The DAI stablecoin, pioneered by MakerDAO, has made a comeback, driven by a renewed surge in demand following substantial enhancements to reward rates for token holders. In a noteworthy milestone, the total market value of circulating DAI has surged beyond $5 billion, marking its highest point since April.
This resurgence comes in response to crypto investors flocking to capitalise on interest rates that have soared as much as 8%. It follows a prolonged contraction, during which DAI’s market capitalisation plummeted from an early 2022 pinnacle of over $10 billion to a low of $4.4 billion in late July, according to data from CoinMarketCap.
The resurgence has also positively influenced the Spark decentralised finance (DeFi) lending platform. Leveraging Maker’s credit facility and seamlessly incorporating DAI, the platform has witnessed an almost tenfold increase in its total value of assets locked (TVL) over the past month, reaching an impressive $430 million, as confirmed by DefiLlama.
To engineer a turnaround, Rune Christensen, the founder of Maker, revealed plans to establish a better interest rate structure for the stablecoin. The strategy taps into protocol-generated revenues from reserve assets like the U.S. Treasury bonds to fund the reward distribution. Termed the Enhanced DAI Savings Rate (EDSR), it initially provided an 8% annual reward on deposits, with provisions for dynamic adjustments as participation escalated. The introduction of the EDSR in early August yielded nearly $1 billion in inflows to DAI.
Still, questions persist regarding the sustainability of this growth and the long-term commitment of new users. The increased payout has greatly impacted Maker’s profits. Kunal Goel, an analyst at Messari, highlighted in a report that “higher rates on higher deposits ballooned the protocol’s interest expense [and] has dried up profit expectations.” In response to these challenges, Maker recently reduced the maximum interest rate to 5%, aiming to rectify both issues.
This adjustment prompted certain substantial investors to divest from DAI, including addresses associated with Justin Sun, the founder of Tron, who redeemed about $200 million worth of tokens, as reported by WuBlockchain. The adjacent Spark protocol also experienced a decline in TVL, dropping from over $600 million to $430 million throughout the week. As the DAI stablecoin navigates this juncture of resurgence and challenges, its path remains a subject of anticipation and scrutiny.