MakerDAO, the decentralized autonomous organization, has been drawing attention due to a recent surge in the Dai Savings Rate (DSR) from 3.19% to a whopping 8% on August 6. This temporary rise, known as the Enhanced Dai Savings Rate (EDSR), was conceived to motivate more holders of Dai (Maker’s stablecoin) to deposit their tokens on the Maker protocol and earn interest. Since the inception of the EDSR, the Dai token has seen a substantial upswing, with its market cap inflating by over $570 million, according to CoinMarketCap data.
Moreover, figures from the Makerburn dashboard reveal that the number of DAI in the DSR program has soared, shifting 396.8 million on August 6 to its present value of 906.7 million. Despite the monumental success of the EDSR, Christen Rune, co-founder of MakerDAO, has suggested revising this incentive plan “based on observed data.”
Proposed EDSR Optimization Plan
On August 8, Rune put forth a governance proposal on the MakerDAO forum to optimize the EDSR. The motivation behind this proposal is to address the current dominance of ETH whales over regular Dai holders concerning the program’s benefits. Rune pointed out that the yields on Dai, which are higher than the cost of borrowing Dai, have resulted in a borrowing activity known as “borrow arbitrage.” This is where traders borrow Dai at 3.19% and deposit it in the EDSR program for an 8% profit. Rune expressed that this was not the intended purpose of the EDSR plan. This investment strategy, Rune noted, is primarily adopted by ETH and staked ETH whales, who now receive a higher yield at the expense of regular Dai holders, the primary target of the EDSR program.
Addressing Borrow Arbitrage
To counteract this unforeseen circumstance, Rune suggested reducing the maximum EDSR interest rate from 8% to 5%. He also proposed increasing the DAI borrowing rate to be equivalent to the EDSR rate at a minimum of 5%, thus putting a stop to the ongoing large-scale “borrow arbitrage” activities. The proposal also indicates that MakerDAO should extend Tier 1 EDSR to cover a utilization range of 0-40% and introduce a Tier 2 EDSR for utilization between 40-55% with the objective of making the EDSR plan sustainable.
Current State of MKR Amidst EDSR Success
Meanwhile, MKR, the native token of the MakerDAO lending protocol, has experienced a decline in its market price in recent days, despite the significant boost in DAI’s market shares. According to data from CoinMarketCap, MKR’s price has dropped by 0.84% in the last 24 hours. This decrease contributes to the token’s ongoing bearish state, where it has lost over 8.26% of its market value in the past week.
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