Categories: Ethereum

Maker DAI Has an “Insane Incentive Misalignment” Says ETH Researcher

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About 80,000 eth held in DAI collaterals has been sold or withdrawn in the past week as MakerDAO (MKR) holders move to raise the DAI issuance fee yet again.

A vote concluded on Friday has hiked the cost of creating eth collateralized DAI from 11.5% to 14.5%, raising it by a combined 14% in two months.

Participation remains skewed with two addresses holding 100,000 MKR in combination, worth circa $60 million. Five addresses voted with 10,000 MKR ($6 million) each.

“I still have my CDP open but I’m pissed off,” says one DAI issuer. “They say in crypto making 100% gains is easy so even a 25% stability fee is okay. That’s great but where are my 100% gains? They’re raising the stability fee during a time where majority of CDP holders have lost money.”

Justin Drake, an ethereum researcher, went further to call for a fork of Maker due to an “insane misalignment of incentives.”

MakerDAO plans to launch a Dai Savings Rate mechanism which gives interest for simply holding DAI. Burning some DAI in the meantime, however, sounds like an interesting proposal.

That should address any concerns regarding the peg and might be an early test of whether the savings mechanism would work, but there is no suggestion by Maker that they plan to burn DAI, although that might change as this high-speed fee rise could affect other cryptos.

When proposing the fee increase, the project said the exchange price persists below $1, there are high inventory levels among market makers and prop desks, and there has been little attributable impact from the previous Stability Fee increases.

That last part remains very much a puzzle because DAI’s market cap has fallen by circa $10 million, yet such reduction of supply is not having much of an effect on the price of DAI.

The primary reason is probably because one can’t clearly see where demand for DAI comes from, especially considering significant competition from semi-centralized stablecoins.

Obviously there’s a clear use case for eth holders to create DAI and thus unlock liquidity, but the use case for others to buy DAI – instead of the far more liquid Tether – isn’t easy to see.

Burning DAI from fees would quite quickly create such use case as holding DAI would then be like having a decentralized savings account.

The problem there from MKR holders’ perspective might be that DAI would then compete with the MKR token as the main use of MKR is to receive dividends from DAI issuance fees.

The other use of MKR was of course to fund the development of this project. In addition it acts as a banker of last resort if the peg goes south.

Removing MKR from the equation might make it far more interesting as then you could have a fully decentralized liquidity bank.

You could potentially have an algorithm that, based on dai issuance and demand for it, automatically asserts what the issuance fee should be and what the savings interest rate should be.

That would get rid of all this voting and all the rest, with complex mechanisms then used to keep the peg from going south.

All of that wouldn’t be easy to build and, without a token, there might not be much incentive to build it except that if it can be done it would benefit the ethereum ecosystem and thus the Ethereum Foundation could fund it.


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