Maker seemingly gives up on Dai peg as interest rates are raised above 0%

A MakerDAO (MKR) governance proposal enacted on Tuesday set interest rates on most assets, with the notable exclusion of Ether (ETH), back above 0%.

According to Daistats, interest rates for the USDC-A, WBTC and other minor vaults are now back to being at 2%, meaning that the protocol is once again collecting revenue for those who borrow DAI against these assets.

Lowering interest rates is generally seen as a way of stimulating DAI creation, which is supposed to lower its price to its intended $1 peg.

While Cointelegraph recently reported that the price finally stabilized after a long period of overpricing, the situation was not to last. As of press time, DAI is trading for $1.03, a significant deviation from its intended price.

Despite an unprecedented rise in DAI supply thanks to successive debt ceiling raises, most of the new stablecoins went into yield farming pools, as Cointelegraph reported. 

One possible reason for the sudden de-peg is the wider market tumble seen since early September. Just as ETH and other cryptocurrencies began a steep decline on Sep. 3, DAI supply went down, while its price went up. A likely explanation for this is that borrowers and debt liquidators rushed to purchase DAI in order to keep the system over-collateralized, as the underlying funds can only be redeemed through the stablecoin.

MKR holders largely remained on the sidelines of the DeFi yield farming trend as insatiable demand for the coin paradoxically forced the community to cut their revenue. It appears that the latest break of the peg made the community waver on its commitment to 0% rates.

Maker has yet to find a satisfactory mechanism to entice arbitrageurs to bring the price down to $1. Several proposals based on strong-handed market interventions are being discussed, while external observers often bring up the idea of setting negative interest rates. The Maker community appears to be unwilling to cross that line for now, however.

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