MakerDAO Proposes 17.5 Percent Stability Fee Decrease

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In another twist, MakerDAO‘s Interim Risk Team has decided to initiate a proposal to reduce the stability fee from 19.5 percent to 17.5 percent, as per a blog post from May 17, 2019. This is the eighth fee change in three months and the second in May 2019. 

Finding Solid Ground 

MakerDAO has backtracked on their increase from 16.5 percent to 19.5 percent carried out on May 3, 2019, after their plan to convince Collateralised Debt Position (CDP) holders to close out their contracts backfired.

With the fees rising from two percent to nearly 20 percent in the span of a few months, the MakerDAO Foundation was expecting CDP holders to close out their contracts. But as users were willing to bear the rising interest costs, the foundation was stuck in a scenario for which they hadn’t adequately prepared.

The point of stability mechanisms like that offered by MakerDAO and Basis Protocol (now defunct) was to create a central banking governance solution to implement monetary policy in a decentralized and community-driven manner.

But in raising fees from two percent to 19.5 percent has earned several different critiques from members in the crypto community. In the first, some have pointed out that it would be cheaper to get a loan from a traditional financial institution in a third world country.

While one dimension of the fee increases – raising and reducing fees to match the volatility of ETH – makes a fair amount of sense, the practical viability of using MakerDAO’s stablecoin, DAI, declines.

In any case, one aspect that should be appreciated is their commitment to maintaining their peg; centralized stablecoins like Tether are far less bothered to halt supply in times when their peg goes below one dollar. In making decentralized governance, their focal point has enabled MakerDAO to better facilitate community discussion and account for the opinions of those with a vested interest in the project.

Decentralized governance has found a competitor in algorithmic monetary policy as stablecoins like Reserve may prove to have an edge over DAI in terms of maintaining a stable peg. Nevertheless, MakerDAO is and will continue to be one of the most effective decentralized lending platforms – so long as they find a long term solution to keeping DAI’s peg intact without rapid fee changes.

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