Token holders of MakerDAO, have, through an executive vote, agreed to reduce the stability fee (interest rates) of all DAI loans to 5.5 percent. MakerDAO is an Ethereum based decentralized lending protocol behind DAI, a stablecoin that is pegged 1:1 against the USD.
Uniquely, and unlike other issuers of TrueUSD or Tether (USDT), the stablecoin is backed by Ether (ETH). To automate lending of DAI, MakerDAO leverages Ethereum smart contracts. Presently, there are 1,716,042 ETH, or 1.58 percent of the total supply, locked in the DAI smart contracts and over $319 million worth of DAI loans have so far being issued out.
Because of ETH backing, the price of DAI tends to fluctuate depending on supply and demand dynamics. Therefore, to keep the value of DAI at equilibrium, MakerDAO usually issue out new DAI tokens while simultaneously increasing stability fee (interest rate) of DAI loans to increase the price of DAI to parity with the greenback.
Like a normal loan, DAI loans issued from MakerDAO are with interest. However, due to market forces and the continuous readjustments by MakerDAO’s protocol to keep DAI at 1:1 against the USD, the stability fee has been on an unexpected upward trajectory, peaking at 19.5 percent and sparking outrage from borrowers and holders of Maker (MKR) tokens.
MakerDAO Stability Fee Voting
The Oct 25 voting saw the reduction of Stability Fee from 9.5 to 5.5 percent in an announcement that was confirmed by the Maker Foundation Interim Risk Team and executed on Oct 28. Here, as dictated by MakerDAO governance model, holders of MKR token would vote “on changes to the Risk Parameters within the Dai Credit System” by staking their MKR tokens in the Maker Voting Contract.
Ideally, voting is supposed to be open, collaborative and for transparency, done on-chain through the Governance Dashboard. But in the last voting, an anomaly was observed where one large MKR whale placed a single vote pushing the number of submitted votes from 2,489 to 44,539 votes, drawing criticism on MakerDAO’s governance.
Wow. The @MakerDAO stability fee (interest rate) has dropped to 5.5%.
A single whale (with 97% of voting power) made the decision. Went from 2,489 votes a few hours ago, to 44,539 votes. pic.twitter.com/BpLqeN6ALY
— Daniel Onggunhao (@onggunhao) October 28, 2019
An analysis by one twitter user found that the voter staked 41,900 MKR from the 75,516 MKR under his/her control meaning the person/entity had a 94.7% control of MakerDAO voting power.
This voter has moved 41,900 MKR to vote. They own 75,516 MKR (7.5% of total supply ; $40M).
They received 108,956 MKR in Aug-2018. This is more than a16z (6%). Actually the biggest MKR holder. At the end day, that is governance and they have significant skin in the game!
— Julien Thevenard (@JulienThevenard) October 28, 2019
Changpeng Zhao, the CEO of Binance, a cryptocurrency exchange that recently launched a staking platform, chimed in, saying “welcome to “decentralization”, where anything is possible, and not under anyone’s control, even some re-centralization.”
A blip, this occurrence has nothing to do with centralization but with governance. Argument is, unlike proof-of work consensus algorithm where a miner has to pay for Capex and Opex, in proof-of-stake systems, coin staking allows whale to centralize and influence voting outcomes.
Feature Image Courtesy of Got Credit.