MakerDAO Hikes Fees More Than 140% To Prevent ‘DAI Demand Shock’

MakerDAO has increased the stability fees associated with minting its DAI stablecoin by between around 140% and 150% to protect against the token suffering a possible demand shock.

The move was implemented on March 10 following the passing of an “accelerated” executive proposal on March 8. The proposal approved hiking the fees associated with minting DAI against ETH, stETH, WBTC, and via its Spark money market protocol from between 6.41% and 7.18% to between 15% and 17.25%.

The yield paid on DAI deposits via the DAI Stability Rate (DSR) also increased from 5% to 15% alongside the fee hikes to encourage users to hold the token, while the delay on governance vote implementation reduced from 48 hours to 16 hours.

MakerDAO described the moves as temporary measures designed to protect against “a potential excessive DAI demand shock caused by further bullish sentiment” as traders offload stablecoins to speculate on digital assets amid the recent crypto rally.

“This set of proposed, non-standard changes is a proactive measure designed to protect the Maker Protocol from temporary market volatility,” MakerDAO tweeted. “Once the market stabilizes, all procedures and parameter configurations are expected to revert to their regular settings.”

MakerDAO noted that its Peg Stability Module (PSM) reserves have fallen $320 million. The protocol also holds approximately $1.1 billion worth of real-world assets (RWAs), predominantly comprising U.S. Treasury Bills. However, the RWAs are subject to daily redemption limits, which may “delay processing relative to the demands on the on-chain stablecoin reserves.”

Dwindling reserves

PaperImperium of GFX Labs, a MakerDAO governance delegate, said more than $900 million was fed into the PSM last week to cover large outflows. The funds were sourced by accessing USDC from cold storage and unwinding exposure to U.S. Treasury Bills. PaperImperium added that Maker’s Treasury Bill exposure has been steadily falling for the past three months.

PaperImperium attributed the massive PSM outflows to borrowing rates on MakerDAO and Spark being low compared to other DeFi protocols due to rates being driven by the three-month Treasury Bill yields.

“As DeFi rates rose relative to TradFi, MakerDAO was mispricing the cost to borrow from vaults or Spark,” PaperImperium said. “In a floating currency, this would spark inflation. In a fixed exchange rate currency (like DAI), this drains foreign currency reserves (USDC) to defend the peg.”

PaperImperium said the PSM’s USDC reserves were “26 minutes minutes away from running out” amid the heavy outflows. Although the project still holding ten figures worth of Treasury Bills, the wire transfers would not be processed over the weekend, prompting the “drastic” rate increases.

MakerDAO is currently the fourth-largest DeFi protocol with a total value locked of $9.78 billion, according to DeFi Llama. Its MKR token is up 2% in the past 24 hours and gained 25% in seven days.