A Fee Hike Might Be Coming to DAI Stablecoin, But MakerDAO Is Holding A Vote First
MakerDAO is the home of the DAI stablecoin, which is backed by Ethereum. However, the current design of the coin has led to some concerns from the developers during their weekly call on the 28th of February. It was suggested that the peg for the stablecoin may need to come with a price increase, due to issues with liquidity if it wants to continue to hold its value.
Rune Christensen, the founder of MakerDAO, was one of the many people at the meeting to voice their worries, saying that the peg that the stablecoin has to the dollar has nearly reached its “breaking point.” The lack of organic demand is damaging, and it could see a drop in the price, which would take it on the path to a “dangerous feedback loop.”
However, in an effort to involve the entire community in this concern, Christensen elected to initiate a poll to help determine whether increasing fees and raising the debt ceiling on the stablecoin system would be helpful.
The poll, which is being called the Dai Stability Fee poll, was launched on Monday, and any user with MKR governance tokens is eligible to vote. The fee would increase from the current 1.5% to 3.5%. Though the coin has shown up at a consistent 98 cents for January on Coinbase Pro and Bitfinex, CoinMarketCap reports that the value of the stablecoin has bounced between 98 cents and $1.02 in global markets. While this may seem like a small amount, the difference can add up quickly.
Cypress Younessi, the risk management lead for MakerDAO, spoke out during the call about the “good deal” of stablecoins that they are putting out into the market. However, he feels that bringing back that amount for now, at least while the stability fee is being debated, is the best course of action.
In a vote last month, the same MKR holders were urged to vote on increasing the fee twice by 0.5%. However, in a Reddit post from today from the company, the developer lead says that the increase would be “negligible,” adding that the increase in fee would end up continuing until the difference between the peg and the stablecoin is corrected.
Still, the increase of the fee isn’t just about MakerDAO itself. The stablecoin is used in several applications that rely on the consistency of the value and the fee, like Gitcoin, which often pays out their bounties in DAI coins. The Connext Network, a payment channel platform that will soon launch their mainnet on Ethereum, uses DAI as their primary transaction medium.
Right now, MakerDAO smart contracts account for 2 million ether tokens, which is about 2% of the total ether produced. However, the adoption of this asset is more like a “collateralized debt position” right now, which means that the dollar-pegged DAI requires three times the ether for withdrawal.
At that point, since the token is a stablecoin, user can liquidate the holdings for the payment of bills, essentially using it as loans, which is a growing demand. MakerDAO provided the following graph to show the way that these withdrawals and later deposits are impacting the platform.
The demand is a major concern to the contributors and employees of MakerDAO, which is why they have been working to increase the use cases outside of the Ethereum ecosystem. According to Nadia Alvarez, a business development associate for MakerDAO’s Latin American office, DAI is being commonly used by crypto-financial service companies as a way to transfer value. BuenBit and BuenGiro are both examples of that. However, based on the statistics collected by MakerDAO, the new holders often liquidate their DAO within an hour of purchasing it.
A problem arises with a DAI CDP, because the ETH price can drop. If that price tanks below 150%, it is liquidated, and there is a risk of losing some of the collateral that they held the DAI coin for, which is the bigger problem.
The only individuals or entities allowed to vote on the addition or removal of data sources are the ones with MKR tokens. This factor is increasingly important as the holders of DAI debate whether the debt ceiling should be raised. If the market drops, liquidation of ether might become necessary, but Christensen has been adamant that this is only a worst-case scenario. Considering that only 10% of MKR token holders participated in the last vote, it is uncertain how many would ultimately vote this time.
The only way for a stablecoin to thrive and maintain its position is with diverse stakeholders. Unfortunately, this does not seem to be the case with MKR token holders, since about 55% is held by the top 3 holders, with 27% being held by the top holder. Polychain Capital’s role has been confirmed in these positions as holding a “significant portion” of MKR tokens, according to a spokesperson. Nick Tomanio, the co-founder of 1confirmation, confirmed that his platform is a major holder of the MKR tokens as well.
Other tops 10 holders have not been publicly listed, and requests for comment from the Ethereum Foundation and Ethereum co-founder Joseph Lubin have been denied. Stephen Palley, a partner of law firm Anderson Kill, willingly took on the hot seat with his own comments, criticizing the lack of transparency around the DAI ecosystem and more.
“They are paradoxically creating something that is supposed to transparent but basing it on something that they apparently won’t explain,” Palley said. “What assurance is there that liquidations are based on rational, objective, reasonable analysis? I suspect – though I don’t know – that there is an Oz behind the word Oracle. I’d be curious to know who sits behind that curtain.”