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MakerDAO Enacts Interim Fee Changes in Response to Market Fluctuations

ByDayne Lee

Mar 11, 2024
MakerDAO Enacts Interim Fee Changes in Response to Market Fluctuations

MakerDAO Enacts Interim Fee Changes in Response to Market Fluctuations

MakerDAO, the entity behind the development of the MKR token, has ratified an “Executive Vote” to enact provisional fee modifications aimed at fortifying the protocol amidst escalating market volatility and optimistic market trends, which have led to a diminution in the reserves of its Dai stablecoin.

Navigating the Dai Supply Contraction

The decision was spurred by a swift contraction in the Dai supply, plummeting from $5 billion to $4.4 billion within a week, as detailed by BA Labs in a proposal to Maker’s Stability Advisory Council. The proposed amendments are designed to bolster the stability of the Dai stablecoin by potentially activating a stablecoin stability mechanism, should there be a need to redeem a fraction of the $1.1 billion in real-world assets (RWAs) currently held within the protocol. Despite Dai’s robust collateralization, the utilization of RWAs introduces liquidity risks that could exacerbate if the sell-off of Dai persists.

Proposal Highlights

The proposal emphasizes the sufficiency of liquid stablecoin reserves and RWAs to withstand market pressures. However, it points to liquidity challenges associated with RWAs as a critical concern:

“Liquid stablecoin reserves and reserves deployed to RWAs are more than sufficient to sustain the increasing pressure generated by the potential bullish market sentiment. The issue lies in the liquidity crunch inherent in the exposure toward stablecoins deployed through RWAs.”

MakerDAO’s ecosystem is deemed stable for now, yet the protocol finds it prudent to prepare for unforeseeable market actions. The suggested adjustments include modifications to various elements of the Maker ecosystem:

  • Maker Vaults
  • SparkLend DAI Borrow Rate
  • Peg Stability Module (PSM)
  • Dai Savings Rate
  • Governance Security Module (GSM) Pause Delay

These include elevating stability fees for several collateral assets from 15% to 17.25%, and raising the SparkLend DAI Borrow annual percentage yield from 6.7% to 16%. These changes were scheduled for implementation on March 10 at 7:55 pm UTC.

Furthermore, the PSM will be adjusted to allow for a quicker cooldown in debt ceiling increases, reducing from 24 to 12 hours. Other planned measures comprise an increase in the Dai Savings Rate to 15% and a reduction of the GSM Pause Delay from 48 hours to 16 hours, enabling more rapid enactment of future modifications.

Table: Overview of MakerDAO’s Fee Adjustments

AspectBefore AdjustmentAfter Adjustment
Stability Fees15%17.25%
SparkLend DAI Borrow Rate6.7% annual yield16% annual yield
PSM Cooldown24 hours12 hours
Dai Savings RateUnspecified15%
GSM Pause Delay48 hours16 hours

Addressing Concerns and Future Direction

While the modifications are intended as temporary measures, the procedure for reverting these changes is not automatic. GFX Labs, a blockchain R&D firm, acknowledged the necessity of the adjustments but expressed apprehensions regarding their scope, cautioning against potential market upheavals.

The temporary nature of these adjustments underscores MakerDAO’s responsiveness to market dynamics, aiming to maintain Dai’s stability and trustworthiness as a decentralized stablecoin. The organization’s proactive stance reflects its commitment to adaptability and prudent risk management in the face of fluctuating market conditions.

MakerDAO’s strategic fee adjustments represent a calculated response to the challenges posed by recent market volatility and the ensuing reduction in Dai reserves. By tweaking fees and modifying protocol operations, MakerDAO aims to safeguard the stability of the Dai stablecoin and ensure the resilience of its ecosystem against future market uncertainties. This approach demonstrates the protocol’s dedication to maintaining a stable and reliable platform for its users, even as it navigates the complexities of the cryptocurrency market.

Featured image credit: Maker via Bloomberg

Dayne Lee

With a foundation in financial day trading, I transitioned to my current role as an editor, where I prioritize accuracy and reader engagement in our content. I excel in collaborating with writers to ensure top-quality news coverage. This shift from finance to journalism has been both challenging and rewarding, driving my commitment to editorial excellence.