What is the DAI Savings Rate (DSR)?

None of the information contained here constitutes an offer (or solicitation of an offer) to buy or sell any currency, product or financial instrument, to make any investment, or to participate in any particular trading strategy.

Understanding the DAI Savings Rate (DSR)

The DAI Savings Rate (DSR) is a critical tool in the MakerDAO ecosystem that directly impacts the dynamics of the DAI stablecoin. The DSR allows DAI holders to lock their holdings into a specialized contract and earn variable interest over time.

This interest isn’t static; it’s a result of governance decisions made by the MakerDAO community. Why? The goal is straightforward: stabilize DAI’s price around the $1 USD mark and directly influence the supply of DAI. In the past, the DSR has acted as a lever and one of the tools MakerDAO has used to maintain the DAI peg. If the community wants to shrink the DAI in circulation, they’ll make the DSR more attractive by increasing the yield. Conversely, if there’s a need to release more DAI into the wild, the DSR is lowered. But now the DSR is being used as a direct mechanism to incentivize growth in DAI supply.

For a considerable duration of the bear market, the DAI Savings Rate remained low. But recently the MakerDAO community following the lead of founder Rune Christensen, cast their vote towards a planned increase in the DSR.

The Rationale Behind the Rise

But why this sudden change in stance? The prime mover behind this uptick in DSR has been MakerDAO’s profitability. With high yields stemming from real-world assets, especially the likes of treasury bills, there’s been an influx of profits. While MakerDAO has put some to work by rebuying MKR on the open market, even more important has been the desire to increase the overall supply of DAI. So governance decided not just to enjoy this increased yield but to share it with the community by amplifying the DSR.

Originally set at a promising 8%, the rate was decreased to 5% as a massive 1 billion new DAI got introduced into circulation. This isn’t just a whimsical change; it’s a carefully calculated move, part of the ‘Endgame plan’ that the governance has been actively working through with a series of projects.

The DSR increase is planned to remain intact in order to further incentivize minting and staking of DAI in the system. So far, traders have been taking advantage of the new opportunity.

The DSR Trading Landscape

This renewed interest in DSR initiated ripples across the broader DeFi market. A substantial amount of DAI got minted and deposited, with a significant chunk coming from a few whales of the ecosystem. The result was an influx of supply and a migration of DAI from other DeFi protocols into the DSR contracts.

This shift increased the rates on platforms like Aave, as holding other stablecoins started seeming costlier when compared to the attractive yields of DAI.

Traders are also borrowing low-cost stablecoins, such as LUSD or GHO, and swapping these assets for DAI, parking their DAI in the DSR. Their objective? A smart play on the yield spread.

The DAI Savings Rate isn’t merely a passive tool. It’s a dynamic instrument that reflects the pulse of the DeFi market, the strategic thinking of the MakerDAO community, and the nimbleness of traders seeking to optimize their returns. As the Endgame plan unfolds, all eyes remain on DSR and the future trajectory it charts for DAI.


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