Governance Polls: Ratifications
August 9, 2021
There has been much discussion lately in MakerDAO community forums about the Stability Fee calculated against the total amount of Dai drawn against collateral held in a Collateralized Debt Position (CDP). We welcome these conversations, as they help us better understand users and very often guide us toward important system improvements. Sometimes, however, even healthy discussion can breed misconceptions, as we are seeing now. When that happens, clarification is needed.
Maker is a project that relies on community governance, and the main goal of the governance process is to stabilize the price of Dai to around 1 US Dollar. With the market price of Dai now within reach of returning to that peg, the Maker community has proven one of the most central tenets of the governance strategy: The cost of minting Dai with the system can be used to impact the Dai supply, and thus the market price.
This is a huge milestone — a proof point for the project moving forward, as it will give Dai users peace of mind whenever a short-lived softening of the peg is experienced. The strategy of altering the supply through the Stability Fee enables Dai to return to its peg.
In light of the above, I will now address three common reactions from the community regarding the last few Stability Fee increases. I hope that by offering my perspective on each and my expectations of Multi-Collateral Dai (MCD), I can provide rationale that steers the conversation in a more valuable direction.
But first, I want to emphasize again that the Stability Fee is a risk parameter designed to address imbalances in supply of, and demand for, the Dai token. If there is too much supply and not enough demand, the way to get Dai closely pegged to the US Dollar and highly liquid is to reduce demand by incentivizing CDP owners to mint less Dai and/or burn existing Dai. One way to do this is by increasing the Stability Fee.
As many in the Maker community are correctly noting, the Stability Fee has become quite high—now nearly 20%. While we would have expected users to close their CDPs more frequently as the Stability Fee rose, CDP users were, on the whole, actually willing to bear the fee increases, which means that the supply of Dai has not decreased enough to bring supply and demand in balance.
The “right” Stability Fee level is the one that helps Dai maintain its peg to the USD. If Dai price stability isn’t prioritized, other aspects of the system suffer. So, maintaining the peg must always come first for MKR holders, even if that means increasing the Stability Fee. CDP holders can “vote with their feet” if they dislike the Stability Fee hikes, since they can choose to no longer participate in the system and close their CDPs at any time.
Expectation: Multi-Collateral Dai (MCD) Will Result in Lower Stability Fees
As the system grows and attracts more users, our understanding of its dynamics evolves. In other words, the current changes are part of the discovery process that all MKR holders (Governance voters) experience and work through together.
There are two factors in MCD that many in the community expect will result in lower Stability Fees overall. The first is the Dai Savings Rate (DSR), which will help the Maker community impact both supply and demand for Dai for the purpose of stabilization. Doubling the number of economic tools at the disposal of community governance should logically produce a stronger effect.
The other factor is simply the inertia produced as the system reaches a larger scale and uses collateral less volatile than ETH. A foremost reason why CDP holders are currently willing to accept a high Stability Fee and keep their CDPs open is that they have high expectations for the future value of Ethereum. This will change when less volatile collateral assets are used.
The Stability Fee has been raised by MKR token holders through votes seemingly often over a short period of time due to a lack of significant change in Dai supply. One reason for this is that sentiment around collateral assets affects the Stability Fee increases CDP holders are willing to withstand. The shift in sentiment around ETH and the market trend from bearish to neutral has significantly altered the demand for ETH leverage. These changes in market sentiment will always occur, and, as a result, the Stability Fee of the base-level CDP product will always change too.
Expectation: MCD Will Positively Affect Stability Fee Movement
As noted above, the release of DSR with MCD will likely have a dampening effect on the Stability Fee overall, but will also likely result in smaller swings of the Stability Fee over time. It will not, however, change how often the Stability Fee can change.
The above statement is a potentially dangerous rumor that I’ve seen circulating on Twitter and other forums. Some believe that CDP holders can avoid paying the Stability Fee by waiting until an Emergency Shutdown of Single-Collateral Dai (SCD) is triggered after the migration to MCD. While it is true that the core of SCD doesn’t support levying the Stability Fee on CDP holders at Emergency Shutdown, as originally communicated, a Stability Fee will apply to all CDP holders who hold their CDPs through the Emergency Shutdown of SCD rather than closing them earlier or migrating them to MCD. This restores the original expectations in the community that there will be no downside for a CDP holder to immediately migrate to MCD when it becomes possible, and that there is no downside to immediately closing your CDP if you think the Stability Fee has become too high.
Feedback from the Maker community is always appreciated, not only because it contributes to our long-term success but also because it helps to foster understanding of our systems and tools, especially for those new to Maker. I hope this post offers some of the clarification many have requested in our forums.