MakerDAO, the world’s newest central bank, has raised the stability fee or interest rates for DAI holders by an incredible 4%.
That makes it a jump from 0.5% to 7.5% in one month through three interest rate hikes, the latest going from 3.5% to 7.5%.
Ostensibly the reason is to maintain a peg to the dollar, but even this considerable hike appears to effectively have had no effect.
We can see there was a jump earlier today to $1.03, but that barely lasted two hours, with it back down to circa $0.99.
That’s despite dai’s market cap falling by 10 million from close to 100 million to now 87 million, meaning about $10 million worth has effectively vanished.
Raising the question: if such jumps in interest rates are not having an effect, then why exactly are such interest rates being increased so aggressively?
One answer might be because the higher the interest rate, the more MKR token holders might benefit. That’s because that 7.5% goes to MKR holders with half a million dollars worth currently accrued through dai fees.
At 7.5% and assuming dai remains at about $100 million in market cap, that’s $7.5 million a year, or about 1% of MKR’s $700 million market cap.
The reason given is because they want to maintain the peg, but MKR has officially stated they run market making bots. Meaning they can keep the peg off-chain by utilizing their MKR holdings.
That it probably has nothing to do with the peg is also shown by the fact that an incredible 7% interest rake hike in one month has effectively had no effect. Dai was at about $0.98. It still is sort of about there.
Part of the reason for dai being at $0.98-$1 rather than a perfect $1 is probably the fact that on FatBTC, for example, XRP/DAI is currently at $0.94.
Likewise different exchanges and different trading pairs appear to have a small difference in dai prices, making a near $1 range sort of what you’d expect.
That’s the top MKR holders. More than 50% of it is held by the top three addresses. About 60% is held by the top five.
The very top holder is probably the MKR team. Then there might be VCs which recently have announced they’ve invested in MKR.
The higher the interest rate, the more money they make. So like banks hook up creditors with cheap credit to then increase the interest rates and milk them, here too you have the dai addicts who might not have much option but to pay this huge fee perhaps because they don’t have the loaned dai at hand to repay or maybe because they’re in some trading position which they can’t close.
It could also be perhaps because they don’t even know they now have to pay 7.5%. When they took the loan at 0.5% a month ago they might think that’s for a year. Not so. They now have to pay 7.5% from March onwards.
How you inform them of this huge change of terms, isn’t very clear. Presumably they have to keep up with MKR public fora.
At 7.5% dai is now more expensive than traditional credit especially considering you’re sort of borrowing from yourself because you have to lock up say 1.5 eth to receive 1eth of dai back. You then have to pay back that 1eth, plus 7.5% a year, to receive your 1.5 eth.
At 0.5% you might not care, but if you’re using this for margins you’d now probably want to use a centralized exchange that offers margins for far cheaper than 7.5%.
In addition, there’s questions of whether this central bank is now affecting all cryptos because a circa 2% fall in crypto prices appears to coincide with this rate hike and this wiping of $10 million.
The stability fee is meant to have a corresponding Dai Savings Rate (DSR) which allows dai holders to lock their funds and get a savings rate of say 2% presumably paid by the stability fee.
So then you’d “play” with these two different interest rates to manage supply and demand and thus maintain the peg.
With only one side of the equation for now, the peg is probably being maintained mainly by maker bots. There’s a high demand for dai, however, or there was, so naturally MKR holders would want to increase the interest rate to as high a level as the market can bear.
But that does raise many questions, including whether there is a misalignment of incentives and whether dai might become a systemic problem for cryptos.