Decentralized finance (DeFi) has redefined how financial systems operate—without central authorities, yet still capable of making critical economic decisions. At the heart of this innovation lies MakerDAO, one of the most influential protocols in the DeFi space. A key function of MakerDAO is adjusting the stability fee—essentially the interest rate for generating DAI, a dollar-pegged stablecoin. But how does a decentralized organization like MakerDAO make such crucial monetary policy decisions?
Unlike traditional financial institutions that rely on centralized committees, MakerDAO uses a transparent, community-driven governance process. This article breaks down the step-by-step mechanism behind MakerDAO’s stability fee adjustments, covering community discussion, polling, and execution voting—while also addressing concerns about governance centralization and economic incentives.
Understanding the Role of the Stability Fee
The stability fee is a core economic lever within the Maker protocol. It determines the cost of borrowing DAI by locking up collateral, such as ETH, in Maker Vaults. By adjusting this rate, MakerDAO influences the supply and demand dynamics of DAI to maintain its 1:1 peg with the U.S. dollar.
When DAI trades below $1 (at a discount), it indicates oversupply. To correct this, MakerDAO can **increase the stability fee**, making it more expensive to generate new DAI, thereby reducing issuance and pushing the price back toward parity. Conversely, when DAI trades above $1, the fee may be lowered to encourage more borrowing and increase supply.
These adjustments are not made arbitrarily. Instead, they follow a structured, multi-stage governance process designed to balance decentralization with efficiency.
Step 1: Community Discussion and Proposal Formation
Before any vote takes place, there must be an open community discussion. When DAI’s price deviates significantly from its peg over time, members of the Maker community—including MKR token holders, developers, and ecosystem participants—begin debating whether a stability fee adjustment is necessary.
During this phase:
- Economic data is analyzed (e.g., DAI market price, collateral ratios, borrowing volume).
- Potential adjustment ranges are discussed.
- Historical precedent shows that adjustments are typically proposed in 1% increments, replacing earlier 0.5% steps due to insufficient market impact.
The current adjustment options span nine tiers:
-4%, -3%, -2%, -1%, no change, +1%, +2%, +3%, +4%.
Once consensus begins to form around a potential change, the proposal is formalized and handed over to the Maker development team, which then prepares the technical infrastructure for voting.
This stage ensures that decisions are rooted in data and broad community input—not unilateral actions by any single entity.
Step 2: Polling Phase – Gauging Community Sentiment
The next step is the polling phase, a 3-day window during which all MKR token holders can cast their votes. Each MKR equals one vote, and voters must choose one of the nine available options.
There are two possible outcomes:
- "No change" wins: If maintaining the current stability fee receives the most votes, the process ends here. Voters who supported the "no change" option can either withdraw their MKR or leave it staked in the system for future votes.
- An adjustment option wins: If any other tier (e.g., +2%) receives the majority, the proposal advances to the next stage—executive voting.
It's important to note: a win in the polling phase does not guarantee implementation. Many media outlets have mistakenly reported rate changes based solely on poll results. However, these polls are non-binding—they reflect sentiment but do not execute changes.
Only the subsequent executive vote can trigger an actual rate adjustment.
Step 3: Executive Voting – Final Approval
The executive voting phase is where real power lies. This stage has no fixed duration and presents only two choices:
- Implement the change recommended by the winning poll option.
- Maintain the current stability fee.
Crucially:
- The “maintain current rate” option carries forward its previous vote weight from the last executive vote.
- Token holders can remove their support (reducing the count) or add more MKR to reinforce it.
- The proposed change starts with zero votes and must be actively supported by voters.
For the adjustment to pass, the proposal must surpass the ongoing support for keeping rates unchanged. Because there's no deadline, this process can take days or even weeks—ensuring that rushed or manipulative decisions are unlikely.
This two-tiered structure prevents volatility in governance and protects against short-term manipulation by large stakeholders.
👉 See how blockchain governance empowers users—step into a world where every vote counts.
Can MKR Holders Manipulate Rates for Profit?
A common concern is whether large MKR holders (whales) could artificially inflate stability fees to profit from token appreciation.
Here’s why that’s economically irrational:
- When users pay back their DAI loans, they must pay the accrued stability fee in MKR, which is then permanently burned.
- This reduces MKR’s total supply, potentially increasing its value over time.
- So yes—higher fees mean more MKR burned, which benefits holders.
However, as Pan Chao, Head of China at MakerDAO, explained:
“Only sustained high stability fees lead to long-term MKR value growth. Short-term spikes won’t create meaningful gains. Artificially inflating fees regardless of DAI’s market price would destabilize the system—and the cost of losing DAI’s peg far outweighs any temporary profit.”
Moreover, if fees are too high:
- Borrowers move to competing platforms.
- DAI usage declines.
- The entire ecosystem shrinks.
Thus, even large stakeholders have strong incentives to act in the protocol’s best interest.
Frequently Asked Questions (FAQ)
Q: Is a polling victory enough to change the stability fee?
A: No. Polls are non-binding and only indicate community sentiment. Only executive votes can enact changes.
Q: How long does executive voting last?
A: There’s no time limit. Voting continues until the proposal either gains enough support or loses momentum.
Q: Why did MakerDAO switch from 0.5% to 1% adjustment steps?
A: Smaller increments had minimal impact on market behavior. Larger steps provide clearer signals and more effective price stabilization.
Q: Who can participate in voting?
A: Any holder of MKR tokens can vote in both polling and executive phases.
Q: What happens to MKR used to pay stability fees?
A: It is permanently removed from circulation—this deflationary mechanism supports long-term value accrual.
Q: Can DAI lose its dollar peg permanently?
A: While temporary deviations occur, multiple safeguards—including liquidations, oracle feeds, and fee adjustments—help restore parity quickly.
👉 Stay ahead in DeFi—learn how smart governance keeps stablecoins strong and trustless.
Conclusion: A Model of Decentralized Monetary Policy
MakerDAO’s approach to interest rate adjustment represents a groundbreaking experiment in decentralized governance. By layering community dialogue, sentiment polling, and binding executive votes, it achieves a balance between responsiveness and resilience.
The system is designed so that no single actor—not even large MKR holders—can unilaterally dictate policy. Instead, economic incentives align stakeholders toward long-term protocol health rather than short-term gain.
As DeFi continues to evolve, MakerDAO’s governance model may serve as a blueprint for other decentralized organizations aiming to manage complex financial instruments without central control.
Whether you're a developer, investor, or simply curious about blockchain innovation, understanding how MakerDAO sets its rates offers valuable insight into the future of open, transparent finance.
Core Keywords: MakerDAO, stability fee, decentralized governance, MKR token, DAI stablecoin, interest rate adjustment, DeFi protocol