Stablecoin deposits on the Maker Protocol have soared in the two days since the community approved a proposal to temporarily raise the DAI savings rate to as high as 8%. Maker founder Rune Christensen has now called for stabilizing the Enhanced DAI Savings Rate (EDSR) by decreasing it to a maximum value of 5%.
It's been a little more than 2 days since the EDSR activated, and DSR utilization has already almost hit 20%, triggering an automatic EDSR decrease to about 5.8%.
I have made a draft proposal to stabilize the EDSR and optimize it for use by Dai holders rather than ETH whales -…
— Rune (@RuneKek) August 8, 2023
The EDSR was implemented as a measure to temporarily increase the interest rate paid out to DAI users when utilization is low. However, in a little over 48 hours since the new rate went live, utilization surged to 20%, causing the EDSR to automatically decrease to around 5.8%.
Much of this activity was driven by Ethereum whales, who were able to borrow DAI at 3.19% and earn the 8% EDSR on their deposits. Christensen believes that harvesting yield in this way “crowds out” regular DAI users who were the intended benefactors of the initial proposal.
In a proposal posted to Maker’s governance forum, Christensen proposed a few measures to deal with the so-called “unintended consequences of the EDSR disproportionately being used by large-scale whales.”
As per the terms of the proposal, the EDSR would be changed to a maximum value of 5%. Additionally, a Tier 1 EDSR would cover utilization from 0-40%, and a Tier 2 EDSR would cover utilization from 40-55%, making the maximum EDSR last longer than before.
“Crypto borrow rates would also increase to be equivalent to the EDSR, so initially they would go to minimum 5%, and this would make it impossible to profit from performing the borrow arbitrage that is currently happening at very large scale,” said Christensen, noting that ETH-A, ETH-B and ETH-C would be exceptions to this.
So far, the response to the proposal has been mixed, with some users opining that if the EDSR never reaches a 40% utilization, it could lead to the unintended consequence of reducing DAI supply rather than driving demand.