Negative Interest Rates

How would Dai hold a peg to a currency that has negative interest rates? Negative interest rates (on demand deposits) means that people are literally being charged a % fee to hold their money at a bank. Based on my understanding of the current MCD system there is no way to mimic this with Dai. It is not possible to implement a negative DSR as currently implemented due to voluntary DSR participation/lock-up. If rates were to go negative, how would Maker prevent Dia from trading at a premium? On the supply side, the goal would be to increase supply by reducing the stability fee but that can’t go lower than 0 (I assume because otherwise MKR holders would be eating the difference which would be unsustainable). On the demand side, the stability fee can’t be lowered below 0(because it’s opt in option). What options are left to maintain the peg in a scenario where the stability fee is 0, the DSR is 0 but Dai is still trading at a premium?

Welcome to the forum @John_Galt !

This is correct.

I think the answer to this is to on-board new collateral types that we can hopefully use to increase supply. It’s admittedly not a great answer, but in the scenario you’ve outlined above, I think that’s the only option.

This scenario is one of the reasons that it’s so important for MCD to include a wide range of collateral assets.

I think onboarding more collateral is the best answer but I don’t think that would be sufficient. I think the DSR would need to be baked directly into Dai as opposed to the opt in option. IMHO this kind of a big deal given the current rate environment. It implies the current Maker system is incompatible with a negative rate environment. In other words it would not currently work with a euro or yen dai and if USD rates went negative I believe the peg would break. Maybe I’m missing something though?

The TRFM can be activated to replicate negative rates. To lower demand for Dai, one can make 1 Dai redeemable for only $0.99 of collateral, for example.


Ah, that makes sense. Should have known I was missing something. Thanks Cyrus!

@cyrus excuse my ignorance but what is TRFM.

I was asking previously about ability for Maker to implement negative interest rates or not.

I think a good sales case would be if Maker would never go negative on rates. I mean really are we going to pay borrowers and bill savers?

If it came down to this I would be advocating highly to adopt a commodity peg either energy or PMs or both since I don’t ever see negative rates entering those markets - just straight up inflation due to excessive money printing and currency devaluation that will ensue by CBs. This whole idea of NIRP is rather insane and dangerous to the world economy to my mind. imo it is my hope Maker should try to do better and avoid going down this road even if it means changing what we are trying to PEG to.

TRFM would make 1 Dai redeemable for some dollar amount of collateral other than $1. So, if 1 Dai were all of a sudden only redeemable for $0.98 at Emergency Shutdown it would de facto act like negative interest rate.

thank you for the reply @cyrus and I apologize for not being precise?

What does the acronym TRFM stand for?

And now that you bring it up it. Is this TRFM a feature or function ‘only’? available during a Emergency Shutdown or during other normal operation of Maker?

Thank you in advance for any reply

TRFM is a super old concept, called the Target Rate Feedback Mechanism. It was actually (afaik) the original implementation of DSR, but it became too confusing (and I agree). Check out this old post from way back in the day

Wasn’t TRFM removed from MCD? I can’t find it in the code base.

Also, AFAIK the TRFM was intended as a temporary (and rather extreme) intervention to be used until the peg can be restored by regular means, and not to implement a continuous devaluation (that negative interest is).

@MakerMan, I believe negative interests don’t make sense outside the insanity known as traditional finance, so I agree that ensuring an equivalent is not possible in Maker would be highly desirable, given that not replicating the legacy system’s failures is one of the unwritten mission statements.

I think the simplified answer to this is that in such an environment, assets prices should rise, including ETH, real estate, metals, etc. The demand for leverage should rise as well, including in Maker, so vault openings and the dai supply should eventually rise, lowering the dai price. Raised debt ceilings can further facilitate this.

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If TRFM is not available, it sounds like there are no other mechanisms available to prevent Dai from trading at a premium in the scenario outlined above. @cyrus could confirm if TRFM is part of MCD?

If true, this is a problem that needs to be solved. TRFM would be one option. Other options would be to make the DSR compulsory with the ability to set to negative. A third option would be for the DAO to mint Dai and sell into the market to increase supply. Not sure that I’ve thought this third option the whole way through, but this may be the best option. It allows Dai holders to avoid negative interest rates and MKR holders to reap the benefits of the printed Dai sales. If the system could reliably and sustainably provide a zero/non-negative return to Dai holders in a negative rate environment this would be huge. I would expect explosive growth of the system. It could/should be done now for the currencies currently experiencing negative savings rates.

Need to make sure I understand the problem, cause it seems complex, but a good question:

  1. As it stands we are pegged to a 2% by design inflationary currency, (USD)
  2. The federal reserve in theory is responsible for the peg above.
  3. 400 years of central bank data shows, this is impossible to do, and there will be periods when real interest rates go negative, and there will be periods of high inflation or deflation.

Is the question: What do we do if real interest rates in the US go negative like September of 2008?
or is the question what do we do if the we somehow become more valuable than than a deflationary USD?
or is the question simply what do we do if we are above peg with SF=0 DSR=0?

Many used to think this scenario was impossible but it is happening with many major currencies today. May not be likely but it is possible this happens to USD. If it did, the DSR and SF may not be able to hold the peg on their own. Another mechanism may be required (like TRFM).

Regarding the other points:

  1. 2% inflation is just one of the Feds mandates
  2. Not a peg to anything, just an inflation target
  3. Not impossible. It is currently happening with several major currencies (Japanese yen, Swiss franc, Danish krone)

By “impossible” I mean it is impossible to have 2% constant inflation or any other type of defined stability. If history is an indicator, there will be periods of negative real interest rates, and there will be periods of higher than usual inflation.

One thing “we could do” is to hustle hard enough to be able to get dai off of the USD peg by the time this happens, moving on to a custom currency/commodity basket or some more advanced stability mechanism. If there will still be a need for a USD-pegged stablecoin, it can be done as a synthetic asset with the new, stable dai as its collateral basis.