user raiden4 posted this on the MakerDao subreddit and it was interesting so I brought the post here for discussion. If you want to see the original comments see link here.
" TL;DR: In the present Maker design, the more demand there is for DAI, the less revenue Maker makes. But we can fix that and also fix the peg in the way.
The more useful DAI is, the more demand there is for it obviously. The more demand there is for DAI, the more DAI goes up in price. As DAI price goes up Maker must reduce the stability fees to incentivize increased supply in order to push the price down. The lower the stability fees are, the less revenue Maker makes. This is of course the opposite of any normal company where increased demand for a useful product means higher revenues.
But what about DAI supply? Isn’t it the case that the higher the DAI price is, the more incentive there is to lock collateral in a CDP, mint it and sell it “at a profit”? That’s not exactly true for the following reasons:
- DAI price can continue to go up after you sold. If you’ll need your collateral back you will have to buy back DAI at a loss, since you were effectively short DAI.
- There is a risk your collateral will go down in price and you will be liquidated.
- There is a risk the contracts will be hacked and you will lose all your collateral.
- Selling DAI short for a few % might not compete with simply locking the same collateral at other DeFi projects and getting potentially better returns (e.g ETH 2.0 staking).
Case in point, right now DAI price is $1.02, which means that arbitragers don’t consider the 2% profit (from selling at $1.02 and buying back at “fair value” of $1) sufficient to cover their risks.
That leads to the question: why do we even assume the fair value of DAI is $1?
An obvious answer is that DAI is backed by $1 worth of collateral that can be collected at global settlement. So we can say that roughly:
DAI’s value = value of redeemable collateral at global settlement ($1)
However we also need to consider the “usefulness” of DAI which adds to its value. Right now there are a few DeFi projects that offer yields on DAI deposits, most of them are higher than any USD savings account. So we should revise:
DAI’s value = present economic usefulness of DAI (a few cents) PLUS value of redeemable collateral at global settlement ($1)
The irony is that the more immediately useful DAI is, the less Maker (and MKR holders) will benefit since the stability fees will tend to go down as I explained above. And we want to make DAI as useful as we can, being programmable money and all, because we want lots of people to use it and in many different ways.
This situation also creates another problem - security. We NEED high MKR price to deter attacks. The more DAI there is, the bigger target Maker becomes and the more security it requires. However, more DAI means more demand (otherwise why would it be generated), which also implies high price, which means lower stability fees, hence lower revenues for Maker and a lower MKR price overall (excluding speculation). At some point that creates a risk for the Maker system.
I would argue that the stability fees must be above 0% at all times to establish a price floor for MKR and protect the system from MKR-related attacked. Recently MKR price went up in USD terms but it really went down when compared to ETH or BTC. Part of it is Black Thursday, part of it is being undervalued but another part is simply lack of revenues or (said differently) unattractive P/E ratio.
What’s a solution? Assuming we don’t want to hurt DAI usability (e.g by introducing negative rates or demurrage) and assuming the stability fees cannot be lowered any more (because they are at 0%, like right now - https://daistats.com), the only other piece in the equation is the value of redeemable collateral. If we make it slightly less than $1 (at global settlement), we can lower the price TO $1 (right now, which is arguably more important since GS is unlikely anyway).
Lowering the value of redeemable collateral also makes it easier to open CDPs since CDP owners will need to lock slightly less collateral and/or will have lower liquidation risk. It also reduces the risk of runaway DAI price in their short position. That means more supply and therefore additional negative pressure on price.
From a technical standpoint reducing the value of the redeemable collateral is very easy - we just need to ask the oracles to report slightly HIGHER prices. If prices are a bit higher than they really are, at global settlement DAI will redeem for a bit less collateral. No change to the smart contracts is required.
The only problem that I see is some controversy because DAI is “supposed” to be backed by $1 of collateral. But that’s just not true - DAI is supposed to be worth $1, not be backed by $1. If DAI holders can sell it for $1 then that’s all that matters.
I say we reduce the collateral value of DAI, let DAI drop a bit and then increase the stability fees to some reasonable level (not 0%)."