On March 12th, the USD-pegged stablecoin, DAI, saw a rapid price increase to over $1.08 as users of the Maker system frantically repaid their loans in an attempt to avoid being liquidated. This was all led by the extreme volatility in the price of ETH, where 1 Ether dropped from over $250 to $90 in a few short days, causing chaos in a system that was not prepared for such a dramatic collapse.
In the days and weeks following, Maker token holders (who govern the system) acted fast in an attempt to restore the peg, initially adding USDC as a form of collateral (previously only ETH and BAT) before also slashing the interest rate on minting DAI (borrowing). The goal was to increase the DAI supply in order to reduce the coin’s price – returning DAI to its $1.00 peg.
DAI Peg Restored
Two and a half months on and the DAI peg has been restored, trading within 0.3% of its target $1.00 value. The return of DAI’s peg comes as a major boost in confidence for decentralized finance on Ethereum. While confidence in dollar-backed stablecoins like USDC had remained intact throughout the downturn (even acting as a crutch for billions of dollars in volume at the time), their centralized nature limits their broader utility for the Ethereum ecosystem. DAI, on the other hand, is a permissionless currency that could make the US Dollar accessible to decentralized applications around the world with minimal red-tape and frictionless innovation – a fundamental building block for advocates of transparent and open source financial applications.
DAI and Maker’s survival during one of the worst market crashes in living memory is therefore cause for celebration. Maker has also implemented safety mechanisms to help handle the price of ETH fall so dramatically again, demonstrating the anti-fragile nature of Ethereum applications.
New high: 128.7M Dai!
— Maker (@MakerDAO) June 1, 2020
DAI Supply Reaches All Time High
Maker has now moved from surviving to thriving, with total DAI in circulation reaching a new all time high at nearly $130 million coins issued. However, this has all come at a time where interest rates on minting DAI have been set to zero – great for promoting borrowing but also unsustainable in the long-term. The same goes for the Dai Savings Rate (DSR), whose rate was paying savers upwards of 7.00% for months on end before also being cut to zero – stifling demand and the peg-breaking price pressure on DAI.
ETH is Money?
Interestingly, the increase in DAI supply has not come from ETH being leveraged (“locked”) in Maker – one of the few metrics that has not seen a sustained recovery since the March 12th crash. Instead, the vast majority of DAI creation has been coming from the likes of WBTC and USDC, with the two coins now accounting for nearly 10% of all issued DAI.
The reason for this is unclear, particularly given that ETH leveraged often increases ahead of – or in line with – a market rally like the one seen recently, however no such pattern was observed. Perhaps users are holding onto their liquid ETH in preparation for staking in ETH 2, or it’s possible that confidence in Maker’s ability to deal with ETH volatility remains low.
Regardless, the single most important performance indicator for Maker is the stability of the DAI-USD peg, which is moving firmly into the “healthy” state. With the peg holding steady, it is likely that we will see an increase in both the stability fees (interest on borrowing) and the DSR (interest on saving) in the coming weeks and months.