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Maker's Spark Lending

The success of DAI as a product depends on its widespread acceptance across DeFi. However, Maker has little control over the downstream dApps that utilize DAI in their strategies, making Maker subject to external incentives and strategies. Therefore, what if Maker simply released its own downstream market protocol? They would have complete jurisdiction over the protocol design, more effectively incentivize and control DAI’s usage, and offer new products, extending their reach throughout the DeFi ecosystem. Enter Maker's new lending protocol, Spark, developed by Phoenix Labs.

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.