If you’ve got cash in a savings account in the U.S., the best savings rate you can find today is ~1.78% annual percentage yield (APY). If you’re in a country outside the U.S. dealing with negative interest rate policy, you’re even worse off. The desire of central banks around the world to keep rates low to stimulate investment and prop up public markets comes at a cost to people who want to save for the future.

If you’ve got Dai (a stablecoin) in an Ethereum wallet, you can earn 8.8% APY. The Dai Savings Rate (DSR) launched in November 2019 and there’s now $54.5M in Dai earning 8.8% APY and growing fast. If 2017–2018 was about crypto speculation, there’s a reason to believe that 2020 and beyond will be about crypto saving. But today all of the crypto savings activity is from crypto-natives. Crypto saving rates must be better understood and the UX of wallets must improve to reach a broader base of people.

The main question most have is what allows Dai savers to earn 8.8% APY? Central banks set rates in the fiat world, who sets rates in crypto and where does the rate come from?

Understanding where the the DSR comes from is complex and if Dai reaches billions of users, most will not understand how it works under the hood. But just like Bitcoin was first adopted by a small group people who understood it and then slowly grew from there, Dai will do the same. Here’s the high level picture of how saving with the DSR works under the hood:

To understand DSR, you need to first understand what the Dai stablecoin is. Here’s an explainer. You can also save and earn with other stablecoins like USDC, but Dai is the most viable solution for the broadest base of people because it’s trust-minimized structure gives it social scalability.

Anyone can get a collateralized loan from MakerDAO by sending ETH or BAT to the MakerDAO smart contract. When the user sends and locks up ETH or BAT at a minimum collateral ratio of 150%, Dai is programmatically minted for the user. That minimum collateral ratio, as well as other key variables in the system (the fee users pay to close out their collateralized loans, the DSR, and the debt ceiling) are determined by MKR token holders who vote on decisions. In practice, a small group of MakerDAO Foundation team members are voting on those decisions today, but anyone who owns MKR has a vote. The process is more transparent and democratic than central banking in the fiat currency world.

The main reason people are getting collateralized loans with MakerDAO today is to get a leveraged long position on ETH. You can do so by locking up your ETH, minting Dai, and buying more ETH with that Dai. As long as your collateral ratio stays above the minimum collateral ratio you can maintain that exposure, and you can close out the position anytime by paying back the Dai borrowed + a fee for the collateralized loan. Part of that fee goes to Dai holders — that is where the DSR fees come from.

To summarize, the 8.8% savings rate paid to Dai holders is generated from the fees paid by people who want to get leverage on their ETH and BAT holdings. Many are skeptical of the a system based on leverage like this — we all know leverage can be dangerous. But the system is fully transparent so it’s reasonable to expect more caution will be taken than in traditional finance. And there’s a positive feedback loop that could occur here: more demand for ETH leads to a higher ETH price which leads to more CDPs which leads to more fees paid by CDP holders which leads to higher savings rates for Dai holders which leads to the Ethereum community growing (more demand for ETH) which leads to a higher ETH price. I think the conviction of ETH holders is still underestimated, and there’s a chance this positive feedback loop is underway.