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MakerDAO token holders recently completed a 4-day vote to approve the proposed 2% increase in the stability fee for the stablecoin, Dai. The new rate will now be 3.5% in total.

The Dai stablecoin has uncoupled from its USD 1:1 peg, persisting below $1 for close to two months — described as resulting from an influx of Dai borrowers. The stability fee hike received strong support from the community of MKR token holders and is pending administrative actions for its implementation following an ‘executive vote.’ Litecoin Blockchain

The Dai Stability Fee and Scaling Issue

Dai has become enormously popular in the cryptocurrency community over the last several months as one of the staples of the emerging narrative towards decentralized finance (DeFi). Maker detailed the sizeable growth and demand for Dai in an earlier blog post — citing a 20 percent average monthly growth rate in ‘non-negligible’ addresses since its inception.

Dai notably retained its 1:1 price peg with the USD despite a more than 90 percent decline in the price of its underlying collateral, Ether. However, analysis by Hasu and Su Zhu — independent cryptocurrency market researchers — in early January revealed that Dai was not scalable due to the lack of professional arbitrage that affords other (i.e., fiat-collateralized) stablecoins a scalable, stable price peg.

It appears that their analysis has been spot on, as the stability fee increase is necessary to correct the price peg following extensive adoption of the novel stablecoin. Maker Dai’s stability fee is the amount paid per CDP by the user and is denominated in Dai. The stability fee can only be paid in MKR and the MKR is burned following payment of the fee. A higher stability fee means higher prices paid on Dai loans, which serves as a future loan disincentive for users comfortable with the previous, lower fees.

The fee has been increased twice already at 0.5 percent intervals, but both were insufficient in managing the price peg and inventory levels. The stability fee may be raised again in the future at more potent increments like 3 or 4 percent.

The fee is currently managed by the Maker Foundation’s temporary Risk Team.

Maker Holders Voting in DAO Framework

Maker (MKR) token holders vote on proposals that involve aspects of the MakerDAO platform such as the stability fee and function as the ‘last line’ of defense against a scenario where the underlying ETH collateral cannot back the circulating Dai. In such an instance, MKR would be sold on the market to raise collateral for the network to support the circulating Dai — decreasing the price of MKR and incentivizing holders to maintain prudent stability parameters.

However, the use of MKR holders as a backstop has come with legitimate criticisms and concerns in the long-term, primarily drawing from the notion that the deflated MKR price from selling would make re-capitalizing the system an arduous and convoluted task.

MakerDAO is a fascinating, censorship-resistant platform at the edge of DeFi for numerous reasons, mainly decentralized leverage and disintermediated loans with Dai. Its widespread adoption is indicative of DeFi’s growing popularity, but if the need persists in raising the stability fee, then MakerDAO may not prove scalable as Dai loans will become prohibitively expensive for many users.

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