Dai is one of the most important innovations in the DeFi ecosystem, so it’s no surprise that the second iteration has garnered a lot of attention. Most people are talking about how exciting Multi-Collateral Dai is, but even the creator of Dai says that the really exciting thing will be the Dai Savings Rate.

“At launch, the exciting thing really is the DSR, right, that really is going to be the big game changer, because it will make it just more easier to manage the system and keep it growing even as dynamics change.” Rune Christensen, MakerDAO

How the Dai Savings Rate works

If you know about Dai, you know that there is a stability fee. Maker’s governance increases the fee as Dai goes over the $1 in order to cut demand. The savings rate acts inversely, increasing as the peg goes under $1 which helps increase demand.

“The stability fee really just tamps down on demand but really what you need is to attract supply, you need monetary policy to pull both the levers of supply and demand” “we probably wouldn’t have the crazy upswings and stability fee up to 20% if they were just able to pull that lever for the stability fee and get some more lenders in there.” – Kyle Kistner, Co-founder bZx

Theoretically, this will give Maker more control over the price of Dai. There will be one oracle, voted in by governance who can change the savings rate whenever necessary. They will only be able to change it within a range voted in by the governance.

The DSR will be funded by the stability fee, so it will always be a certain percentage lower than what they borrowers are paying.

It doesn’t work well without Multi-Collateral Dai

Christensen said that DSR is the most exciting part of the upgrade, but it can’t work well without Multi-Collateral Dai. They are looking trying to accomplish a low risk – low reward or medium risk – medium reward model, and Dai being backed only by Eth creates higher risk.

“That is also where multiple collateral types become important because if you want to provide an attractive DSR that is asking as this risk free base level, you need to be able to consistently attract a large amount of users at the supply level that can collateralize.” – Rune Christensen, MakerDAO

Still if users want to take on a bit more risk, Lending platforms should be able to implement the Dai Savings Rate on their backend. This would combine the DSR with the risk of throwing your money into a lending pool, allowing for higher interest rates for lenders.