Decentralized finance (DeFi) protocol MakerDAO increased its DAI savings rate (DSR) to 1% in December 2022. The move led to over 35 million DAI being deposited within a month, as per MakerDAO.
Now, a new proposal to increase the DSR to 3.33% is under discussion. The proposal was put forth by risk management firm Block Analitica and submitted by MakerDAO’s Risk Core Unit Team. The proposal needs to be approved through an Executive vote before the changes are applied.
The DSR enables users to lock up MakerDAO’s DAI stablecoin in DSR smart contracts and earn interest. Basically, when users borrow DAI against collateral like Ethereum (ETH) or wrapped Bitcoin (WBTC), they have to pay stability fees, which fund the DSR. Thus, the new proposal also aims to change the stability fees for certain assets used as collateral.
According to MakerDAO, the DSR is a key monetary policy lever. It helps balance the demand and supply of DAI by either incentivizing or disincentivizing users from locking up DAI. DSR is often adjusted to deal with short-term changes in the market conditions of the Dai economy.
Broader market implications
A Block Analitica executive noted on Twitter that the rise in DSR could be a “huge tailwind for the entire defi ecosystem.”
Phoenix Labs co-founder Sam MacPherson, who was previously a lead developer at MakerDAO, believes the rise in DSR is likely to have broader market implications. He tweeted:
“Borrow rates at your favorite lending platforms are about to jump to ~4.5% as Maker drastically raises the cost of capital.”
Lending protocols like Aave and Compound offer rates of up to 2.62% on stablecoins like USD Coin (USDC), Tether (USDT), and DAI. The change would thus allow MakerDAO to offer higher rates than its competitors in hopes of bringing more capital.
This change could potentially result in higher borrowing rates for stablecoins in the DeFi ecosystem. If traders choose to exchange their stablecoins for DAI or withdraw from other lending platforms in order to deposit DAI into DSR contracts, the overall supply of stablecoins would decrease. As a consequence, borrowing costs would rise.
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