DAI Stablecoin Surpasses $5B Market Cap, Boosting Spark Protocol

The unveiling of the Enhanced Dai Savings Rate has sparked a reversal in the recent downtrend of the token's market valuation.

The overall market capitalization of DAI surged by almost $1 billion within this month, driven by the implementation of reward rates that reached up to 8%. Nevertheless, the heightened payout had an impact on the profit projections of MakerDAO, leading the organization to cap the rate at 5%.

The resurgence in demand for MakerDAO's DAI stablecoin can be attributed to renewed interest, primarily propelled by the elevated reward rates that have been extended to holders of the token.

The aggregated market value of circulating DAI has exceeded the $5 billion mark, signifying a return to this level for the first time since April. This resurgence follows an extended period of decline, during which DAI's market capitalization plummeted to around $4.4 billion by late July from its earlier pinnacle of over $10 billion in early 2022, as evidenced by data sourced from CoinMarketCap.

This resurgence has also produced a favorable impact on Spark, a decentralized finance (DeFi) lending platform that leverages Maker's credit facility and incorporates DAI. Over the course of the past month, the total value of assets locked (TVL) within the Spark protocol experienced a surge of almost tenfold, reaching an impressive figure of $430 million, as indicated by reports from DefiLlama.

In a concerted effort to initiate a turnaround, Rune Christensen, the founder of Maker, unveiled strategic plans last month for an elevated framework of interest rates. This strategic move was aimed at enhancing the allure of the stablecoin for crypto investors, by harnessing protocol-generated revenues from reserve assets, such as U.S. Treasury bonds, for the distribution of rewards.

The initiative, coined as the Enhanced DAI Savings Rate (EDSR), initially offered an annual reward of 8% on deposits. This dynamic rate was structured to adjust in accordance with the increased participation of investors in the promotion. In the aftermath of the launch of EDSR in early August, DAI witnessed an inflow of nearly $1 billion.

Is DAI’s growth sustainable?

However, concerns have arisen with respect to the sustainability of DAI's growth trajectory and the ability to retain new users over an extended timeframe.

The substantial surge in payouts has had a considerable impact on the profit margins of Maker, as highlighted by Kunal Goel, an analyst at Messari. He noted that "Higher rates on higher deposits ballooned the protocol’s interest expense [and] has dried up profit expectations." Additionally, this scenario created avenues for arbitrage, as noted by Goel.

In response to these challenges, Maker has made the necessary adjustment, reducing the maximum interest rate to 5% over the weekend, with the intention of addressing both issues.

This adjustment prompted specific major investors, including addresses associated with Tron founder Justin Sun, to divest their holdings of DAI. Reports have indicated that addresses controlled by Sun redeemed tokens worth approximately $200 million, as reported by WuBlockchain.

Consequently, the aggregate value locked (TVL) within the Spark protocol, closely intertwined with Maker, also experienced a decline. This value dropped from over $600 million to $430 million over the span of a week, as indicated by data sourced from DefiLlama.