MakerDAO: What is Stability Fee

The Maker's smart contract charges customers who borrow DAI a fluctuating interest rate called the stability fee. It fluctuates based on how Maker holders vote on proposals put forth by MakerDAO Interim Risk Teams.

When the crypto market faces slow or negative growing, supply and demand become imbalanced. When the stability fee is increased for DAI, the cost of borrowing for users of collateralized debt positions (CDPs) increases, lowering DAI supply and making CDP use less appealing. A reduction in the Stability Fee or borrowing cost, on the other hand, will encourage greater DAI minting, acting as a policy tool to control supply expansion. The DAI token's Stability Fee is a risk parameter meant to offset supply and demand mismatches.

The Maker Protocol earns a significant amount of money through the stability fee, which is the protocol's primary source of revenue.

Increases and Reductions in the Stability Fee

• June 7th 2021 - stability fee decreases of 1 - 2% on most collateral

• June 28th 2021 - stability fee decreases of 0.5 - 3% on most collateral

• November 1st, 2021 - stability fee increases of 0.5 - 1% on most collateral

• November 15th 2021 - stability fee increases of 2.5 - 5% on BTC collateral

• November 29th 2021 - stability fee increases of 0.25 - 3% on most collateral

• December 7th 2021 - stability fee increases of 0,5 - 3% on most collateral

• February 7th 2022 - stability fee decreases of 0,25 - 2% on most collateral

• April 8th 2022 - stability fee decreases of 0.25 - 1.25% on most collateral

• May 16th 2022 - stability fee deacreases of 0.5 - 1% on most collaterals

I looked up different dates of changing in the Stability fee on Google/Twitter. These dates may be used to examine how it has affected the number of Mint transactions and the amount of DAI minted. Because raising the Stability charge should prevent users from minting additional DAI, we predict fewer DAI to be mined on days when the fee is raised.

Data

Over the previous months, the daily quantity of DAI minted and repaid has surged rapidly, from less than 200 million DAI minted daily in June to about a billion DAI minted in a single day in November. This growth of DAI minted and repaid is mostly concentrated in November and December, when these measures skyrocketed in comparison to preceding months. Three distinct stability fee modifications in November, including a 5% increase on some BTC collateral, actually boosted interest rates. Increased interest rates do not appear to have impacted user involvement with the site, however it's difficult to determine how they affected the net amount DAI generated vs. repaid in this graph because the two are so closely related.

Over the previous months, the daily net change in DAI borrowed has remained mainly positive, indicating that more DAI was being loaned than returned. During the middle of October to the middle of November, there was a net DAI loaned excess of over 200 million DAI on numerous days. This is odd because there were no stability charge changes in October and solely stability cost hikes in November, as previously stated. An increase in interest rates would seem to produce a decline in lending, however this does not appear to be the case at this moment. In May, tmore DAI was being returned than loaned, that happened because the crypto market crashed due to the lost of the 1$ peg of UST.

Last but not least, let's have a look into the daily number of transactions. The DAI minting transaction count appears to be unaffected by the stability fee. As a result, we can conclude that MakerDAO's Stability Fee decisions are influenced by DAI minting amount per day rather than the number of DAI transactions minting per day.