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Maker's DAI has maintained a steady yet modest presence, accounting for a mere 3% of the total stablecoin market share. Despite the tumultuous market conditions that have seen many of its counterparts falter, DAI has remained resilient, albeit struggling to expand its reach. However, Maker's innovative approach to incentivizing holders could potentially alter this trajectory.
In a strategic move to attract and retain investors, Maker has begun offering yield to DAI holders. The company recently increased the DAI Savings Rate (DSR) to 3.2%, a decision that resulted in a threefold surge in DAI deposits within a span of just one month. This initiative could potentially catalyze user adoption, particularly among investors who hold their assets in stablecoins and are in pursuit of on-chain yield.
Depiction of the DRS. Source
Furthermore, Maker's integration of Ethereum-based Liquid Staking Tokens (LSTs) as collateral has significantly enhanced its capital efficiency. The unique feature of LSTs is their ability to generate yield even when locked in smart contracts, thereby pushing capital efficiency beyond the 100% mark.
A Spark for Dai?
In May 2023, Maker launched Spark Protocol, its first spin-off and proprietary front end, which offers DAI liquidity at a fixed rate equivalent to the DSR. This strategic move could potentially stimulate organic adoption and enhance the protocol's functionality.
The Spark Lend protocol is the first product in a broader strategy to build vertically integrated markets for DAI. Spark Lend, a lending platform forked from Aave V3, lets users deposit assets as collateral and borrow assets as debt from other users. However, Spark Lend’s tight association with Maker enables a few unique characteristics.
The most impactful characteristic is the ability to set the borrow rate of DAI on the protocol below other money markets. Initially, the plan is to set the rate at the Dai Savings Rate (DSR) of 1%. This will be the cheapest credit rate in DeFi, made possible by Maker fronting the initial 200 million DAI debt ceiling for the vault and completely removing the need for third-party liquidity providers.
Historically, MakerDAO balanced vault stability fees and the DSR to manipulate the supply and demand for DAI to maintain its peg. With this new market extension, MakerDAO will be able to directly monitor and regulate the supply of DAI in the Spark Lend market. This enables the DAO to guarantee the variable borrowing rate trends toward a specific level and yields an additional tool to manage DAI fluctuations.
The core component that sets this new DAI-supporting lending engine apart from other platforms is the combination of Maker’s Dai Direct Deposit Module (D3M) and PSM. D3M is a unique vault that allows Maker to directly interact with any secondary market by actively controlling the DAI supply according to current demand. Users will benefit from a more fixed and reliable DAI borrowing rate, which typically is subject to high fluctuations. The D3M has recently been incorporated into both AAVE and Compound, yielding more lucrative borrow rates for DAI across the greater lending market.
Spark Lend will only support five types of high-liquidity collateral on launch: DAI, ETH, Lido’s stETH, wBTC, and Savings DAI. Savings DAI (sDAI) is DAI locked in the DSR contract, essentially acting like a savings account by offering a stable, low-risk yield. As previously mentioned, Spark Lend also incorporates the PSM, enabling users to directly swap USDC for DAI at 1:1 within the interface.
The recent rise in global interest rates has significantly bolstered the profitability of stablecoin issuers. During the era of zero-interest rates, issuers were forced to either settle for minimal net interest margins or assume additional risk to generate substantial yield on deposits. However, the current financial climate allows for the deployment of funds into short-term U.S. government bonds, which can yield annualized returns of approximately 5%. Consequently, the profits of stablecoin issuers have seen a significant upswing.
This lucrative opportunity, previously inaccessible to Maker, has now been unlocked with the proliferation of Real-World Assets (RWAs) on-chain. Maker has successfully accumulated $2.5 billion in RWAs, which now constitute 50%+ of its asset portfolio. These RWAs are projected to generate an annualized yield of approximately 4%, further solidifying Maker's position in the stablecoin market.
