Amid heightened volatility and an optimistic market outlook, MakerDAO has fortified its protocol. A recent surge in bullish sentiment has led to a depletion of reserves for DAI, its dollar-pegged stablecoin. Due to this depletion, MakerDAO enacted a series of temporary fee adjustments. The proposal, spearheaded by BA Labs, a key member of Maker’s Stability Advisory Council, comes in response to a significant decrease in DAI supply from $5 billion to $4.4 billion within one week.
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Emergency Protocol Adjustments Proposed
BA Labs announced that it is advocating for protocol parameter adjustments through an expedited governance process outlined in the Atlas protocol language. The proposal entails significant changes, including raising the DAI Savings Rate (DSR) from 5% to 15% and targeting increases in stability fees for key vault types like ETH-A, from 6.41% to 15.25%, and WBTC-A, from 6.68% to 16.75%.
“The DSR is an additional lever MakerDAO can utilise the DSR to make holding DAI more attractive, which in turn increases DAI demand and ultimately alleviates the downward pressure of the DAI price,” explained BA Labs. Additionally, the proposal recommends reducing the Governance Security Module (GSM) Delay from 48 to 16 hours and adjusting the Peg Stability Module (PSM)-USDC-A DC-IAM TTL from 24 to 12 hours, streamlining governance processes and reinforcing DAI’s stability framework.
Despite the current challenges, BA Labs affirmed that the underlying fundamentals supporting DAI are still robust, and this accelerated governance proposal aims to preempt potential short-term liquidity constraints.
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Exploring Market Volatility and Liquidity Concerns
Recently, the total supply of MakerDAO’s DAI has decreased from approximately 5 billion to 4.38 billion. This decline can be primarily attributed to the turbulent conditions prevailing in the cryptocurrency market, marked by escalating rates and a trend of users minting and subsequently selling DAI in favour of other assets.
DAI is sufficiently over-collateralised, with some collateral allocated to Real-World Asset (RWA) vehicles. However, people are concerned about potential liquidity constraints if MakerDAO’s DAI selling trend persists. The proposal reveals that the crux of the issue lies in the liquidity crunch inherent in the exposure toward stablecoins deployed through RWAs. Meanwhile, liquid stablecoin reserves and reserves allocated to RWAs are currently adequate to withstand the mounting pressure stemming from potential bullish market sentiment.
Adjustments to Stabilise Protocol
In an effort to stabilise the protocol, a series of measures have been greenlit for implementation starting March 10th. These adjustments include a significant increase in MakerDAO’s DAI savings rate from 5% to 15%. Additionally, there is a corresponding uptick in stability fees for core vaults, hovering around 9-10% each. Modifications will also be applied to the Spark Effective Borrow APY and the Peg Stability Module.
While these alterations are intended to be temporary, concerns linger regarding the absence of an automatic mechanism for fee reversion.
According to GFX Labs, while the changes are “Directionally correct”, the magnitude of the adjustments might be overly substantial for a single manoeuvre, potentially causing market dislocations and disruptions.
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Community Consensus and Governance Approval
Despite these reservations, MakerDAO’s proposed adjustments have garnered support from the community. JanSky, the Reserve Governance Facilitator, acknowledges the legitimacy of the proposal and pledges to work towards its implementation. Moreover, the Stability Facilitator Ecosystem Team has endorsed the proposal for an executive vote, signalling broad consensus within the MakerDAO community.
While some community members advocate for more gradual changes, the consensus underscores the urgency of addressing the current stability concerns surrounding DAI. Proactive governance and community consensus are vital to safeguarding the integrity and stability of MakerDAO’s ecosystem even as the protocol navigates this turbulence.
Looking Ahead: Ensuring Sustainable Stability
In the aftermath of these emergency measures, MakerDAO must remain vigilant in monitoring the efficacy of the implemented changes and their impact on DAI stability. Continuous assessment and adjustment may be necessary to ensure sustainable stability within the protocol. Additionally, proactive communication with the community and transparent governance processes will be crucial in maintaining trust and confidence in MakerDAO’s ability to navigate through challenging market conditions.
As the Decentralised Finance (DeFi) landscape evolves and adapts to dynamic market forces, MakerDAO’s resilience and ability to swiftly respond to emergent challenges will be tested. However, thanks to a dedicated community and a commitment to decentralisation, we can expect the protocol to stand the test of time.
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