DAI Stablecoin Surpasses $5B Market Cap on Higher Yield, Lifting Spark Protocol

• DAI’s market capitalization jumped by near $1 billion this month following the introduction of reward rates as high as 8%.
• The increased payout bit into issuer MakerDAO’s profit expectations, though, prompting Maker to cap the rate at 5%.

MakerDAO’s DAI stablecoin has returned to growth, driven by rejuvenated demand for the token after boosted reward rates for holders.

The market value of all DAI in circulation surpassed $5 billion for the first time since April as crypto investors pounced on interest rates as high as 8%. This follows an extended decline, with DAI’s market cap shrinking to as low as $4.4 billion in late July from a peak above $10 billion early in 2022, according to CoinMarketCap data.

The growth also boosted decentralized finance (DeFi) lending platform Spark, which leverages Maker’s credit facility and integrates DAI. The protocol’s total value of assets locked (TVL) increased by near tenfold over the past month to $430 million, according to DefiLlama.

Aiming for a turnaround, Maker founder Rune Christensen laid out plans last month for a higher interest rate regime to make the stablecoin more attractive to crypto investors by tapping into protocol revenues generated by reserve assets such as U.S. Treasury bonds to pay out the reward.

The so-called Enhanced DAI Savings Rate (EDSR) offered initially an 8% annual reward on deposits, and was set to adjust dynamically as more and more investors made use of the promotion.

DAI saw nearly $1 billion in inflows after introducing the EDSR in early August.

Is DAI’s growth sustainable?

However, questions linger about whether the growth can be sustained and new users would stick around for long.

The extra payout has drastically bitten into Maker’s profits, Kunal Goel, analyst at Messari noted in a report. “Higher rates on higher deposits ballooned the protocol’s interest expense [and] has dried up profit expectations,” he wrote. The too-high rate also opened up opportunities for arbitrage, Goel added.

Maker lowered the maximum rate to 5% this weekend to fix both issues.

That prompted some large investors to ditch DAI, including addresses controlled by Tron founder Justin Sun which redeemed some $200 million worth of tokens, WuBlockchain reported.

The Maker-adjacent Spark protocol TVL also declined to $430 million from over $600 million through the week, DefiLlama data shows.