Why does the increase in DAI deposit interest rate to 8% cause a split in the MakerDAO community?

Why does the 8% increase in DAI deposit interest rate split the MakerDAO community?

Author: Tim Craig, DL News

Translation: Felix, LianGuaiNews

After MakerDAO increased the yield rate of stablecoins earlier this month, DeFi users flocked to DAI. Since the community raised the DAI yield rate to 8% on August 6th, the market value of DAI (the circulating supply of stablecoins pegged to the US dollar) has increased by 25% to reach $5.2 billion. While some members of the MakerDAO DAO behind Maker appreciated the increase in yield rate, others were skeptical.

LianGuaiperImperium, a member of the MakerDAO community and GFX Labs governance liaison, said, “This will only allow whales to continue borrowing from the depleted treasury.”

But the rise in DAI yield rate has had a broader impact, benefiting several other DeFi protocols as well.

Background

This split began on August 4th, when MakerDAO token holders voted to raise the yield rate offered to DAI holders from around 3% to 8%, as part of a final plan proposed by MakerDAO co-founder Rune Christensen.

According to the proposal, Rune Christensen hoped to increase the yield rate of DAI to “stimulate the demand for DAI and Maker, as well as promote the sustainability of capital inflows.”

Shortly after the vote was passed, due to DeFi users rushing to take advantage of the higher yield rate, the market value of DAI soared to $5.4 billion.

Despite the continuous decline in the market value of stablecoins, 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 former representative of MakerDAO, said that with the DAI savings rate increased to 8%, deposits have increased by 300% (Nam referred to deposits in the SLianGuairk Protocol, which is a lending protocol launched by MakerDAO and operated by blockchain development company Phoenix Labs. It allows users to deposit DAI to receive sDAI, a receipt token with yield, similar to Lido’s stETH and other liquid staking tokens), which is a reasonable move.

Tom Wan, a cryptocurrency analyst at 21.co, said that the possibility of potential airdrops for the SLianGuairk Protocol project also stimulated the demand for DAI. Many users arbitrage the difference between the DAI borrowing rate and the 8% DAI savings rate, with a yield rate of about 4%.

However, the 8% DAI yield rate was short-lived.

In less than a week, after the circulation of DAI increased by over $1 billion, Christensen proposed another proposal on August 8th to reduce the savings rate to 5%. Christensen mentioned that the 8% rate had achieved “rapid success” in promoting DAI usage, but he warned that in order to prevent arbitrage by large holders and for the long-term healthy development of the Maker protocol, the rate needed to be lowered. The proposal was passed and implemented on August 20th.

Due to the decrease in yield rate, many funds were withdrawn, and the market value of DAI shrunk by about $200 million overnight. Since then, the market value of DAI has stabilized at around $5.2 billion.

Disagreement

This event has sparked disagreement within the MakerDAO community. On one hand, rewarding DAI holders helps MakerDAO curb the decline in DAI market value. However, critics of Christensen’s plan argue that the increase in DAI adoption may be temporary and unsustainable.

MakerDAO community member LianGuaiperImperium believes that this move is not successful unless DAI holders consistently hold a small amount through the SLianGuairk Protocol, which offers a 5% yield. Otherwise, relying on a 5% yield directly from the MakerDAO treasury would be unsustainable. Although the income Maker receives from its holdings of US Treasury bonds should be able to cover the 5% yield, transferring that money onto the Ethereum blockchain may be easier said than done.

The problem lies in the fact that most of Maker’s revenue comes from off-chain sources. In reality, very little can be brought back on-chain for various reasons. It can be imagined that if this continues in the long term, the incentive measures of high yields would be seen as a mistake. Others have also pointed out the drawbacks of using a high DAI savings rate to promote growth.

Cryptocurrency analyst Tom Wan believes that relying solely on high yield strategies may not be the best choice. Leading stablecoins such as Tether’s USDT and Circle’s USDC have captured a significant market share without offering high savings rates to holders. Currently, USDT is the largest stablecoin in the cryptocurrency space with a market capitalization exceeding $82 billion. The development of stablecoins ultimately depends on utility and adoption. Without specific use cases, stablecoins will have many profit-driven holders who will abandon DAI as soon as better profit opportunities arise.

However, other stakeholders in MakerDAO are optimistic about this move.

Former MakerDAO representative Doo Wan Nam believes that if half of the circulating DAI is deposited into the SLianGuairk Protocol, then the strategy of increasing the DAI savings rate is successful and the 5% yield is sustainable.

“If the total supply of DAI does not change, then candidly speaking, this move is not successful. But considering that the market value of DAI has indeed increased (up 25%), it means that DAI’s overall finance has become more resilient.”

Broader Benefits

The increase in DAI market value benefits not only MakerDAO and its related projects. DeFi protocol Term Finance, which offers fixed-term interest rate loans, raised nearly $1 million in its initial sDAI auction.

Billy Welch, co-founder of Term Labs, the company behind Term Finance, stated that sDAI is a good collateral asset as a high-quality income asset, but currently, there aren’t many protocols offering collateralized loans.

Elsewhere, the demand for DAI yields is flowing to other blockchains, not just Ethereum.

Martin Köppelmann, co-founder and CEO of the Gnosis blockchain, believes that increasing the DAI savings rate has been successful because it has triggered many users and projects to integrate sDAI.

Köppelmann explained that Gnosis is currently working on integration in order to bridge the gap between DAI locked in Gnosis and Ethereum, thus gaining full DAI savings rate returns.

“We have long planned to do bridging work, but when the interest rate increased to 8%, it undoubtedly urged us to accelerate our pace.”

Related reading: Unopposed Proposal: MakerDAO Increases DSR to 8%, What are the Pros and Cons for the Protocol?