‘The Stability Fee is a bit like an interest rate on Dai. Users who lock ether into a collateralized debt position (CDP) contract to obtain Dai are charged interest over time, and this interest is known as the “stability fee.” This fee is an annual interest rate, and the loan can be returned at any time. When the loan is returned the CDP owner returns the Dai and pays outstanding interest.

The stability fee is used as a risk parameter, by which stakeholders can influence the price of Dai to maintain its $1 peg. The price of Dai is simply determined by supply and demand: when supply outpaces demand the stable coin falls below its peg, as it has done continuously for the past month.

The lagging demand for Dai is expected, since the cryptocurrency market has been surging recently. In a bear market, investors retreat to stablecoins for security. In a more bullish market, those same investors sell their stablecoins and move value to the riskier crypto assets.

What does this mean for Dai?

The fact that the ecosystem needs to keep increasing its stability fee could mean that the model isn’t working. That could have two reasons:

CDP owners aren’t paying attention, and have no idea they’re being automatically forced to pay outrageous interest rates. CDP owners just don’t care or understand what’s going on. In the announcement for the latest vote, MFIRT outlined 3 key reasons for another increase:

“Key factors under consideration for increasing the Stability Fee are:

Exchange price persists below $1

High inventory levels among market makers and prop desks

Little attributable impact from the previous Stability Fee increases”

It’s surprising that this vote is happening so soon after just hiking the rate 3.5% less than a month ago. Some analysts have suggested the system hasn’t been given enough time to recalibrate at the previous rate. Others are in disbelief that a 150% collateralized loan is seeing the same interest rate as an unsecured line of credit.

In any case, it’s clear that these rate increases aren’t working as planned, since Dai is still trading below $1.

To counteract the decrease in demand, MakerDAO tries to decrease the supply by raising the stability fee. This makes it more expensive to hold a Dai loan, encouraging CDP owners to close their contracts and pay the accrued interest that they owe.’

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