Analysis: Why does the DAI target interest rate feedback mechanism fail?

Officials have a cloud: Since February, MakerDAO has received large-scale attention and application, and the number of DAIs has increased from $50 million to $90 million. The price of DAI appears to be slightly below the $1 deviation.

Why the DAI price will be anchored for a long time, less than 1 US dollar, the explanation given is the expectation of ETH growth and the pressure of the legal currency. To put it bluntly, everyone thinks that ETH prices will rise. Everyone tends to use coins, but they need money to spend money, and they are going to mortgage DAI, so the number of DAIs is rising all the way.

But the problem is that everyone needs money, not DAI. The market does not have such a big demand for DAI. If the supply exceeds demand, the price will naturally fall. The price of DAI will be slightly lower than 1 US dollar, and the DAI will be de-anchored.

Under the expectation of ETH growth, the strong demand for borrowing will inevitably lead to an increase in the supply of DAI. When the market demand of DAI remains unchanged, the supply will exceed demand and the price will fall.

Why is the number of DAIs issued in the near future increasing rapidly? The official said that MakerDAO has received large-scale attention and application. This is only one of the reasons, but I think the more important reason is that the market is getting warmer during this time.

Why do you say this? Please see the above picture. From February 1st to the present, the market has entered the upward channel, and the circulation of DAI has also increased rapidly at the same time. Is there any necessary connection between them?

At present, in the digital currency market, investment demand is the most important demand, or the demand for speculative currency is the first demand. The market has entered a rising channel, and for the players, there is a need to borrow DAI, or the demand for leverage. Therefore, the growth of DAI's issuance is more due to the leverage demand of players caused by the warming of the market.

Understand the increase in the number of DAIs, and then look at the market demand of DAI. The market demand that affects DAI is mainly the application of DAI. At present, the main application of DAI is decentralized exchanges, as well as DEFI such as Augur. As far as the current DAI application scenario is concerned, there has not been much change, which means that the market demand for DAI has not changed much.

Therefore, the supply of DAI increases, the demand does not change, the price of DAI falls, and the anchor is de- anchored for a long time.

In order to stabilize the exchange rate of DAI, MakerDAO raised interest rates five times in two months, and the DAI interest rate rose from 0.5% all the way, from 0.5% to 1.5%, 3.5%, 7.5%, 11.5% and 14.5%, and is expected to rise. To 16.5%.

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

The above picture can see two phenomena: 1. After the interest rate adjustment, there is a big impact in a short period of time, and the impact is not significant for a long time; 2. Below a certain interest rate, the interest rate adjustment and the supply of DAI have little effect.

Looking at this picture, although the interest rate of DAI has been rising, the exchange rate of DAI has shown a downward trend. The interest rate of DAI has little effect on the exchange rate of DAI. In other words, the DAI target interest rate feedback mechanism has failed.

This is basically consistent with my judgment: the demand for DAI is the demand for loans, and the demand for loans is only related to market expectations. Currently, it is mainly related to the leverage demand of the market. For players who are crazy in the market, DAI's leverage is only three times, and it is far from the futures market's 10 times and 20 times leverage.

The interest rate of DAI is also very low. Officials say that the DAI interest rate is slightly lower than the short-term target rate, which is higher than the long-term neutral interest rate. We can understand that short-term is a usury and long-term bank loans.

If the interest rate of DAI is lower than the short-term target interest rate of the market, it has little effect on the borrower. Assuming that the short-term target interest rate that the borrower can accept is 20%, then the target interest rate is adjusted below 20%, which has limited impact on the demand for borrowing DAI. Even the regulation is not at all possible.

To achieve the effectiveness of the target interest rate feedback mechanism, the target interest rate must have a validity interval. Outside this interval, the mechanism will fail. The target interest rate is lower than the lower limit of the interval, and the adjustment of the interest rate is equal to the itching of the boots, which is difficult to function; above the upper limit of the range, it will trigger a wide range of liquidation, and there will be no obvious adjustment effect. The lower limit of this interval is the upper limit of the interest rate that can be borne by the DAI. At present, the short-term interest rate is a reference value, which may be 20%.

For the current price return of DAI, I think it is closely related to market expectations. After the market rose wildly, participants' judgments on the short-term trend of the market were divided. If the borrower of the DAI believes that the market will go down in the short term, it will reduce the demand for borrowing DAI. Under the stimulus of interest rate, the DAI will be destroyed and the ETH will be redeemed. Therefore, it shows the price return of DAI.

The key factors affecting the stability of DAI prices are the market demand for loans and the application needs of the market. The effect of the DAI target interest rate feedback mechanism needs to be further tested. How to develop the application requirements of DAI is the most important.

The official said that under the multi-mortgage DAI system, there will be DAI deposit interest rates. That is to say, developing DAI's financial needs and reducing market liquidity. However, if the price of DAI cannot be guaranteed, investors dare to take DAI to manage their finances. There is doubt that DAI demand is a pseudo-demand. Only when the system is online can the results be seen.

Author: Allin block chain