MakerDAO plans to raise DAI savings rate to a maximum of 1%, reduce capital outflow, and integrate benchmark interest rates.

In order to increase the competitiveness of DeFi against traditional finance and prevent capital outflows from the DeFi market as risk-free rates rise, MakerDAO plans to raise the deposit rate for DAI. Currently, users are highly supportive of this idea, and the deposit rate is expected to increase from the current 0.01% to 1%.

DAI Savings Rate Adjustment Proposal

As traditional financial interest rates evolve, the MakerDAO Open Market Committee has recently proposed a new adjustment to the DAI Savings Rate (DSR).

With several new revenue streams on the horizon, MakerDAO is poised to afford higher rates. These revenue sources include the Peg Stability Module (PSM) for GUSD, short-term Monetalis bonds, and potential investment opportunities with Coinbase.

Note: PSM is a fixed-price token swap protocol based on Dai. For example, with the USDC PSM, users can swap USDC for new Dai at a 1:1 ratio.

The MakerDAO Open Market Committee states that to capitalize on potential revenue opportunities, MakerDAO needs to ensure sufficient liquidity to maintain DAI stability. However, the gradually increasing risk-free rates may lead users to shift their capital from DeFi to traditional instruments like treasury bills. To counter this trend, increasing the DSR can help retain or increase the DAI supply, thus supporting MakerDAO's liquidity position.

Furthermore, raising the DSR can facilitate integration with other protocols like Aave and Compound, where idle DAI can be deposited to earn interest, thereby increasing the supply of DAI in MakerDAO.

How High Should the DAI Savings Rate Be Adjusted?

The proposal offers five options for adjusting the DSR: keeping it at 0.01%, or increasing it to 0.25%, 0.5%, 0.75%, or 1%.

According to the current voting results, raising it to 1% has garnered nearly 100% support, albeit with only 13 voting addresses. This poll is expected to conclude on 12/2.

The MakerDAO Open Market Committee notes that increasing the DSR to 1% would bring it close to or even surpass many on-chain yield sources, potentially reducing liquidity in other lending platforms or liquidity pools in the short term, but encouraging third-party integrations in the long term.

According to Dai Wallet, raising the DSR to 1% would exceed the Dai borrowing rates on Compound and Aave.

Moreover, assuming no increase in deposits after raising the DSR to 1%, the total cost would rise to 12,000 DAI per year. Although costs will rise with increased deposits, higher liquidity can also present revenue-generating opportunities for MakerDAO.

Benefits of Increasing the DAI Savings Rate to 1%

hexonaut from the MakerDAO engineering core team urges users to vote for a 1% rate increase, citing the following benefits:

1. Halting/Reversing Capital Outflows from DeFi: As the interest rate gap between DeFi and traditional finance widens, a rapid decrease in DAI circulation may occur. Centralized stablecoin issuers are aware of this trend and are offering risk-free returns through initiatives like Coinbase Institutional, a move MakerDAO should also consider.

2. Yield is the Best Marketing Tool: With DeFi rates plummeting in recent months, now is the time to show DAI holders the opportunity to earn higher returns. 0.5% is good, but 1% is more enticing.

3. Aligning Traditional Finance and DeFi Benchmark Rates: hexonaut believes this convergence is inevitable and essential for MakerDAO to prevent capital outflows and achieve industry success.

4. Enhancing Decentralization: Additional income from the increased DAI market value will be converted into ETH collateral to reduce reliance on stablecoin reserves, providing the protocol with greater resilience from more income.

In addition to the aforementioned benefits, hexonaut suggests that after the $500 million MakerDAO Investment Proposal, the protocol can afford higher DAI deposit rate costs. Currently, the yield on the $500 million bond is about 4%, meaning that DAI deposits will break even when accumulated to $2 billion, enhancing MakerDAO's deposit capacity.