Paxos Proposes MakerDAO Cap Increase

Two of crypto’s biggest stablecoin players may be teaming up.

On one side, we have Paxos, the issuer of the Pax USD stablecoin. On the other side sits MakerDAO, the issuer of the Dai stablecoin and the 2nd largest DeFi protocol by value managed.

And in the middle is a proposed raising of the Pax USD limit in MakerDAO’s Peg Stability Module (PSM).

The What?

The PSM is how MakerDAO keeps Dai’s value at $1.

Think of the PSM kind of like a bank. Users can deposit other stablecoins into the PSM and receive Dai at a 1:1 ratio. The effect is that Dai is always backed 1:1 by other dollar-pegged assets, allowing Dai to maintain its dollar peg.

And because Dai is such a large stablecoin, the PSM is accordingly also very large, with $3.2 billion currently in the vault.

Why Does Paxos Want This?

The ultimate goal of any stablecoin issuer is to maximize the supply of their stablecoin. In other words, Paxos’s prime directive is to get as many people using Pax USD as possible.

And one popular way to use a stablecoin is to deposit it into the PSM.

The problem for Paxos is that the current maximum amount of Pax USD allowed in the PSM is only $450 million. That’s not a large number for a stablecoin.

But, if the limit is raised to $1.5 billion as Paxos proposed, that could go a long way toward increasing the circulating supply of Pax USD.

Ok, But Why Would MakerDAO Agree?

Two reasons:

1. In return for raising Pax USD’s PSM cap, Paxos would send MakerDAO monthly payments worth 45% of the effective Federal Funds Rate (the national US interest rate). At current rates, that would amount to $29 million in annual revenue for MakerDAO.

2. MakerDAO’s PSM is currently heavily weighted toward USDC. This is widely seen as an existential risk for Maker, as anything happening to USDC, such as a government crackdown, would effectively kill Dai. So, MakerDAO is actively attempting to diversify the PSM. Raising the Pax USD limit would contribute to these efforts.

Why Is This Important?

Dai is the dominant decentralized stablecoin, and it’s not even particularly close.

A strong, more diverse, Dai is in all of our best interests, as should it ever fail, the damage across the DeFi ecosystem would be catastrophic.

Any effort to diversify the PSM is worth celebrating, and Paxos’ is no exception.