Thoughts on MakerDAO's DSR & EDSR.

Been looking at the EDSR since it was activated a few days ago, and it seems like it's working.  

The DAI Savings Rate (DSR) is a feature of MakerDAO that allows users to earn interest by locking their DAI into a special vault, which helps to maintain the stability and demand of DAI. The DSR is determined by MKR holders.

The Enhanced DAI Savings Rate (EDSR) can activate or deactivated by the Maker Governance.   The EDSR adjusts the DSR based on the DAI supply and demand. The EDSR increases when the DAI supply is higher than the DAI demand, and decreases when the DAI supply is lower than the DAI demand.

The EDSR helps to stabilize the DAI price, which should ideally be close to $1. The EDSR has a maximum value of 8%, which can be changed by Maker Governance.  

The EDSR was activated on August 2, 2023, and since then, it has helped to keep the DAI price around $1. However, this has not yet resulted in significant growth in DAI’s market capitalization, which has only stabilized after declining steadily since mid-March.  

Spark Protocol, a fork of Aave’s v3, is integrated with Maker’s Direct Deposit Dai Module (D3M), which allows Maker to lend DAI directly to Spark users at a lower rate than the market.  

Spark Protocol also offers lower borrowing rates than MakerDAO, which creates an arbitrage opportunity for users who can borrow tokens from Spark Protocol and lock them into the MakerDAO vault to earn the EDSR.

To prevent this arbitrage opportunity and to incentivize Spark users to stay on the platform, the cofounder of MakerDAO proposed a draft proposal to cap the EDSR at 5% and to increase crypto borrowing rates on Spark Protocol to match the EDSR.

This proposal is about modifying the Enhanced DAI Savings Rate (EDSR), a temporary feature of the Maker Protocol that adjusts the DAI Savings Rate (DSR) based on the DAI supply and demand. The EDSR helps to stabilize the DAI price, which should ideally be close to $1.

The EDSR has a maximum value of 8%, which can be changed by Maker Governance.

The proposal suggests that the EDSR should be updated more frequently based on the observed data of the DAI market.   Specifically, the proposal recommends that the EDSR should be

• increased by 0.5% every week until it reaches 8%, and then
• decreased by 0.5% every week until it reaches 0%.  

The proposal also suggests that the EDSR should be reset to 0% if the DAI price deviates from $1 by more than 2% for more than 24 hours. The only exceptions would be for ETH-A, ETH-B, and ETH-C, which are risk profiles for $ETH collateral with different liquidation thresholds, stability fees, and borrowing limits.

Rune also suggests creating a new SubDAO token which would be used to govern Spark Protocol. Spark's tokens would be distributed to Spark users based on their borrowing and lending activity.  

This proposal of retroactive token rewards for Spark Protocol borrowers is a clever idea, though it probably should have been there from the beginning.

The token holders would be able to vote on Spark Protocol’s parameters and policies, as well as receive a share of the protocol’s fees.

The importance of this proposal is that it could help to balance the supply and demand of DAI and SubDAO tokens, which could benefit both MakerDAO and Spark Protocol in the long run.

It could also help align the incentives of both platforms’ users and governance communities, fostering collaboration and innovation in the decentralized finance (DeFi) space.

Additionally, it could help to reduce the risk of instability or manipulation of either platform by whales or large funds, which could otherwise exploit the arbitrage opportunity and exit the system once it closes.

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