DSR increase to 15% and how to capitalise it
What caused the increase and how to capture potential gains with interest rate differentials
Despite a 15% retracement from its recent peak of over $73,500, the price of Bitcoin, the Cryptocurrency Fear and Greed Index has consistently remained in the zone of greed/extreme greed over the past few weeks.
The overall positive sentiments this month in the market is likely to be driven by Bitcoin Spot ETFs and the upcoming halving event in April, which led to more institutional allocation as well as retail participation.
What is DAI’s Saving Rate (DSR)
In essence, the DAI Savings Rate (DSR) is a tool to maintain the stability of the DAI Stablecoin in the MakerDAO ecosystem.
The DSR allows DAI holders to lock their DAIs into a contract to earn interests. However, the interest rate is not static, instead it varies based on the governance decisions of the MakerDAO community (ie. holders of MKR tokens).
By incentivising users to lock their DAI in savings accounts, it thereby impacts the Demand and Supply of DAI.
For instance, when DSR is higher than the interest rates in other financial products, it encourages users to deposit their DAI into savings account to earn DSR therefore leading to greater demand for DAI.
On the supply side, when more DAI holders lock their Stablecoins in the savings account rather than keeping them readily available for trading or other purposes, the supply of DAI in circulation decreases.
DSR jumped from 5% to 15%
With the recent surges in interests and prices of cryptocurrencies, there has been a selling pressure on DAI which can be attributed to the following reasons:
1. Interest in riskier assets
During bull market, investors are usually more interested in riskier assets as they have high growth potentials. Because of that, investors may choose to sell their DAI holdings and put their funds towards those riskier assets for potentially higher yielding or more speculative investments.
2. Liquidity needs
In addition to the increase in appetite for riskier assets, investors will also need liquidity in participating in other new investment opportunities. As DAI offers stable value and can be be easily converted to cryptocurrencies and fiat, DAI holders may sell their DAI to meet their liquidity needs.
The above create impetus in the decrease of supply of DAI, in fact it was evident by a rapid decrease in DAI supply from $5 billion to $4.4 billion in just seven days. To address the decrease in reserves caused by volatility and bullish sentiment, MakerDAO has approved the vote for adjustments in various fees including the DAI Savings Rate (DSR), increasing it from 5% to 15%.
How to capture 15% DSR
To capture the increase in DAI Savings Rate (DSR), it simply involves taking advantage of the opportunity to earn interests on your DAI holdings.
There are a few scenarios:
1. Existing DAI holdings
If you already have DAI holdings, you can simply deposit them into DSR-enabled accounts through Dapps such as Spark and SummerFi.
2. Obtain DAI
If you do not already have DAI, you can acquire it by purchasing on Cryptocurrency Exchanges, or by using Decentralised Exchanges (DEXs) to swap other Cryptocurrencies into DAI.
3. Borrow DAI
Under the same principle of conventional arbitrage, Crypto Yield Arbitrage is a strategy which involves finding a platform where you can borrow at a lower interest rate on one platform and earn higher interest rate on another platform.
With that being said, the goal is to find protocols where we can borrow DAI at a rate lower than 15%, below are some of the DAI borrowing rates of protocols on Ethereum.
i) Borrow DAI on Ethereum
Aave: 9.08%
Cream finance: 6.24%
Minterest: 41.21%
Apart from borrowing protocols in Ethereum ecosystem, investors can also consider borrowing DAI on protocols on other blockchains such as Arbitrum, Optimism and so on.
ii) Borrow DAI on Arbitrum
Aquarius: 3.61%
Lodestar: 12.66%
Glend: 15.87%
iii) Borrow DAI on Optimism
Aave: 27.80%
4. Borrow other Cryptocurrencies and swap to DAI
As you can see, there are not many options for borrowing DAI, even when including other chains apart from Ethereum. Therefore we can also take an additional step to search for a potential better yield by also considering to borrow other crypto on other chains.
ETH on Compound (Arbitrum): 2.76%
ARB on Paribus (Arbitrum): 1.43%
USDC on Glend (Arbitrum): 15%
ETH on Exactly (Optimism): 3.19%
ETH on Eralend (zkSync): 1.77%
SOL on Solend (Solana): 4.38%
USDC on Jet Protocol (Solana): 2.99%
However, after getting alternative crypto on other chains, investors will have to swap the crypto back to DAI as well back to Ethereum, which can be done by utilising swaps and bridges between the source chain and destination chain (ie. Ethereum).
Follow-up Actions
After depositing DAI in to DSR-enabled accounts, investors should keep an eye on the DSR rate because the DSR is subject to change based on governance decisions, hence staying informed about updates from the MakerDAO community and official channels is important. Investors should regularly check the DSR rate and assess whether it aligns with their investment strategies and risk tolerance.
If DSR increases further, investors can:
i) deposit additional DAI into their DSR-enabled accounts, or
ii) withdraw the deposited DAI or utilise the interest earned
iii) reinvest the interests earned and leave their DAI locked in the DSR to continue earning interests
Potential Risks
When navigating in the Defi space, we shall always bear in mind that when utilising the DSR and Defi protocols, they both carry risks such as smart contract vulnerabilities, market fluctuations and liquidity issues.
Therefore it is crucial to conduct research, assess the risks involved and invest appropriately. In addition, investors should always refer to official MakerDAO resources and platforms to ensure that they are interacting with legitimate and secure channels for accessing the DSR.
Final Thought
Utilising the increase in DAI Savings Rate can be a valuable strategy for investors seeking to maximise their returns in the DeFi space. By understanding the DSR dynamics, monitoring rates, and exploring borrowing options, users can potentially increase their passive income while minimising risks. However, it is crucial to approach DeFi investments with caution, conduct thorough research, and stay informed to make informed decisions in this rapidly evolving landscape.