A weekly developer call of the MakerDAO, the open-source developer group of decentralized, ETH-backed stablecoin DAI, came to the understanding that the coin’s dollar peg was reaching its “breaking point” due to a lack of organic demand.
Concerns at the meeting mostly revolved around the DAI’s ability to hold its peg at a time when there’s a speculative drop in its market value.
It is this concern that saw the founder of MakerDAO Rune Christensen suggest that stakeholders vote to determine whether the team should hike the fees for the dollar-pegged coin and in the process help resolve issues surrounding its liquidity.
MakerDAO launched the poll on Monday, in which holders of the MKR governance tokens are expected to vote on the question of the “Dai Stability Fee.” The vote will be to determine whether the fee should be raised from 1.5 percent to 3.5 percent.
As well as other stablecoins in the crypto space, the DAI has seen fluctuations in its prices over most of 2019, with data at XBT.net showing that prices have so far dropped to $0.98 or risen to $1.02.
While DAI has remained consistent enough on Coinbase Pro and Bitfinex at about $0.98 since January, the bouncing seen on the global markets is a cause for concern.
MakerDAO’s risk management lead Cypress Younessi said during a public call that although the dollar-pegged token was giving a “good deal,” the pressing concern at the moment is to get the price locked at least until the right kind of stability in fees is reached.
Last month, MKR holders voted twice to increase the fee by 0.5%, but according to an official Reddit post, that increase had a “negligible” impact on correcting the difference between the stablecoin’s value and the peg.
As such, the project’s risk team felt there needed to be an increment of 2% “until the trend in the peg has been corrected.”
Increasing the fee isn’t going to impact just MakerDAO, but several other applications that rely on the increasingly popular stablecoin’s value and fee, including Gitcoin that regularly denominates and pays its bounties in DAI coins.
Other applications that leverage the DAI as their primary medium of transactions are payment channel platforms. An example is the Connext Network which is soon launching its mainnet on the Ethereum platform.
Collateralized DAI
At the moment, MakerDAO smart contracts have seen users lock over 2 million ether tokens, with these accounting for about 2 percent of total ETH supply.
However, increased adoption for the DAI token continues to occur via “collateralized debt positions” (CDPs), which requires that a user’s locked ether be three times the amount of DAI they wish to withdraw.
As a stablecoin withdraw-able for fiat, the DAI token has become extremely popular with ETH holders who want loans to pay off bills.
But this has had a broader effect in destabilizing the network- principally due to the spike in loan demands that does not correspond to the demand for DAI for organic purposes.
MakerDAO has noted that the widening gap brought about by this scenario has seen contributors and employees look to increase the token’s use cases.
Some of the new usages happen behind the scenes at companies that offer crypto-financial services when handling backend value transfers.
Allegedly, most people who hold the stablecoin end up liquidating it within an hour or so of possessing it. But perhaps this is directly related to another problem impacting ether collateral in DAI CDPs.
For instance, a CDP will automatically liquidate when ETH prices decline to value below 150 percent, but even that doesn’t guarantee that a user will recoup all of their collateral.
MKR Token holders
A spokesperson for MakerDAO revealed that only those individuals and entities that hold MKR tokens would have the opportunity to vote, mainly on matters relating to the addition or removal of data sources.
Under current circumstances, the power to vote is a crucial aspect given the debate regarding an increment in the stablecoin’s debt ceiling.
If markets drop significantly, then liquidating ether collateral becomes a necessity, although Christensen maintained that this was only “hypothetical” and a “worst-case scenario.”
Still, it remains to be seen how many MKR holders will participate in the latest vote, given that those who voted in the last two rounds were less than 10 percent.
The DAI needs a diverse ecosystem of token holders and other stakeholders to pull together for it to make it in the industry. However, therein lies a problem as a majority of the tokens are owned by very few people.
For instance, Etherscan shows that the top three holders of the token control 55 percent, with one of this owning roughly 27 percent. a16z fund’s Andreessen Horowitz owns 6 percent, while hedge fund 1confirmation also has a significant amount of MKR tokens.
While the rest of the top 10 holders haven’t been publicly listed, the trend is that most MKR is in the hands of very few people. ConsenSys and the Ethereum Foundation are also thought to hold significant portions although information to that effect isn’t available.
Disclaimer: This is not investment advice. Cryptocurrencies are highly volatile assets and are very risky investments. Do your research and consult an investment professional before investing. Never invest more than you can afford to lose. Never borrow money to invest in cryptocurrencies.
