Summary:
This proposal seeks to introduce the first stablecoin market to FiRM: DAI. Using the Personal Collateral Escrow feature in FiRM, we can enable DAI deposits to take advantage of the yield available through the DAI Savings Rate, allowing users to enjoy borrowing at a high collateral factor for a well-known stablecoin.
Background:
About DAI
DAI is the leading decentralized stablecoin and created by MakerDAO and founded in 2015 by Rune Christensen. The concept behind DAI was to create a stablecoin that would be pegged to the US dollar while maintaining its decentralized nature and avoiding reliance on traditional financial institutions.
The DAI stablecoin maintains its value close to one U.S. dollar through a system of smart contracts and incentives. If the price of DAI deviates from the target price of $1.00, the MakerDAO system adjusts certain parameters, such as the Stability Fee and the Debt Ceiling, to encourage users to either mint or burn DAI, helping to restore its peg.
The DAI Savings Rate
The DAI Savings Rate (DSR) is a variable interest rate paid to users who deposit
their DAI stablecoins into the MakerDAO’s DSR smart contract. The DSR serves as an incentive - similar to a savings account - for DAI holders to deposit and hold their DAI which helps to stabilize DAI’s value and maintain its USD peg. DAI deposited in the DSR can be withdrawn at any time.
Maker has made expanding its portfolio of Real World Assets a priority and, in part due to relatively high interest rates on short-term U.S. government bonds and other portfolio holdings, Maker has accumulated $2.5 billion in RWAs that now represent 54% of its asset portfolio. This portfolio is expected to generate an annualized yield of ~4% this year and Maker is sharing this yield with DAI holders and to encourage greater participation in the DSR effort. Maker governance, recently increased the DAI savings rate (now 3.19% APR) and today there is ~$300MM in DSR TVL. NB: there is also a new governance proposal being considered which would raise the DSR to as high as 8%.
The DAI Savings Rate APR is determined by MakerDAO governance and can be adjusted based on prevailing market conditions and overall supply and demand dynamics.
Proposed Concept
Add DAI as collateral on FiRM while allowing depositors to also receive DSR interest.
Implementation on FiRM
Maker is a truly permissionless system enabling third party developers to access features like the DAI Savings Rate.
The proposed implementation allows a user to deposit naked DAI into a new DAI market on FiRM. That DAI is then immediately deposited into Maker’s Dai Savings Rate module where it will earn yield. Yield from DAI deposited into the DSR is continually generated for the user account. As the user’s Personal Collateral Escrow accrues yield, the borrower’s loan will become increasingly more collateralized, as long as DAI doesn’t negatively depeg from the USD.
Users may view their DSR balance at any time in FiRM, which calls a balance() function in the DAI Savings Rate contract. Note that the DSR does not issue a receipt token.
Withdrawing DAI from FiRM, with accrued DSR interest, functions like any other market on FiRM, however the Personal Collateral Escrow facilitates the call to the DAI Savings Rate contract’s exit function which enables the user’s DAI to be withdrawn to their wallet.
Market Opportunity
DAI is the largest decentralized stablecoin in the industry, with over $4.2 billion in circulation and the vast majority remaining on Ethereum mainnet https://defillama.com/stablecoin/dai
DSR TVL is relatively nascent at ~$307,000,000 but it is seeing recent growth now that Maker governance voted to increase the APR. We should expect DSR TVL to continue to rise for the foreseeable future as Maker seeks to address some softening in DAI’s circulation growth.
The core value proposition for DAI holders is to simply allow them to earn yield on their DAI while also using it as collateral for loans. Lending against DAI with DSR interest is not offered by other lenders today. This proposal allows DAI holders to borrow at fixed rates with a high collateral factor (potentially as high as 90%) while continuing to receive DSR yield. Moreover, there are no lockups and users may withdraw at any time.
Stablecoins as collateral for lending is not novel. Today, for example, Aave supports more than $500MM in stablecoin TVL as loan collateral. For Inverse, this marks a potentially lucrative foray into stablecoins as collateral for users who seek to make their stablecoin holdings more productive but with the high certainty/peace of mind of fixed borrowing costs.
In addition to “DeFi native” individual FiRM users, this proposal is also intended to appeal to DAO treasuries holding DAI who seek an alternative method for borrowing at fixed rates against their stablecoin reserves.
Risk Assessment:
The RWG analysis for DAI can be found here, which assigns an asset score of 9.98/10 for DAI, an exceptionally high score, with the following conclusions and parameter recommendations:
- Price Volatility: A high score in price volatility suggests that DAI price experiences minimal fluctuations or instability compared to the benchmark (wETH). This volatility indicates a lesser level of risk associated with DAI’s price movements.
- Token Distribution: A high score in token distribution indicates that DAI tokens are well distributed amongst numerous holders or addresses, potentially resulting in an even distribution of ownership. This distribution speaks to the asset’s decentralization, market stability, and deep liquidity.
- Market Capitalization: A high score in market capitalization suggests that DAI has a noteworthy overall market value relative to wETH. A high market capitalization score indicates that DAI has attained a considerable level of adoption or popularity.
- Trading Volume: A high score in trading volume indicates that DAI experiences high levels of trading activity compared to wETH. Higher trading volume generally implies deep liquidity and market interest, making it easier for investors to buy or sell DAI without significant price impact or slippage. This is also important in the context of liquidations.
- Project Fundamentals: A high score in project fundamentals suggests that DAI’s underlying project has strong attributes, such as an experienced team, solid technology, and a promising roadmap. This positive evaluation indicates that the project has a strong foundation and potential for success.
- Token Utility: A high score in token utility implies that DAI’s tokens have diverse use cases and functionality within the associated ecosystem. The higher the score, the more versatile and valuable the tokens are perceived to be. Token utility is essential as it reflects the demand and practical applications of DAI within its ecosystem.
Parameter Recommendations
| Supply Ceiling | 10,000,000 DOLA |
|---|---|
| Initial Fed Supply | 5,000,000 DOLA |
| Daily Borrow Limit | 1,000,000 DOLA |
| Firm Global Supply Ceiling | 42,000,000 DOLA |
| Collateral Factor | 90% |
| Liquidation Factor | 50% |
| Liquidation Incentive | 5% |
| Staleness Threshold | 3650 |
Conclusion
Adding DAI provides a new category of loan collateral - stablecoins - as an option for FiRM users. FiRM is uniquely positioned to take advantage of the yield generated via the DAI DSR and therefore the growing TVL of DSI locked in DSR’s. The score for DAI provided by the RWG provides further confidence in the safety of this market.