Unopposed proposal: MakerDAO increases DSR to 8%. What are the pros and cons to the protocol?

Author: Jiang Haibo, PANews
MakerDAO officially raised the DSR (DAI deposit interest rate) to 8% in the early morning of August 7, Beijing time, in the form of short-term subsidies. Since Maker has invested more than $2 billion in RWA and currently only about 20% of DAI is stored in the DSR contract to earn interest, giving DSR a higher short-term subsidy will not put Maker into a loss. However, this move also reduced Maker’s profit expectations, which may also indicate that Maker’s growth has entered a bottleneck period. Below, PANews will explain the background, process and impact of this incident.
 Insufficient Stablecoin Reserves in PSM
As DAI issuance declines and investment in RWA increases, the stablecoin reserves in the Maker-anchored Stability Module (PSM) continue to decline. According to data compiled by @SteakFi in Dune, Maker’s investment in RWA has reached US$2.35 billion.
Among them, USDC in PSM is the main exit liquidity of DAI. According to Etherscan and DeBank data, the value of reserve assets in Maker: PSM-USDC-A contract dropped from US$5.5 billion at its peak to 180 million US dollars on August 3. Dollar. If liquidity is exhausted, DAI cannot be redeemed for USDC, which will affect user confidence in DAI and Maker.
This situation was also mentioned in our previous article. Please read for reference: "Interpretation of MakerDAO's development status: Expected profits to increase significantly, buyback rules may be adjusted to protocol capture value".
If certain incentives can be used to attract more funds to mint DAI with USDC, and Maker will convert USDC into US dollars to purchase U.S. bonds, and in the process distribute part of the income to DAI depositors in DSR, Maker's growth flywheel is expected to be realized. . As a result, a proposal to increase DAI deposit income was born. This plan is a short-term incentive measure, and it is necessary to observe the capital retention after the incentive ends.
 Rune-led, unopposed vote
On July 19, MakerDAO co-founder Rune Christensen initiated a discussion on the rapid implementation of “enhanced DSR” in the forum. The article mentioned that Enhanced DSR (Enhanced Dai Savings Rate, EDSR) is an effective DSR system that temporarily increases user availability in the early boot stage when DSR utilization is low. ESDR will be a one-time, one-way temporary mechanism that will decrease over time. At this stage, the demand for DAI and DSR needs to be increased to ensure that more user groups will participate in SubDAO mining and other Endgame products in the future.
On July 24, the proposal to implement EDSR began to go to public opinion polls, with an approval rate of 99.93%, an abstention rate of 0.07%, and no objection.
On August 2, this proposal entered the executive voting stage together with proposals such as increasing Spark’s debt ceiling. It was finally passed on August 4 and came into effect in the early morning of August 7, Beijing time.
According to the previous design, DSR was determined by the U.S. bond yield, that is, part of the profit was reserved for Maker based on the U.S. bond yield. This time, the DSR is directly raised to 8%, which is already higher than the obtainable U.S. bond yield. Since the DAI (the issuance of DAI - the stablecoin reserve in PSM) that can help Maker earn income is much higher than the DAI deposit in DSR, this approach will not put Maker into a loss.
However, this approach will also significantly reduce Maker’s short-term profit expectations, which may harm the interests of MKR holders. There was no objection to the proposal during the nominal investigation stage, which shows that Rune currently has an absolutely dominant voice in Maker. Prior to this, the venture capital institution a16z had sold all its MKR holdings.
 Potential impact of increasing DSR
Prior to this, DSR has basically become the highest source of income for major stablecoins in major DeFi protocols. The radical approach of introducing EDSR this time will have some impact on Maker.
1. DAI issuance increases
According to data from Makerburn, due to the implementation of EDSR, the issuance of DAI ended its long-term reduction phase and began to rebound again. From data observed on the afternoon of August 7 alone, the issuance of DAI increased by 200 million in the past day.
2. Short-term expected earnings decline and P/E rises
Due to the improvement of DSR and more capital participation, Maker's expenditure on DSR has increased significantly, and the expected annualized profit has dropped from US$84.29 million on August 6 to US$61.82 million. The P/E also rose to 21.15, more than double the P/E of 8.43 at the end of June.
3. It may increase the stablecoin deposit income of other lending protocols.
Maker will increase the DSR to 8%, and users who deposit DAI in lending protocols such as Aave may redeem and deposit it to the DSR. Depositors of other stablecoins such as USDT and USDC may also switch to DAI to deposit DSR.
4. May increase demand for USDC
Since the most convenient way to obtain DAI is to mint it 1:1 with USDC via PSM, aggregators such as 1inch have also integrated this solution. Users who do not hold DAI and want to mint stablecoins may need to purchase USDC, increasing the demand for USDC. The price of USDC also reached 1.002 USDT on August 7.
5. PSM balance increases
According to the aforementioned DeBank data, the reserve balance in the PSM:USDC contract rose from $280 million on August 5 to $350 million currently. Makerburn data shows that the balance in PSM:USDC increased by $56 million in the past 24 hours, which means that the DAI minted through PSM:USDC in the past 24 hours was 56 million.
Considering that EDSR has just begun to be implemented, the above trend should continue, but what is important is how much funds will remain in the protocol after EDSR ends. If it can attract more funds and increase the issuance of DAI, it is expected to bring more funds to the subsequent SubDAO and Endgame. However, if all participants participate in short-term arbitrage funds, Maker will only waste part of the funds.
 Other arbitrage strategies based on wstETH
Since the previous lowest stable rate for staking DAI with wstETH was the same as DSR, there is no room for arbitrage by staking wstETH to mint DAI and depositing DAI into DSR. It will only face the risk of the collateral being liquidated. Increasing DSR brings new arbitrage. space. Divine Fish @bitfish1 shared an arbitrage strategy on Twitter. First, pledge ETH into wstETH, then pledge wstETH in Maker to cast DAI, and finally deposit DAI into the DSR contract. You can not only get the ETH staking income, but also because the DAI deposit income on DSR is higher than the stable rate of minting DAI, you can get this difference in addition, that is, you can earn additional subsidies from Maker.
 DAI’s new circulation statistics
According to current data, the issuance of DAI has increased by approximately 200 million in the past 24 hours, the DAI minted through wstETH-B has increased by 50 million, and the DAI minted through D3M (Spark) has increased by 57.9 million (the proposal to increase Spark’s debt ceiling has also just taken effect), Through PSM: USDC minted DAI increased by 56 million, and the rest was minted through ETH-C, WBTC-A, stETH-A, etc. The main source is the mortgage casting of cryptocurrency, which shows that there is indeed a large amount of arbitrage funds. It is necessary to observe the implementation of Spark and other SubDAO in the future. If it cannot bring income higher than the stable rate required for minting DAI, then this part of the funds may flee.
 Spark front-end review controversy
The Use Dai link on the MakerDAO official website can jump directly to the Spark website, where you can stake DAI on Spark. Spark will audit the user's wallet address and IP address. Users in the United States, China and other restricted areas cannot use it. Some users who use VPN will also be detected, which has caused a lot of discussions about decentralization. However, considering that Maker holds a large amount of RWA collateral and needs to meet compliance requirements, this approach is also acceptable. Restricted users can also consider DSR packaging products such as Chai.