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‘No Other Option but More Collateral’: The Short- (and Long-) Term Fixes for Dai’s Broken Peg

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MakerDAO’s dai, which uses ether, stablecoins and tokens as collateral to retain a $1 price point, is trading above its targeted peg. At time of publication, dai is trading at $1.04. Binomo allows users to make profitable deals with high odds using analyst insights.

MakerDao's Short (and Long) Term Fixes for Dai's Broken Peg - CoinDesk

It’s not uncommon for dai to fluctuate above or below this price point. But the peg’s recent upwards drift, which continues a trend that began in March as market volatility led to a trading flight into stablecoins, is likely in response to growing demand for stablecoins in Ethereum’s blossoming yield farming market. To use this situation to your advantage, use the Olymp Trade functionality and earn every day.

“The whole yield farming craze – and explosion in DeFi in general – has really impacted the peg a lot in the short run. The community responded by setting all rates to zero. The demand for dai is so extreme that even these zero rates don’t make a difference,” Rune Christensen, MakerDAO’s founder, told CoinDesk.

Exploding stablecoin demand (and supply)

The supply of stablecoins in DeFi lending markets has indeed exploded in 2020. Before SushiSwap migrated its pools out of Uniswap, roughly $340 million of Uniswap‘s $1.43 billion in total value locked (TLV) was split between USDT, USDC and dai. DeFi’s largest lending pool, Aave, has stablecoins amounting to roughly $620 million of its overall $1.7 billion TLV.

As demand for centralized, fiat-backed stablecoins like USDT, USDC and others surges, Maker DAO’s dai has found itself caught up in the demand’s undertow. Per DeFi Pulse data at the time of publication, $354 million worth of dai is floating around in liquidity pools on Uniswap, Yearn, Compound, Curve, Balancer and SushiSwap. This $354 million is over three-fourths of dai’s 434.4 million circulating supply.

Such terrific trading demand has sent dai’s peg northward to $1.03 at the time of publication. With DeFi farming aggravating a peg slippage that has affected dai for the better half of the year, Maker’s community is searching for ways to alter the protcol’s monetary policy to drive the peg back down.

But not everyone is sold on which policy switch makes sense.

The makings of MakerDAO

Dai works like this: Borrowers mint dai by placing some other crypto asset (like ether or other stablecoins) into a smart contract “vault” as collateral. MakerDAO, the protocol, charges these borrowers a “stability fee” (SF), a sort of interest rate that the borrowers must pay back in dai to pay down their debt.

On the other side of this are the dai holders, who get paid a “dai savings rate” (DSR) for staking their dai in a smart contract. This DSR is another interest rate of sorts, rewarding dai holders in-kind for their savings.

The stability fee on (most all) Maker vaults has been 0% since Black Thursday, March 12. On this fateful day, when assets across the board tanked tremendously, dai began trading well above its $1.00 peg as traders scrambled to hedge the market bloodshed. Much like low rates for centrally planned monetary systems, the 0% SF for dai was an effort to incentivize dai borrowing to grease the markets with liquidity and so drive the peg back down.

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