MakerDAO Reduces Stability Fees to Rekindle Stablecoin Demand

MakerDAO Reduces Stability Fees to Rekindle Stablecoin Demand

The decentralized finance platform, MakerDAO, intends to rekindle demand for its DAI stablecoin through fee reduction. The platform allows borrowers to use volatile cryptocurrency as collateral for loans of stablecoins (known as dai) pegged to the U.S. dollar.

MakerDAO Focused on Stablecoins’ Development

MarkerDao has adjusted stability fees across a wide variety of crypto assets used as collateral on the platform.

This development comes as the demand for DAI and other stablecoins has cooled amid the recent crypto market retracement, with Maker hoping to drive up demand for DAI minting by reducing fees.

MakerDAO is a decentralized autonomous organization launched on the Ethereum blockchain a year after the announcement of Ethereum. MakerDAO introduced the world’s first decentralized stablecoin through smart contracts known as Maker Vaults.

These smart contracts are formed on applications such as Oasis Borrow, where users put up their digital assets as collateral to generate DAI. MakerDAO and Maker Protocol are Ethereum-based.

Decentralized Finance Ecosystem

Stablecoins minimize volatility and are usually pegged to a fiat currency. The creation of the DAO and stablecoin laid the foundations for the decentralized finance ecosystem. MakerDAO introduced Multi-Collateral DAI (MCD) in 2019, bringing real-world assets closer to the blockchain.

MCD established the concepts of generating collateral and yields from stablecoins. With MCD, people earn from holding a stablecoin in a particular smart contract. They may also use a stablecoin as collateral for several types of cryptocurrencies. 

Stability Fees

When users deposit crypto assets to mint the protocol’s stablecoin, DAI, the debt incurs a stability fee that is effectively continuously accruing interest due upon repayment of the borrowed tokens.

Maker’s fluctuating stability fees are formed to maintain DAI’s dollar peg. When collateralized debt position (CDP) holders mint more DAI than the market demands, the stable token’s price could fall below $1.

Raising the stability fee makes the cost of borrowing DAI go up, reducing the demand for minting the token. Conversely, as MakerDAO has just done, reducing the fees drops the cost of borrowing DAI to stimulate demand.

DAI’s circulating supply rose to an all-time high of $5.1 billion on June 16 but has dropped 6% since then to current levels of around $4.8 billion. Demand for stablecoin has slowed amid an accelerating downtrend in crypto asset prices and falling activity in the DeFi sector.

MakerDAO token holders are in the process of voting on whether to implement flash loan functionality. The proposal will allow a maximum of 500 million Dai to be minted by individuals for flash loans, if successful. Existing constraints that limit the value of loans based on the volume of liquidity available in lending pools will be eliminated.

Wayne Jones

Wayne is an all-rounded cryptocurrency writer who has written for several publications in the fintech industry. Having graduated from the University of Essex Colchester, he developed a passion for blockchain technology and has been curious about how the blockchain can modify the traditional financial industry.