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The new approach is reportedly a strategic way of generating revenue from idle assets on MakerDAO’s balance sheet.
Coinbase has posted a proposal on the MakerDAO governance forum that would move 33% of Maker’s $1.6 billion Peg Stability Module (PSM) into a Coinbase Prime custody account, boosting Maker’s revenue by almost $24 million.
If approved, the proposal made by Coinbase would pay Maker a 1.5% yearly percentage yield of $528,000,000 USDC. Maker will also be able to mint, burn, withdraw, and settle its PSM allocations through Coinbase Prime almost instantaneously in USDC and will not be charged any custody costs for its PSM allocations to Coinbase.
Maker’s PSM was created to hard-peg the price of DAI to $1, and was released after the protocol’s peg saw a spike above $1 after the Covid crash in 2020.
This increased demand for loan liquidations due to ETH dropping more than 40% during the crash.
Due to the under collateralization of numerous vaults caused by this market activity, there was a cascade of liquidations in the Maker Protocol.
A lot of other users also resorted to buying DAI heavily in order to pay off their debts and terminate their Maker Protocol positions which eventually led to DAI’s price rising above $1.
Despite the fact that PSM has been successful in maintaining DAI’s peg, one of the major issues raised on the forum by adcv, a pseudonym for a member of Maker’s strategic finance core team, is Maker’s capacity to invest its balance sheet successfully.
Maker’s current PSM asset allocation is “highly underinvested,” which “reduces the protocol’s ability to take a risk and its attractiveness as a stablecoin.”
The new approach is reportedly a strategic way of generating revenue from idle assets on Maker DAO’s balance sheet.
PSM is a special module of the Maker Protocol to quickly exchange Dai for stablecoins at a 1:1 rate.
PSM also technically doubles as a special type of Maker Vault with 100% Collateralization Ratio and 0% Stability Fee, as users are not asking for a DAI loan against their crypto.
In the event of external market shocks, Maker’s PSM also aims to provide a bilateral buffer protection for the price of DAI.
The premium of DAI can be eliminated or slowed down by the anchoring stability module, which can immediately inject newly generated DAI into the market at a price of 1:1.