The activation of MakerDAO's Multi-Collateral DAI (MCD) upgrade on November 18, 2019, marked a significant milestone for one of the largest decentralized finance (DeFi) projects. This upgrade introduced substantial changes to the ecosystem, expanding beyond the single-collateral system that only accepted ETH as collateral for generating the SAI stablecoin. The new MCD system allows users to collateralize multiple types of assets to mint DAI, bringing enhanced flexibility, new monetary policy tools, and broader utility to the DeFi space.
Key Upgrades in the Multi-Collateral DAI System
Expanded Collateral Types
Before the upgrade, the Single-Collateral DAI (SCD) system only permitted ETH as collateral to generate SAI. The MCD system now supports additional assets, determined through MakerDAO’s governance process where MKR token holders vote on proposals. As of early 2020, the accepted collateral types included ETH and BAT, with the potential for more assets to be added in the future.
Stable Fee Payments in DAI
A major operational shift allows users to pay stability fees (effectively, loan interest) in DAI instead of MKR tokens. This reduces friction for borrowers and simplifies the fee payment process. Additionally, unpaid stability fees now accumulate as part of the debt. If interest remains unpaid over time, the increasing debt can eventually lead to the liquidation of the collateralized position, adding a new risk dimension for borrowers.
Introduction of the DAI Savings Rate (DSR)
The DSR enables DAI holders to earn interest by depositing their tokens into a dedicated smart contract. This feature not only provides a yield opportunity for users but also serves as a new monetary policy tool for regulating demand for DAI. By adjusting the DSR, MakerDAO can influence whether users prefer to hold or spend DAI, complementing the stability fee that primarily affects the supply side.
Performance and Adoption Metrics
Migration Rate and Collateral Utilization
Within one month of the MCD launch, approximately 50% of the circulating SAI had been migrated to DAI. BAT, the first new collateral type added, saw reasonable adoption, though WETH (wrapped ETH) continued to dominate the collateral pool. In January 2020, BAT collateral accounted for about $4.5 million, compared to $355 million in WETH. Relative to their market caps, however, both assets had similar locking rates: 1.5% for BAT and 1.8% for ETH.
MKR Tokenomics and Governance
MKR tokens serve dual purposes: governance voting and value accrual through token burns. When stability fees are paid in MKR, those tokens are destroyed, creating deflationary pressure. Initially, 1 million MKR were created; by early 2020, 11,000 MKR had been burned, leaving 989,000 in circulation. The migration process accelerated the burn rate as users closed SCD positions to move to MCD.
MKR ownership is highly concentrated. The top three holders controlled about 38% of the supply, with the top six exceeding 50%. Major holders include the MakerDAO governance contract, a team multisig wallet, and venture capital firm Andreessen Horowitz (a16z).
CDP Statistics and Liquidation Patterns
Over 154,000 Collateralized Debt Positions (CDPs) were created in the SCD system. Most remained open, with only about 19,609 closed by early 2020. The largest CDP (#3088) held 178,720 PETH (pooled ETH) as collateral, with an outstanding debt of 8.28 million SAI and accrued stability fees of $800,000.
During ETH’s price decline in late 2019 (from $183 to $122), liquidations occurred when prices dropped by an average of 7.2%. Approximately 38,000 ETH were liquidated, generating an estimated $170,000 in profits for liquidation bots, accounting for gas costs and execution variables.
Migration Process and Remaining Challenges
Migration Contract Mechanics
A migration contract was implemented to facilitate the smooth transition from SAI to DAI. This contract held migrated SAI, allowing CDP owners to quickly move their positions to MCD. At its peak, the contract held 99 million SAI, representing 97% of the supply at the migration’s start. However, new SAI was also minted during this period to provide liquidity for deleveraging and secondary market activities.
Remaining SAI and Pending Decisions
A significant portion of SAI and CDPs remained in the old system months after the upgrade. The top 100 CDPs represented 86% of the remaining SAI debt, with 30 showing no activity during the migration. These inactive positions held 11.5 million SAI and accrued 1.2 million SAI in unpaid fees.
SAI holders are also concentrated, with the top 100 addresses holding 75% of the remaining supply. Many of these are linked to DeFi platforms like Compound, which held SAI in liquidity pools. Declining liquidity on decentralized exchanges (DEXs) poses challenges for remaining SAI holders and borrowers.
Impact on Secondary Lending Markets
Shifts in Lending and Borrowing Dynamics
The introduction of the DSR disrupted secondary lending platforms like Compound and dYdX. MakerDAO effectively became the preferred savings vehicle for DAI holders, especially after Compound began depositing unused DAI into the DSR. dYdX saw an 80% decline in DAI deposits. The total DAI supplied to secondary markets fell to 15% of the total stablecoin supply, down from 46% in September 2019.
On-Chain Activity and DSR Utilization
Daily active addresses for DAI stabilized around 2,000, slightly below SAI’s pre-migration average. DSR participation grew steadily, particularly in late December 2019 when Compound integrated with the DSR and the rate increased from 2% to 4%. However, a further rate hike to 6% did not significantly boost deposits, and utilization rates declined in early 2020 as DAI supply grew faster than DSR inflows.
👉 Explore advanced DeFi strategies
Frequently Asked Questions
What is the difference between SAI and DAI?
SAI is the stablecoin from the Single-Collateral DAI system, which only accepted ETH as collateral. DAI is from the Multi-Collateral DAI system, supporting multiple collateral types and featuring upgrades like the DAI Savings Rate.
How does the DAI Savings Rate (DSR) work?
DAI holders can deposit their tokens into a smart contract to earn interest. The rate is set by MakerDAO governance and helps regulate demand for DAI by providing a risk-free yield option.
What happens to unpaid stability fees in the MCD system?
Unpaid fees accumulate as debt. If the debt grows too large relative to the collateral value, the position may be liquidated to cover the outstanding obligations.
Why are there still SAI and CDPs in the old system?
Some users have not migrated due to inactivity or strategic reasons. MakerDAO governance will decide when to shut down the SCD system entirely.
How does the MCD system improve upon the SCD system?
MCD supports multiple collateral assets, allows stability fee payments in DAI, introduces the DSR, and reduces liquidation risks through better risk management.
What is the role of MKR token holders?
MKR holders govern the Maker Protocol by voting on collateral types, stability fees, DSR rates, and other critical parameters.
Conclusion
The transition to Multi-Collateral DAI has been largely successful, with rapid adoption and significant ecosystem support. The upgrade enhances MakerDAO’s flexibility, monetary policy tools, and resilience. Remaining challenges include migrating residual SAI holders and deciding on the timing for the old system’s shutdown. MakerDAO continues to serve as a leading example of decentralized governance and innovation in the DeFi space.