For more than two weeks the dai stablecoin has sat below its $1 peg, and has been trading for roughly $0.97 over the last seven days. This has given concern to the Maker Dao community which has decided to raise the dai stability fee to 11.5% per year.
Maker Community Hopes Increased Stability Fees Will Return Dai to $1 Peg
Stablecoins have been extremely popular over the last few years but when the cryptoconomy gets volatile, these assets are prone to slipping from their dollar backing. One such coin that’s overcollateralized with ethereum is the Maker network’s dai, faithfully held its 1:1 ratio with the USD until recently. However, the cryptocurrency has been performing much lower than expected and hasn’t held the $1 ratio since March 26, according to market data. Because of this issue, the creators of the programmatic lending protocol Maker Dao have given the community a few solutions to fix the stability problem.
This week Maker Dao (MKR) token holders, who can be polled to resolve certain issues concerning the dai stablecoin, discussed raising the network’s stability fee. Essentially dai often holds to the 1:1 dollar ratio because it uses a system called the Collateralized Debt Position (CDP), in which people creating dai have to pay into a system that uses overcollaterization and an added stability fee. This means the ratio of ETH collateral needed in order to mint dai is fixed at 1.5:1 at all times. Since the price downturn, however, Maker Dao participants have voted to raise the stability fee to 11.5% per year. Essentially, CDP owners need to pay down their debt to obtain their locked ETH collateral but must also pay a stability fee. Once a debtor pays off the CDP loan plus the stability fee (the fee can only be paid in MKR), the collateralized ETH will be freed from the contract.
“Signal your support for a 4% increase to the Stability Fee,” explains the Maker Dao’s poll boards. “Vote for this proposal to signal your support to increase the Stability Fee by 4%, bringing it to 11.5% per year.”
After Previous Fee Hikes the Latest 11.5% Increase Per Year Ratified
On April 11, the 4% increase proposal was ratified with 50,844.75 MKR according to the poll dashboard. The main reasoning for the stability fee price hike was “exchange price persists below $1,” and “high inventory levels among market makers and prop desks.” Moreover, it is believed there will be “little attributable impact” from the previous increases. Back in February, MKR holders increased the fees twice by 0.5% each time, and then in March, the community added another 6%. The impact of these fractional increases did not muster enough strength within the markets to restore the 1:1 dollar peg.
If the increase to 11.5% doesn’t help dai’s stability then concerns as to the asset’s viability will mount, especially if crypto markets continue to stay volatile. The issue is not limited to the dai stablecoin either, as even stablecoins that are reportedly backed by real dollars have seen ups and downs during times of extreme turbulence within the cryptoconomy. Dai tokens themselves are very dependent on excess collateral but if the price of ethereum (ETH) suddenly crashed, critics have said this could raise issues. However, ETH’s price has seen rapid appreciation recently and the increasing dai supply by 3.02 million has shown investors are still making draw actions.
Most of the stablecoins backed by fiat have been in the ecosystem for quite some time, but despite this, some cryptocurrency proponents don’t trust stablecoins. Years ago, investors in nubits (USNBT) thought that each token would remain pegged to the USD, and it did up until June 9, 2016. Anyone holding nubits today would be lucky to get $0.06 per USNBT.
What do you think about MKR token holders voting to increase stability fees so much over the last two months? Do you think raising the fees will restore the 1:1 peg with the U.S. dollar? Let us know what you think about this subject in the comments section below.
Image credits: Shutterstock, Pixabay, Maker Dao and Dai logos, Etherscan, and Markets.Bitcoin.com.
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Author: Jamie Redman