The Real World Finance team has been releasing an article about Banking in Crypto.
The overall idea is that MakerDAO is a bank just like any other. Not regulated just like eurodollar banking. Banks are businesses that try to maximize profit by having the biggest spread between funding rate (DSR) and lending rate (SF). We should have the higher SF (i.e. more risk) and the lowest DSR (i.e. low perceived risk for DAI holders). There are two risks for DAI holders: solvency (1 DAI being backed by less than $1) and liquidity (inability to exchange DAI for $1 when needed).
As it’s a framework it not perfect and things will change with time anyway. Regarding MakerDAO, two elements can be discussed.
- In the hierarchy of US Dollar I put DAI below USDC. The fact that we can get USDC from DAI is a recent development due to the PSM. It’s a strong point for DAI in my opinion even if it doesn’t feel like it. We might want to ask Paxos to create a DAI-FIAT stablecoin so that we can show that DAI can be redeemed for a US bank deposit without going through a competitor.
- The solvency and liquidity risk imply customers demanding higher deposit interest rates (DSR). This is not at all a problem today. DAI demand is high even without that. But a good chunk is due to AMM models like Curve that demand a huge amount of DAI (to somewhat match USDC and USDT) and all the DeFi farming. But what happens next?
We can be better than the competition by having a better brand, better marketing, better UX, better integrations, better network effects. But otherwise, this theory should apply. This is why USDT is losing market share.