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What’s the MakerDAO Stability Fee and how does it affect me?

What’s the MakerDAO Stability Fee and how does it affect me?

MakerDAO Stability Fee

Isn’t Dai supposed to be worth $1?

You may have noticed lately that when you go to spend your Dai, it’s worth a little less than a dollar. While at first this may seem alarming, in reality it’s no cause for panic. This fluctuation in Dai’s price is part of the MakerDAO credit system, and MKR holders have ways to fix situations like this. For example, by adjusting the MakerDAO Stability Fee.

How does Dai work?

Quick refresher on the Maker system, in case you’re not familiar: A user can open a Collateralized Debt Position (CDP). Then, she can lock ETH into her CDP, allowing her to mint Dai. CDPs must maintain a minimum collateralization rate of 150%. Put another way, users can draw up to two-thirds the value of their collateralized ETH in Dai. And the idea is that each Dai is pegged to the US Dollar and backed by Ethereum.

I know what you’re thinking: Isn’t the problem of just printing money the exact reason we have crypto in the first place? Ahh, but creating Dai through a CDP isn’t free…

The MakerDAO Stability Fee is calculated against the Dai drawn on your CDP

You can think of the Stability Fee as the interest rate you pay for minting (i.e., borrowing) Dai. The Stability Fee accrues continuously and can be paid in either MKR or Dai. MKR token holders determine the Stability Fee percentage through Maker’s governance system, known as the MakerDAO. Composed of MKR token holders, the MakerDAO maintains and secures the Maker credit system by voting on issues that affect the system’s growth and stability. Thus, MKR holders are in charge of ensuring that the Dai supply fits the market’s demand for Dai.

Adjusting the Stability Fee can restore the peg

When CDP owners mint more Dai than the market demands, the price of Dai falls below $1. A higher Stability Fee increases the cost of borrowing Dai. This should reduce demand for Dai by incentivizing CDP owners to mint less Dai and/or burn existing Dai to pay off their CDP. Thus, increasing the Stability Fee can help bring Dai back to its peg.

Who determines how and when to adjust the stability fee?

It’s hard to predict if and when the MakerDAO Stability Fee needs adjusting. For this reason, the Maker Foundation employs a full-time risk assessment team, which proposes thresholds for altering the Stability Fee (rate of change over time, deviation of the peg, sampling times) and presents them for approval to MKR voters. If you’re interested in learning more, the Maker Foundation encourages MKR holders to attend their weekly Governance and Risk meetings.

What happens next?

Last week, MKR holders voted to increase the MakerDAO Stability Fee to 3.5%. Hopefully, this will help bring the value of your Dai closer to $1 soon. If you own a CDP, you are now paying 3.5% annually on any Dai you have drawn. So if you want to keep holding Dai, you might want to explore cheaper ways to do so. In some cases, it may actually be more cost effective to burn the Dai you’ve minted and instead borrow from another DeFi lending platform like Compound Finance.

Tools you can use

  • Want to open a CDP, lock ETH in it, and generate Dai – all in a single transaction? You can, with Settle’s CDP Station
  • Curious how the Stability Fee adjustment affects MakerDAO’s dominance among DeFi projects? Check out DeFi Pulse 
  • Feel like every DEX has a different going rate for Dai? Find where to get the most bang for your buck with DEX.AG 
  • And don’t forget that if you grab a free Settle account, you can keep track of + analyze all your holdings with the most advanced portfolio tracking tool in crypto: Settle Portfolio!