DAI’S Hold to the Dollar Peg Wavers in the Wind for Stability but Community’s Stablecoin Outlook is Bright
You may have heard of the awful situation that the MakerDAO community is living recently. The whole lending ecosystem is based around the DAI stablecoin. However, it seems like the stablecoin is having trouble to maintain its peg with the USD recently, which has been making the community increase fees.
MakerDAO was originally launched in December 2017 during the highest point of the crypto market. It was an Ethereum-based ERC20 token and it was pegged to the U. S. dollar (USD). However, differently, from companies like Tether and Circle, the creators of this stablecoin have created another token as well, the MRK tokens.
The MRK tokens are used by the voters of the ecosystem, but also as fees that have to be paid by them. By paying “stability fees”, which are burned, the prices will remain always stable. However, this is far from being what is happening right now.
At the beginning of 2019, the price of DAI has begun to go down sharply. Tokens were being sold by $0.95 USD in secondary markets, which undermines the value of the so-called stablecoin.
This has prompted the community to keep raising fees all the time. After several hikes, the fees are currently at 11.5% per year. However, the community is far from certain that these solutions will actually make the prices keep where they should be and the situation gets direr with time.
Many people in the MakerDAO community, though, are optimistic. They still see the stablecoin as the one that will be the default in the future.
Why Is The Price Not That Stable?
In fact, the price of the DAI tokens were never really stable. It always fluctuates around $1 USD, going higher or lower depending on the current demand for the tokens.
According to Steve Becker, the CEO and president of MakerDAO, this is normal to a point. Supply and demand are basics of the economy and they also drive the prices of the tokens in this ecosystem. The problem is that now prices are always below $1 USD.
The whole logic behind hiking the fees is that the CDP (collateralized debt position) owners should give their money back (and pay the debts) which would diminish the number of tokens in the market and keep the prices stable.
ETH is used as collateral, however, which makes the whole thing much more complicated than that. The MakerDAO users can long on ETH when they open a CDP by borrowing the DAI to purchase more ETH and, if the prices increase, they will profit from that.
Now that Ethereum is constantly going up this year, the MakerDAO ecosystem seems to be suffering from that. People are longing ETH and the prices are going down because a lot of people are taking these loans in order to speculate, which directly harms the ecosystem if everybody starts to do it.
The demand for DAI has not risen because its price is stable, but the demand for ETH is going up, which makes the prices of DAI go down. This has led the community to increase the fees five times this year, which has not worked as well as intended and even one more fee hike may be on the way.
How To Solve The Situation In The Long Term?
The main question for the community now is how to solve this mess. The MakerDAO ecosystem has a lot of promise but it is struggling to find the right solution for this problem.
Some people in the industry criticize the fee hikes as they harm the users in order to do something that the system should do on it's own and to help make the prices stable. The CEO of DiamDEXX, another stablecoin company, the best idea would be to actually use something “real” to back the tokens and ditch the fee system. This is not really an option for MakerDAO, so a solution is needed.
Unfortunately, no solution that is not a fee hike is very controversial and does not get readily accepted by the community.
According to Lawson Baker, a MakerDAO community member, there are four ways to solve the problem. Either increase interest rates. find ways to increase usage, limit the supply during creation with debt ceilings or combine all three answers.
At the moment, combining all of these ideas seems like the best way to simply prevent the network from completely collapsing, something that is a real risk right now.
MakerDAO has also been criticized by lack of transparency, to make matters even worse. The board of the company is made up of unknown individuals and some in the community feel that it should be more transparent in order to inspire more confidence from the market.
Will MakerDAO eventually become the top stablecoin of the market or this just a childish dream of its followers? The truth is that they will have to find a good answer before they can solve this tricky problem.