Introduction
With over 2 million ETH (~$300M) collateralized on Maker—representing 2%+ of ETH’s circulating supply—Dai stands as a flagship DeFi project. Unlike centralized stablecoins (e.g., USDT, USDC), Dai’s primary demand stems from decentralized leverage trading and asset circulation rather than professional arbitrage. This article explores Dai’s scalability constraints and why its design inherently resists rapid supply adjustments.
How Stablecoins Scale
Scalability in stablecoins hinges on supply elasticity—how quickly supply adjusts to demand fluctuations. Centralized stablecoins like USDT achieve this through closed-loop arbitrage:
- **Price > $1**: Arbitrageurs mint new tokens at par value ($1) and sell them at the premium (e.g., $1.02), pocketing the spread.
- **Price < $1**: They buy tokens at a discount (e.g., $0.98) and redeem them for $1.
This cycle ensures tight price stability and rapid supply adjustments.
Dai’s Fundamental Limitation
Dai’s overcollateralization requirement (currently 150%) disrupts this arbitrage mechanism:
- For every $1 of ETH locked, only $0.66 of Dai is minted.
Arbitrageurs must wait for Dai’s price to drop to profitably close their CDP, exposing them to:
- Uncertain timing: No guarantee prices will revert.
- ETH price risk: Requires costly hedging (e.g., borrowing ETH to short).
- Capital inefficiency: 33% of locked ETH remains idle, incurring opportunity costs.
👉 Why overcollateralization impacts Dai’s liquidity
Why Professional Arbitrage Fails for Dai
- No Closed-Loop Cycle: Unlike USDT, Dai’s arbitrage involves multi-step, time-sensitive actions (mint → sell → wait → buy back → close CDP). Delays erode profitability.
- High Threshold for Profitability: Dai’s price would need to exceed $1.50 (with current 150% collateral) to enable risk-free arbitrage—a scenario deemed unrealistic due to competition from cheaper stablecoins.
- Natural Demand Ceiling: Dai supply grows only via organic borrowing demand (e.g., tax deferral, leverage), not speculative arbitrage. This caps scalability.
| Factor | USDT | Dai |
|---|---|---|
| Collateral Ratio | 100% | 150%+ |
| Arbitrage Speed | Minutes | Days/Weeks |
| Supply Elasticity | High | Low |
Implications for MakerDAO
- ETH Demand Decoupling: Increased Dai demand ≠ higher ETH demand. Maker’s value lies in decentralized borrowing, not stablecoin expansion.
- Utility Over Speculation: Maker thrives as a censorship-resistant lending tool (e.g., BlockFi alternative), not a supply-locking mechanism.
- Stability Through Crises: Despite ETH’s 90% price drops, Dai survived via its overcollateralized safety net.
FAQs
Q: Can Dai’s collateral ratio be lowered to improve scalability?
A: Reducing ratios risks undercollateralization during volatility. Maker prioritizes stability over scalability.
Q: Why choose Dai over USDT for decentralized apps?
A: Dai offers censorship resistance—vital for DeFi—though with trade-offs in liquidity speed.
Q: How does MakerDAO generate revenue?
A: Through stability fees (interest on CDPs) and liquidation penalties, not Dai’s price appreciation.
Conclusion
Dai’s stability comes at the cost of scalability. Its reliance on organic borrowing demand—not arbitrage—makes it resilient yet niche. For projects needing rapid supply adjustments, centralized stablecoins remain superior. However, Dai’s decentralized ethos ensures its role as a cornerstone of trustless finance.