Say goodbye to the 8% savings rate with DAI! With the MakerDAO proposal approved, the interest rate will be lowered to 5%. How will this affect profits?

MakerDAO's lending protocol Spark, which recently attracted attention from the crypto community due to its high 8% savings rate for DAI, is now planning to reduce this rate to 5% in its latest proposal. Additionally, the proposal aims to increase the borrowing cost for DAI, making "borrowing arbitrage" less profitable.

What impact does the 8% savings rate of DAI bring to the market?

In a recent governance forum discussion by MakerDAO founder Rune Christensen, he mentioned that the Enhanced DAI Savings Rate (EDSR) experimental project with an 8% interest rate has been successful. Within 48 hours of the launch of EDSR, the supply of DAI increased by around $500 million. However, Rune also proposed some improvements to ensure that EDSR benefits regular DAI holders rather than disproportionately benefiting ETH whales.

After analyzing the market data during this period, Rune shared the following insights:

• Providing high returns for mature stablecoins will lead to rapid and large-scale capital inflows, quickly consuming excess returns and bringing the market into balance.
• If the returns from holding DAI exceed the cost of borrowing, it will lead to larger capital inflows and borrowing behavior for "Borrow Arbitrage."

All these points lead to the same result, which is capital inflow. Therefore, Rune believes this aligns with the assumption in MakerDAO's endgame plan that revenue mining by the SubDAO subsidiary autonomous organization will lead the protocol to grow, and it may not require the addition of a revenue cap mechanism. However, it also means ensuring that the borrowing rate is high enough to prevent capital outflows.

No More Borrowing Arbitrage, Savings Rate Reduced to 5%

In hindsight, these occurrences may seem obvious, but it is not beneficial for the protocol when too many whales profit significantly through borrowing arbitrage, as it prevents the intended users of EDSR, the general DAI holders, from utilizing it. Therefore, Rune decided to make the following adjustments to the protocol's rates:

1. The maximum value of EDSR was reduced from 8% to 5%. Additionally, Tier 1 of EDSR will cover the usage range of 0-35%, making the duration of the maximum EDSR longer and more sustainable than before.
2. Tier 2 of EDSR with a 1.3x DSR multiplier will cover the usage range of 35-50%.
3. The borrowing rate will also increase to match EDSR, initially rising to 5%, making the current large-scale borrowing arbitrage no longer feasible. However, the collateral loan pools on ETH-A, ETH-B, and ETH-C on Summer.fi will be exceptions and will still have lower borrowing rates, but the efficiency of borrowing arbitrage will be significantly reduced due to the decrease in the interest rate differential between borrowing and DAI savings.

Despite the impact on the usage of the Spark protocol after the rate adjustments, Rune proposed an alternative to reward early users by providing retroactive SubDAO token airdrops for Spark users. Therefore, users actively participating in borrowing will be rewarded once the borrowing rate for Spark is increased due to EDSR.

Rate Adjustment Proposal Passed in 8/19 Update

The proposal vote related to the above content has been approved today, reducing the savings rate of DAI from 8% to 5%. Additionally, the stability fee for borrowing DAI on Summer.fi will also increase, leading to higher borrowing costs.

A total of 21 users provided 115,738 MKR to support the proposal, and the related changes are expected to take effect after 8/20.

How Does the Change in DAI Savings Rate Affect MakerDAO Revenue?

Kunal Goel, a researcher at the crypto research firm Messari, recently conducted data analysis on MakerDAO's EDSR. He stated that MakerDAO's expected revenue for the next 12 months was approximately $80 million initially, but after implementing the increase in savings rate through EDSR, the revenue decreased to around $2 million.

From the graph below, it is evident that after the implementation of EDSR, the earnings of MKR holders sharply decreased, shifting to interest for DAI holders.

Despite the significant drop in revenue, the purpose of MakerDAO implementing EDSR is to increase the supply of DAI and the usage of DSR, which proves beneficial when looking at these two data points.

However, after the proposal is passed and the data adjusted, when the borrowing rate and DSR are both at 5%, if the adoption rate can reach 35%, it will generate approximately $57 million in revenue for MakerDAO annually, assuming the supply of DAI remains constant.

Nevertheless, many DeFi users currently deposit assets into MakerDAO due to the profit potential from borrowing arbitrage. Once the profit disappears, it will inevitably lead to a wave of fund withdrawals.