MakerDAO’s Update is a Pure Expression of DeFi 2.0

IntoTheBlock explores how MakerDAO's update will allow it to interact with the secondary market with more control over DAI.

By: IntoTheBlock Loading...

On-Chain Markets Update by Juan Pellicer, IntoTheBlock

MakerDAO is back in the spotlight both for its new feature release as well as the surge of its token, MKR, by 24% in the last seven days.

A proposal was passed this week to launch a new feature called Dai Direct Deposit Module (D3M). This will allow Maker to directly interact with its secondary market by actively controlling the DAI supply according to its market demand. The effect will be better rates for its users and an increment in DAI supply. Such an increment will directly impact the MKR holders due to Maker auctions and token burns. We will show here some on-chain indicators about the current DAI growth and how the MKR holders are reacting.

Maker + Aave = Stable Rates

Periods of high demand in DeFi produce high spikes in borrowing rates that negatively affect users that have to pay higher than expected costs over their loans. D3M will act over the main DAI lending market (Aave) by stabilizing its DAI interest rates. When the demand for it is high, DAI will be minted and supplied over Aave to decrease its interest rates. Conversely, if demand is low DAI liquidity will be removed from Aave in order to increase its interest rate.

These adjustments will align DAI users and MakerDAO by keeping attractive and predictive rates (chosen by the DAO as a 4% borrow rate target) which will incentivize the usage of its users. Maintaining the cheapest borrowing rate among the three major stablecoins is a key competitive advantage that will make DAI use increase, since for many users the cheapest borrowing rate is the major deciding factor when borrowing stables.

DAI historical borrowing rates, according to Aavescan.

This mechanism, along with the current expansion of Aave towards other chains, is expected to improve the DAI utilization ratio and its peg while keeping Aave rates competitive. This usage increase of DAI potentially benefits MKR coin holders, since Maker’s auctions system will burn MKR and reduce its supply. Furthermore it benefits from the Aave liquidity mining program, by collecting AAVE tokens and earning governance rights in Aave Governance along the way.

Is issuing liquidity algorithmically considered DeFi 2.0?

The term most used between DeFi 2.0 proponents is liquidity. But protocol controlled value, positive feedback loops, and incentives alignment come with it. The D3M feature is all of that. It issues liquidity algorithmically and directs it towards secondary markets in a feedback loop that improves interest rates to drive up demand. That demand increase will accrue more fees and thus benefit the MKR holders with token burns.

This is similar to the mechanism used in Olympus DAO or Tokemak, where the users can benefit by allowing the protocol to direct liquidity towards secondary markets. It also resembles algorithmic stablecoin’s mechanism such as the ones of FRAX or DOLA where they directly exercise expansionary and contractionary monetary policies. All these protocols are seeking ways to directly interact with secondary markets in benefits of both users and the main protocol.

Meanwhile DAI usage continues to grow

The long-term perspective is supported by the fact that DAI usage continues to increase along with the DeFi growth. The number of addresses with DAI can be used as a proxy of users. Currently this metric is at an all-time high surpassing the 400,000 addresses mark, more than doubling from 197,440 on November’s last year. This data only accounts for Ethereum data, so its multi-chain figures are slightly larger.

DAI Total Addresses with balance, according to IntotheBlock DAI addresses on-chain indicator.

This increase in DAI usage can be measured as the amount of active loans taken in each protocol. Recently Aave gave in its first position to Maker, which currently stands as the leader with the largest amount loaned at $8.1b. This corresponds to the amount of DAI in circulation, which have doubled since May of this year when it was topping at $4b

Loans Outstanding, according to IntotheBlock DeFi indicators.

It seems that long term ‘hodlers’ of MKR are aware of the DAI growth and this protocol improvements and its number continues to increase. Over 20,000 addresses have been holding MKR for more than one year. The volume held by these addresses is around 190,000 MKR, which is almost 20% of the circulating supply:

MKR 1Y+ hodlers, according to IntotheBlock MKR ownership on-chain indicator.

These indicators showed that the increasing use of DAI continues to impact positively in the long term view of Maker. The new feature will increment DAI usage even more and consolidate Maker as the market leader in decentralized stablecoins and one of the main legs of DeFi. If you are interested in reading further about D3M, be prepared about the level of DeFi knowledge and the amount of work that is behind a feature launch like this with thoughtful discussions, risk assessments, and even simulations.