Increasing the Dai Stability Fee

July 27, 2018

A month from now, the Maker Foundation will start the process of stabilizing the Dai target price using adjustments of the stability fee.

With Single Collateral Dai, we will use a manual system of individual proposals, that are each voted in by the community, with the aim of emulating the behaviour of the long run solution planned for Multi Collateral Dai.

The long run balancing mechanism

In Multi Collateral Dai, the balancing mechanism proposed by the Maker Foundation will utilize oracles and algorithms chosen by Maker governance to adjust the stability fee for balancing supply and demand around the $1 USD Target Price on a semi-automatic basis. This setup will be quite similar in aim to the logic of the Target Rate Feedback Mechanism while avoiding its downsides.

The goal of the balancing algorithm will be very simple: when Dai is observed trading below $1 USD by the oracles, they will trigger a stability fee increase. This reduces the supply of Dai and helps push the price back up towards the $1 USD Target Price. On the other hand, if Dai is observed trading above $1 USD, then the stability fee decrease will be triggered, increasing supply of Dai and pushing the price back down towards $1 USD Target Price. The force of the stability fee change and the sensitivity of when changes are triggered will be decided by Maker governance.

The interim solution during Single Collateral Dai

Since the semi-automatic algorithm is not available in Single Collateral Dai, the Maker Foundation Risk Team will emulate the role of the oracle, and create proposals that allow the community to implement a healthy monetary policy to keep the supply and demand of Dai in balance.

The Maker Foundation Risk Team is an independent team funded by the Maker Foundation that focuses on educating the community on governance, and bootstrapping the decentralized governance process and the scientific risk community it needs to flourish, in preparation for Multi Collateral Dai.

Through monitoring the price of Dai in the markets, as well as sentiment among market participants, the Risk Team has come to the conclusion that there is an adequate basis for increasing the stability fee of Single Collateral Dai in the short term. As a result, on August 26 the Risk Team will hold the first executive vote for a Stability Fee adjustment done for the sake of balancing Dai supply and demand. This adjustment, and future adjustments after it, mean that users in the ecosystem can remain confident that Dai will continue to stay close to the Target Price.

This initial executive vote will be the beginning of a continuous process. After the first Stability Fee adjustment, the Risk Team will monitor the results and may propose more adjustments of a similar or smaller magnitude if necessary. Since it will be the first time we engage in this type of adjustment, it is hard to tell how quickly and how much the market will react, and for that reason, the Risk Team will initially approach any future adjustments on a case-by-case basis, rather than commit to a plan without empirical basis up front.

On the basis of the data gathered from the first stability fee adjustment, the Risk and Economic Teams will lead an effort for constructing a transparent plan for Stability Fee adjustments in partnership with the community, that can stay with Single Collateral Dai and keep it stable until it is shut down.

The details of the first Stability Fee adjustment

On August 26 the Maker Foundation Risk Team will hold an executive vote to increase the stability fee for Dai from 0.5% to 2.5%. If approved by the community of MKR holders, the new rate will go into effect on August 26, giving CDP holders a one month warning period.

As a result, borrowing Dai will become more expensive. Between now and August 26 users can pay down debt at a lower rate if they do not want to continue with a 2.5% stability fee after the adjustment.

Because the user friendly voting interface will not be ready for use with Single Collateral Dai at the time of this vote, the Maker Foundation will communicate with highly technical MKR holders about voting via command line tools, to ensure the stability fee adjustment happens in a timely manner and to avoid any disruption of Single Collateral Dai. This is in accordance with the Strong Market Focus principle of the Foundation Proposal, that commits the Foundation to ensure that Dai must be kept viable and competitive in the stablecoin marketplace.

Any MKR holders who are highly skilled at manipulating blockchain transactions in CLI interfaces, please contact us if you are interested in voting. Nevertheless, given the significant risks involved in voting by manual CLI tools, MKR holders should be aware of the significant risks of participating in this vote. Please reach out in our Rocket Chat #help channel for more information.

Increasing community involvement in future stability fee adjustments

As noted in our Foundation Proposal, the Maker Foundation is committed to full decentralization of governance. We believe the path to decentralization must be gradual and measured in order to ensure the stability and long-term success of the Dai platform. A critical step toward decentralization will be the availability of user-friendly safe voting interfaces at the launch of Multi Collateral Dai, and the Foundation Proposal vote, the latter of which is happening on August 22, 2018.

On August 26 the user-friendly voting interface will not yet be compatible with Single Collateral Dai. We expect it to be compatible with Single Collateral Dai for any potential future stability fee adjustments after August 26, so all future adjustments can be made with little friction by the full Maker community.

July 27, 2018