Maker Protocol’s stability fee is voted into existence with MakerDAO’s governance mechanism. The stability fee is what helps keep DAI’s peg afloat, and the confirmation of a reduction to 5.5% signifies a positive outlook on demand for DAI. As the price of ETH moves up, adoption metrics for DeFi protocols continue to chug along in tandem, October 28, 2019.
Correlation Between ETH and DAI
MakerDAO is governed using native MKR tokens, so it goes without saying that there is a correlation between MKR and DAI. But having been built on Ethereum, DAI shares a lot of fundamental relationships with ETH. In order to open a collateralized debt position (CDP) and mint DAI, one has to lock up 150 percent of the DAI loan amount worth of ETH.
MKR holders are rewarded as more CDPs are opened by way of stability fees. When arbitrage opportunities on DAI appear in the open market (exchanges), the stability fee is used as a means of keeping the peg stable. If DAI is falling below $1, fees are increased to stop people from mass minting DAI and incentivizes them to buy it on the open market. If the peg goes above $1, the stability fee is reduced so people can mint cheap DAI and bring the price closer to the $1 target.
Opening a CDP is profitable during ETH bull markets, and as the price has risen the last few days, DeFi has staged a comeback, reaching an all-time high for ETH locked in financial dApps.
A Bull Market Will Help Capitalize Open Finance
Close to 2.2 percent of the entire supply of ETH is already invested into open finance protocol;. the United States M2 money supply is $15 trillion; 2 percent of that is $150 billion.
In that context, there is already a lot of ETH on these protocols, and issuance on Ethereum is far lower than the United States Treasury’s. If more ETH accrues to DeFi, and the price of ETH gains value along the way, it will make today’s viewpoint of capital in DeFi look like an illusion.
But, if ETH price appreciation is the driving factor for DeFi capitalization, as opposed to a scenario where protocols thrive because more absolute ETH is locked into DeFi, it will mean that usage hasn’t grown – only the base amounts in USD terms will have. This results in a network where wealth is largely concentrated with a few entities.