MakerDAO, a decentralized autonomous organization that provides crypto collateralized loans, voted to raise interest rates from 1.5 percent to 3.5 percent. The vote is a continuation of two February rate increases in an attempt to curb its Ethereum-backed stablecoin, Dai, from trading below its $1.00 peg.
As Dai continues to trade below its $1.00 peg, holders of Maker (MKR) on Mar. 8th have once again voted to increase interest rates to its loans. The interest rate was increased from 1.5 percent to 3.5 percent. And, if Dai does not stabilize at $1.00, the interest rate will be increased again to 5.5 percent.Background on Maker’s Loans
Maker is an open platform that provides collateralized loans through a series of smart contracts and oracles, giving users access to credit without a centralized point of control.
Users obtain these loans by locking their Ethereum in a smart contract. In return, users receive Dai, a stablecoin which represents a pool of all ether locked in the platform. Dai is soft-pegged to $1.00 based on the locked-up ETH. Users can then sell Dai for fiat or use it as leverage by trading it for more cryptocurrency.
Currently, users can obtain up to 60 percent of the value of their ether in Dai. If the ratio between collateral and the loan amount provided falls below this 60 percent ratio, then the position is automatically liquidated; consequently, it is often prudent to take loans below this maximum ratio to decrease the chance of automatic liquidation.
To repay the loan and retrieve the locked Ethereum the user must repay the Dai they received in addition to a stability fee, an annual interest rate charged to borrowers to compensate participants who maintain the stability of the system.How Dai Maintains Its Peg
When Dai is trading below $1.00, users are incentivized to purchase Dai (at a discount from its $1.00 peg) to repay their loans. When Dai is trading above $1.00, Ethereum holders are encoura...