The 8% yield of DAI is very attractive, but it will soon be a thing of the past.
The 8% DAI yield will soon disappear.
It is expected to drop to 5.58% in the short term, and most likely to drop to 5% in the long term.
With the activation of Enhanced DAI Savings Rate (EDSR), the 8% high yield has attracted a massive inflow of funds to DAI in the past few days. Many whales (represented by Sun Ge) and retail investors have rushed in, trying to share this rare low-risk, high-yield “cake”.
However, unfortunately, although the 8% yield is attractive, based on the current on-chain data and the MakerDAO community’s intention, this number is most likely to soon become a thing of the past.
Short-term adjustment possibility: 8% > 5.58%
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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 / total supply of DAI) has exceeded the threshold of 20%, and the current value is 22.5%.
According to the previous design plan of the MakerDAO community for EDSR values, the amplification factor of EDSR will dynamically change based on four different scenarios of DSR utilization rate, as follows:
When the DSR utilization rate is below 20%, the amplification factor of EDSR is 3 times the base DAI savings rate (commonly known as “DSR”), but the upper limit is 8%. Since the current base DSR value is 3.19%, the EDSR value within this range will only be 8%;
When the DSR utilization rate is in the range of 20% to 35%, the amplification factor of EDSR is 1.75 times the base DAI savings rate, so the EDSR value within this range will be about 5.58%;
When the DSR utilization rate is in the range of 35% to 50%, the amplification factor of EDSR is 1.35 times the base DAI savings rate, so the EDSR value within 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 base DSR value, which is 3.19%;
All the above dynamic changes will take effect only after the DSR utilization rate has been continuously within a certain range for 24 hours.
Based on the above design, it can be inferred that because the DSR utilization rate has currently risen to the range of 20% to 35%, if it continues for 24 hours, EDSR is expected to soon drop from 8% to 5.58%.
Long-term adjustment possibility: 8% > 5%
As for why there is another potential adjustment possibility in the long run, it is because on August 9th, MakerDAO founder Rune Christensen has proposed (currently in the early discussion stage) to change the original design plan for EDSR values.
The reason for this change is that Rune and other community users have found that although an 8% interest rate does effectively increase the demand for DAI, it also leads to a large amount of arbitrage in lending, causing most of the profits to flow to whale addresses rather than ordinary DAI holders.
The specific arbitrage operation involves MakerDAO’s first SubDAO project, SLianGuairk Protocol.
SLianGuairk Protocol is a decentralized lending protocol forked from Aave. The protocol allows users to borrow using the base DSR value (i.e. 3.19%). It is obvious that there is a large arbitrage space between the 8% interest rate inside the DSR contract and the 3.19% loan cost inside the SLianGuairk Protocol. As a result, many whale addresses have started to borrow DAI from SLianGuairk Protocol and deposit it into the DSR contract, thus amplifying their own profit situation.
In response to this, Rune has proposed three improvement measures.
The first measure is to reduce the upper limit of EDSR from 8% to 5%, and change the dynamic adjustment scheme of EDSR with the utilization rate of DSR. The new scheme is as follows:
When the utilization rate of DSR is in the range of 0% to 35%, the EDSR amplification factor is tripled, but will not exceed 5%;
When the utilization rate of DSR is in the range of 35% to 50%, the EDSR amplification factor is 1.3 times;
When the utilization rate of DSR exceeds 50%, EDSR will no longer be effective.
The second measure is to increase the loan interest rate in SLianGuairk Protocol (excluding pools ETH-A, ETH-B, ETH-C, etc.) from the base DSR value to the real-time EDSR value (based on the current utilization rate, it is estimated to be a maximum of 5%), so as to curb potential arbitrage activities in lending.
The third measure is a compensation measure. As the increase in loan interest rates will inevitably increase the cost for borrowers, Rune proposes to provide potential retrospective airdrops of SLianGuairk Protocol tokens (SPK) to borrowers.
A Few Words About SPK
Regarding the potential airdrop mentioned earlier, let’s talk a little more about it here.
On August 10th, Rune once again posted in the community to introduce the potential SPK pre-mining airdrop plan in SLianGuairk Protocol. He pointed out that the statistics for the airdrop should start from when the loan interest rate is increased to 5% (i.e., the maximum value of EDSR), and the specific allocation will be calculated based on the amount and duration of users’ loan assets.
In addition, Rune also supplemented the economic model design of all SubDAO tokens, including SPK, in the article.
The article pointed out that each SubDAO will distribute 2 billion tokens through liquidity mining in the first ten years after the token generation event (TGE), with 500 million tokens per year in the first two years, 250 million tokens per year in the following two years, 125 million tokens per year in the next two years, and 62.5 million tokens per year in the last four years.
According to the disclosed Endgame Plan by MakerDAO last year (subject to potential changes), the liquidity mining of SubDAO tokens (then known as MetaDAO) will be allocated to three pools, with 20% allocated to the DAI pool, 40% to the ETHD pool (the LSD token planned by MakerDAO), and 40% to the MKR pool.
Considering the expanding business scale of the SLianGuairk Protocol, it is possible that SPK will soon become the first SubDAO token to emerge. Whether it is through a hidden airdrop or a race to mine, it may be time to prepare in advance.