% DAI yield is short-lived.

After adding more than $1 billion to the circulation of DAI in less than a week, Christensen proposed another proposal on August 8 to lower the savings rate to 5%. Christensen cited the 8% interest rate as having been “instantly successful” in promoting DAI usage, but warned that lower interest rates are needed to discourage arbitrage by large players and for the long-term health of the Maker Protocol. The proposal was adopted and implemented on August 20.

As yields fell and many funds were withdrawn, DAI's market value shrank by about $200 million overnight. Since then, DAI’s market capitalization has stabilized at around $5.2 billion.

different opinions

The incident created divisions within the MakerDAO community. On the one hand, rewards are issued to DAI holders to help MakerDAO curb the decline in the market value of DAI. But critics of Christensen’s plan argue that the increase in DAI adoption may be temporary and unsustainable.

PaperImperium, a member of the MakerDAO community, believes that this move is not successful. Unless the scale of DAI holders utilizing the 5% rate of return through the Spark Protocol remains small, the 5% rate of return will be directly borne by the MakerDAO treasury, which will be unsustainable. While Maker’s income from its U.S. Treasury holdings should cover the 5 percent yield, moving that money onto the ethereum blockchain may be easier said than done.

The problem is that most of Maker’s revenue comes from off-chain. In reality, it rarely gets back on-chain for various reasons, and it is conceivable that if this is the case over the long term, the incentives for high yields will be found to be misguided. Others have also pointed out the drawbacks of using high DAI savings rates to promote growth.

Crypto analyst Tom Wan said that relying solely on high-yield strategies may not be the best choice. Top stablecoins such as Tether's USDT and Circle's USDC have occupied a large market share without providing holders with a high savings rate. USDT is currently the largest stablecoin in the encryption field, with a market value of more than $82 billion. The development of stablecoins ultimately depends on utility and adoption, and without specific use cases, stablecoins will have many profit-seeking holders who will abandon DAI as long as there is a better opportunity for profit.

However, other MakerDAO stakeholders are optimistic about the move.

Former MakerDAO representative Doo Wan Nam believes that assuming half of the DAI in circulation is deposited in Spark Protocol, the strategy of increasing the DAI savings rate is successful, and the 5% rate of return is sustainable.

“If the total supply of DAI does not change, then frankly the move is not successful. But considering that DAI’s market cap did increase (up 25%), this means that the overall financial change for DAI be more flexible".

Wider benefits

It’s not just MakerDAO and its related projects that are benefiting from the growth in DAI’s market capitalization. Term Finance, a DeFi protocol offering fixed-term rate loans, has fetched nearly $1 million in its first sDAI auction.

Billy Welch, co-founder of Term Labs, the company behind Term Finance, said that as a high-quality yield asset, sDAI is great collateral, but there aren’t many protocols offering collateral in the business yet.

Elsewhere, demand for DAI yields is flowing to other blockchains rather than Ethereum.

Martin Köppelmann, co-founder and CEO of the Gnosis blockchain, sees the increase in the DAI savings rate as a success, as it triggered a lot of users and projects to integrate sDAI.

Köppelmann explained that Gnosis is currently working on an integration to lock DAI on the bridge between Gnosis and Ethereum, thereby earning full DAI savings rate benefits.

"We've been planning to do bridging for a long time, but when interest rates were raised to 8%, it definitely pushed us to step up the pace," he said.

Related reading: Unopposed proposal: MakerDAO raises DSR to 8%, what are the pros and cons for the protocol?