MakerDAO Founder Unveils Plan to Enhance EDSR and Benefit Regular Dai Holders

By 0xK2 08/9/23 9:11 AM

In a recent proposal titled “Adjusting GOV12.1.2,” Rune Christensen, the founder of MakerDAO, Rune Christensen, has unveiled his plans to optimize the Economic DAI Savings Rate (EDSR) to ensure its benefits are more evenly distributed among regular Dai holders. The proposal comes in response to the rapid success of the EDSR, which was activated just 48 hours ago and has already garnered significant attention from the community.

The EDSR, with its alluring 8% interest rate for holding DAI, received widespread acclaim from the community for its forward-thinking approach. However, Rune Christensen acknowledged that some adjustments are necessary to align the project with the evolving market dynamics.

It’s been a little more than 2 days since the EDSR activated, and DSR utilization has already almost hit 20%, triggering an automatic EDSR decrease to about 5.8%.

I have made a draft proposal to stabilize the EDSR and optimize it for use by Dai holders rather than ETH whales -…

— Rune (@RuneKek) August 8, 2023

In the brief period since the launch of EDSR, an astonishing increase of almost 0.5 billion DAI in supply has been observed. Additionally, the utilization of the DAI Savings Rate (DSR) has almost reached the critical 20% threshold, triggering an automatic reduction of the EDSR to around 5.8%. These events have provided invaluable insights into the behavior of the market and its participants.

One significant revelation is that offering high yields on a stablecoin with a solid reputation, such as DAI, attracts rapid and substantial capital inflows. This influx quickly adjusts the excess yield, bringing it in line with the prevailing market conditions. Rune Christensen underlined the importance of this observation, as it affirms the viability of SubDAO yield farming and negates the need for yield-cap mechanisms in SubDAO farming yield.

Moreover, Rune Christensen noted that providing higher yields for holding DAI compared to the cost of borrowing against collateral leads to even larger capital inflows and borrowing activities. This phenomenon, dubbed “borrow arbitrage,” involves borrowing DAI at a lower rate and deploying it to earn higher yields in the EDSR. While this outcome was perhaps unsurprising in hindsight, the scale of the borrowing arbitrage highlighted the need for maintaining sufficiently high borrowing rates to prevent capital leakage.

Despite the success of EDSR, Rune Christensen expressed concern about its unintended concentration among large-scale Ethereum (ETH) and staked ETH “whales.” This unintentional consequence risked overshadowing the intended benefits for regular Dai holders. As a response to these observations, Rune Christensen introduced a series of adjustments to the Stability Scope, with the proposal being marked as “MIP102c2-SPXX.”

Key changes in the proposal include:

Reducing the maximum value of the EDSR from 8% to 5%.
Expanding the coverage of Tier 1 EDSR to encompass utilization ranging from 0% to 40%, ensuring its sustainability.
Extending the duration of Tier 2 EDSR, which offers a DSR multiplier of 1.3x, for utilization between 40% and 55%.

Additionally, crypto borrowing rates would be raised to match the EDSR, ensuring that borrowing arbitrage becomes impractical. Exceptions would apply to ETH-A, ETH-B, and ETH-C, which would retain lower rates to maintain borrowing efficiency.

While these changes are generally regarded as reasonable, they could result in higher borrowing rates for regular users of the established native vault engine. Rune Christensen acknowledged that this might not significantly impact established users but could pose challenges for newer platforms like Spark Protocol.

To address this issue, Rune Christensen proposed a novel solution—an airdrop of retroactive subdao tokens for Spark Protocol users who actively borrow from the platform. This incentive aims to reward early participants in Spark Protocol and foster the growth of its community.

At the time of writing, the proposed changes are still in the drafting stage and have not been voted upon by the DAO. Rune Christensen’s transparent approach highlights his commitment to adapting the project based on data and community feedback, showcasing the collaborative spirit of the decentralized finance landscape. As this proposal evolves, the crypto community eagerly awaits the DAO’s decision on GOV12.1.2 and the potential optimizations to the EDSR.

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