If the new proposal is approved, an increase in the DSR could lead to higher lending rates for stablecoins across the DeFi ecosystem.

Decentralized finance (DeFi) protocol MakerDAO increased its DAI Savings Rate (DSR) to 1% in December 2022. According to MakerDAO, the move resulted in over 35 million DAI being deposited within a month.

A new proposal to increase the DSR to 3.33% is being discussed. The proposal was proposed by risk management firm Block Analitica and submitted by MakerDAO’s Risk Core Division team. The proposal must be approved by an executive vote before the change can be applied.

DSR enables users to lock MakerDAO’s DAI stablecoin in the DSR smart contract and earn interest.

When users borrow DAI against collateral such as Ethereum (ETH) or Wrapped Bitcoin (WBTC), they must pay a stability fee to fund the DSR. Therefore, the new proposal also aims to change the stability fees for certain assets used as collateral.

According to MakerDAO, the DSR is a key monetary policy lever. It helps balance the supply and demand of DAI by incentivizing or discouraging users to lock up DAI. The DSR is frequently adjusted to respond to short-term changes in market conditions in the Dai economy.

Wider market impact

An executive at Block Analitica noted on Twitter that the rise of DSR could be a “huge tailwind for the entire defi ecosystem.”

Phoenix Labs co-founder Sam MacPherson, who was previously lead developer at MakerDAO, believes the rise of DSR could have broader market implications. He tweeted:

“Borrowing rates on your favorite lending platform are about to jump to around 4.5% as Maker significantly increases its cost of funds.”

Lending protocols like Aave and Compound offer interest rates up to 2.62% for stablecoins like USD Coin (USDC), Tether (USDT), and DAI. Therefore, this change will allow MakerDAO to offer higher interest rates than its competitors in the hope of bringing in more funds.

This change could lead to higher lending rates for stablecoins in the DeFi ecosystem. If traders choose to swap their stablecoins for DAI or withdraw from other lending platforms to deposit DAI into the DSR contract, the overall supply of stablecoins will decrease. As a result, borrowing costs will rise.