MakerDAO continuous rate hike: purpose, policy effect, decentralized currency market impact

As a provider of a stable currency in Ethereum, MakerDAO raised interest rates five times in two months, increasing its interest rate from 0.5% to 14.5%, and expecting it to rise to 16.5%.

This article will answer questions and misunderstandings about the current round of stabilization rates and the impact of decentralized money market participants.

Foreword

  • The purpose of raising interest rates is to maintain Dai’s price and dollar anchorage.
  • Raising interest rates means that the cost of borrowing Dai is more expensive.
  • The deposit and loan interest rates of Ethereum's decentralized financial projects are affected by this.
  • The decision to raise interest rates is proposed by the Maker Risk Team, and the MKR holders vote to execute
  • Increasing the interest rate on borrowing Dai is a measure of equity, and multi-mortgage Dai will have a better adjustment mechanism.
  • Dai began to break off anchor and contracted to return to $1.
  • The interest rate hike is still not over, and the current interest rate on Dai is slightly lower than the short-term target rate, which is higher than the long-term neutral interest rate.
  • If you turn on CDP, you can consider the cost and also Dai

Why increase the stable rate?

Since February of this year, MakerDAO has received a large-scale attention and application, and the number of Dai's releases has jumped from $50 million to $90 million.

With the expectation of ETH growth and the pressure on the withdrawal of the French currency, Dai's price appears to be slightly below the $1 deviation.

In order to slow down Dai's issuance and motivate Dai to return Dai, the price of Dai is pushed back to $1 in the open market. The MakerDAO risk team undertook a rate hike cycle proposal to raise the Dai interest rate from 0.5% to 1.5%, 3.5%, 7.5%, 11.5% and 14.5%.

(The blue line represents the Dai interest rate, the green represents the newly generated Dai supply, and the red represents the reduced Dai supply)

Interest rate policy effect

After the interest rate on Dai was increased to 3.5%, Dai's supply was reduced by 5 million, and Dai's price also returned to around $1 in the short term. However, due to the steep increase in ETH's appreciation in early April, Dai's supply climbed to $90 million and the price fell below $1. The subsequent 7.5% interest rate level did not actually affect the price of Dai.

As a result, the MakerDAO risk team proposed a further incremental rate hike to provide a proposal to maintain the original interest rate, increase 1%, increase 2%, increase 3%, increase 4%, and vote by Maker holders. The 4% and 3% increase proposals were most supported on April 12 and 19, respectively, and were adopted in subsequent implementation proposals.

Dai's supply has effectively decreased by 6%. Although the price has not yet returned to more than US$1, in the open market and the OTC market, Dai began to dis-unpegging and returned to the US$1. The interest rate hike is still not over, and the current interest rate on Dai is slightly lower than the short-term target rate, which is higher than the long-term neutral interest rate.

Interest rate impact of decentralized monetary system

Affected by the increase in Dai's benchmark interest rate by MakerDAO, decentralized financial projects such as Compound in Ethereum also experienced an increase in deposit and loan interest rates under the influence of marketization. The current deposit and loan interest rates on Compound are 5.76% and 12.96%, respectively.

What does it mean for market participants?

  • For those who borrow Dai, it is necessary to consider the current cost of borrowing Dai (14.5% per year), decide whether to repay Dai, and close CDP.
  • For ordinary Dai users, no additional action is required. From a revenue perspective, Dai can be deposited into a stable lending system to earn deposit interest.
  • For MKR holders, encourage active participation in governance voting.

Misunderstanding and response

“Is the interest rate raised to meet the interests of MKR holders?”

Although the stable rate needs to be paid by MKR, there is no dependency on the interest rate hike cycle and the benefits of MKR.

MKR expected return = loaned Dai supply * stable rate

This round of interest rate hikes is to shrink the supply of Dai and further maintain the price stability of Dai. Keeping Dai's price stable and the interests of its holders is the most important goal of MakerDAO. Dai's supply is growing steadily* Competitive interest rates best match the long-term incentives of MKR holders.

“Is the concentration of MKR distribution leading to the centralization of interest rate adjustment decisions?”

The issue of the distribution of MKR is a commonplace topic.

The first 26% of the addresses are multi-signature wallets under the Foundation Development Fund and do not participate in voting. The second 23% is the governance voting lock contract. The third address, 6.65%, is the new MKR that has not been mapped.

That is, 73% of MKR is in the market and more than 23% vote.

“Do you raise interest rates for CDP holders?”

Interest is calculated in segments. The previous interest is still accrued at the previous interest rate, and only the new calculation is made on the date after the interest rate adjustment takes effect.

CDP holders can change Dai at any time based on interest bearing preferences.

“Is it better to increase the stability rate?”

Under the single-collateral Dai system, the proposal stable rate is the most appropriate and market-oriented policy. In addition to increasing the stability rate, there are two monetary policy tools to adjust the debt ceiling and increase the mortgage rate. But lowering the debt ceiling will cause the system to stop any new Dai generation, and raising the mortgage rate will inevitably force some CDPs to liquidate.

In the secondary market, with the emergence and diversification of decentralized financial projects, Dai will have a more conventional lending cycle, which will make Dai's flow more independent of the volatility of ETH itself.

In addition, even if Dai's price continues to break off, MakerDAO, as the last lender, can subscribe to Dai for $1.

Under the multi-collateral Dai system (expected to go online in the middle of the year), there will be a Dai deposit rate. The deposit interest rate will be a more effective Dai price control tool than the stable rate. At the same time, it is not limited to Ethereum's collateral framework, which will bring more liquidity and more arbitrage space to Dai. In a multi-collateral system, interest is also calculated in the liquidation rate, making the currency tool to increase the stable rate more powerful.

At present, the de-anchorization of Dai is a short-term issue, and the stable rate has proven to be a valid monetary policy available. At the same time, the Maker Risk team welcomes feedback from community members. You can participate in our governance meeting on Google Meet every Thursday night through the MakerDAO public number or at https://reddit.com/r/mkrgov.

Data Sources:

Https://daicast.info

Https://vic007207.github.io/crypto_data/

Https://mkr.tools/

Author: Pan Chao