MakerDAO’s newly approved Enhanced Dai Savings Rate is a temporary enhanced interest offer that has won favour with investors.
July has been a fairly lacklustre month for the crypto market. Bitcoin and Ether saw little price action, with both currencies down 3.5% and 2.5% respectively. MakerDAO’s native token, MKR, however, has performed exceedingly well, with gains of nearly 58%.
Over the past 30 days, the token has added $415,446,390 to its total market cap, breaking into $1.15 billion.
MakerDAO is a leading DeFi protocol on Ethereum that lets users to lend and borrow cryptocurrencies without intermediaries. It’s maintained by two tokens: DAI, a stablecoin that’s soft-pegged to the US dollar, and MKR, a governance token.
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A key factor contributing to MKR’s July rally is likely the recently approved governance proposal known as ‘GOV12.1.2’, which introduces the Enhanced Dai Savings Rate (EDSR).
MakerDAO’s Dai Savings Rate (DSR) enables users to earn interest on their held Dai.
While the DSR offers one of the highest interest rates in DeFi, uptake has been lower than expected, according to Rune, who shared the proposal on the MakerDAO forum.
“The DSR itself has seen some adoption, but overall it has been miniscule compared to the amount of increased stability fees we are now earning from Vault users,” they wrote.
To address this and increase uptake of the DSR, the DAO has devised and approved an ‘enhanced’ version of the DSR, known as the EDSR. It aims to temporarily boost the effective DSR available to users during the early bootstrapping phase, namely when DSR utilisation is low.
In more practical terms, it offers early adopters of the DSR a more lucrative, temporary opportunity to earn interest on their holdings in order to incentivise wider uptake.
How it works in real terms
The EDSR is determined on two factors: the current DSR rate (how much interest you can earn) and the DSR utilisation rate (how many people are using it).
The lower the utilisation of the DSR, the higher the EDSR bonus, the forum outlines. However, as more people start to use the DSR, the bonus goes down, until so many are using it that it goes away completely. (At which point, the DSR would stand on it own.)
It’s a “one-time, one-way temporary mechanism”, said Rune, pointing out that the EDSR can only decrease over time and cannot increase again, even if DSR utilisation goes down.
The mechanism quickly attracted attention and enthusiasm among investors, who have pushed the price of MKR from $817 on July 1 to $1,289 at the time of writing (CoinGecko).
The approach has also stabilised the total supply of Dai, which now sits at 4,145,353,764 DAI.
Disclaimer: CryptoPlug does not recommend that any cryptocurrency should be bought, sold, or held by you. Do conduct your own due diligence and consult your financial advisor before making any investment decisions.
