MakerDAO Considers Boosting DAI Savings Rate To 8%

One of the oldest DeFi projects is having a breakout week.

MKR, the governance token of MakerDAO, has surged over 25% to $1,170 in the past seven days. Prior to this week, the token hadn’t been above $1,000 since October 2022.

Maker is a lending protocol which, at $5.15B, has the third-highest total value locked (TVL) in DeFi. Maker’s key product is DAI, an overcollateralized stablecoin pegged to the U.S. dollar.

There doesn’t appear to be a clear catalyst for the price action, but key changes are coming soon for Maker— the first is a vote which went through on July 16, which approved monthly MKR buybacks.

Sam Macpherson, who formerly worked for MakerDAO and is now working on Spark Protocol, a lending platform centered around DAI, told The Defiant that the protocol is set to buy roughly $7M worth of MKR per month.

Traders may be frontrunning the anticipated buying pressure.

Macpherson also thinks it’s possible that a discussion about a one-time program to raise the Dai Savings Rate (DSR), a module which pays users interest on their DAI deposits, is contributing to MKR’s price action.

Enhanced DSR

A post on Maker’s forum by Rune Christensen, the controversial founder of the protocol, is pushing for an increase in the DSR from 3.19% to 8%. That is much higher than stablecoin yields on major lending platforms like Compound and Aave where rates are generally between 2% and 3%. Likewise, Treasury bills are yielding roughly 5.5%. Given prevailing market conditions, an 8% yield on DAI will be highly attractive.

Christensen thinks of the increase as a growth initiative. “We cannot lose sight of the fact that growth is the lifeblood of the project at this (still) early stage,” he wrote.

As more users deposit into the DSR, the rate will correspondingly decrease. This would be a one-way decrease, meaning that, if utilization drops down, the rate won’t increase again. The extra yield on the DSR would come from Maker’s revenue, which stems from the interest it earns when people collateralize their assets to borrow DAI.

As it stands, people can borrow DAI for far cheaper than the proposed 8% and earn a spread on the difference between the rates.

The DSR was restarted in December and picked up a major deposit of $77M from Olympus DAO in February. MacPherson said that the rate increase would have to be cleared by MKR holders.

Maker is both DeFi’s most mature protocol and one of its most complex. The project is undergoing an overhaul of its governance structure and considering developing its own blockchain. Maker’s revenues are increasingly coming from “real world assets.” And meanwhile, its dependence on USDC, widely criticized due to USDC’s reliance on traditional financial institutions, is decreasing.

All of the changes come against the backdrop of a dropping DAI supply — the market capitalization of the stablecoin peaked at nearly $10B in February 2022. After the collapse of Terra in May of that year, roughly $2B dollars of DAI left circulation in just a week as collapsing prices forced users to close out their collateralized debt positions to avoid being liquidated.

The supply of DAI has never recovered to May 2022 levels — intuitively this makes sense as users borrow against volatile assets like ETH to mint DAI — the lower ETH and other digital assets’ prices are, the less DAI people can borrow.

DAI’s circulating supply now sits at $4.2B.