Measuring DAI Supply and Demand Price Effects

At the time of this writing, DAI price has been hovering around 1 USD for about 3 months, but in the last few weeks we’ve seen a lot of trades occurring at 1-3% above the peg. In our view, upward pressure on DAI price is due to number of reasons, the main one being that DAI demand has picked up while sell pressure from leverage traders has lost some steam.

All the charts below can be accessed at https://graphs.santiment.net/makerdao

DAI demand is extremely hard to estimate. It is measured not only by looking at increased bids for DAI on exchanges, but also by the amount of DAI that is passively held by people. Namely, passive holdings work as short term sinks, effectively taking DAI out of circulation and creating upside price pressure.

Also keep in mind that higher velocity (speed of DAI changing hands) – which usually correlates negatively with passive holding metrics – isn’t necessarily a bad sign for price. In general, higher velocity means higher usage and network growth.

For this analysis, we focused primarily on passive holdings among groups of services that we believe serve as short term sinks. The most obvious entities serving this purpose are secondary lending platforms with unborrowed DAI.

Based on the data above, passive holdings across entities we follow have been picking up steadily over this year. The biggest increase came recently, when a significant number of people bought DAI and deposited it to lending platforms to earn extra yield. Unborrowed DAI sitting on lending platforms reached 11.3m, which is almost 14.5% of the total supply. Also note that crypto company treasuries have begun using DAI as a long-term hedge, and we’re sure we haven’t whitelisted all of them. Finally, we’ve also seen an increase in payment provider inventories. These entities naturally sell DAI on the market when users make payments, but they always keep some inventory aside, particularly if service is growing.

Note also that DAI deposited at exchanges – both centralized (CEX) and decentralized (DEX) – has been falling in recent weeks. Total holdings on these exchanges is now about 5.1m DAI, lowest in last 4 months. DEX and CEX holdings don’t serve as short-term sinks however, as increased DAI deposits there lead to increased selling. The recent drop in DAI deposits on exchanges could therefore indicate decreased DAI selling pressure.

In our view, the largest category of passive holders are market makers, but we aren’t able to identify them (yet). Also note that high DAI inventory held by market makers isn’t a good proxy for measuring demand, as their behaviour is oriented toward short-term activity. In fact, if market maker inventory is high, these entities might offload unnecessary reserves and cause a price drop. They also might not be eager to defend the peg by buying additional DAI when there is a downward price pressure. On the other hand, low DAI inventory in market maker hands could indicate positive price pressure.

As said, DAI demand has just partial effect on the price peg. Supply must be analyzed as well. Supply was “problematic” during the first quarter of this year because DAI minting wasn’t able to keep up with demand. We know that once DAI is minted, it is (for the most part) immediately sold on the market. Based on DAI CDP activity over the last few weeks, we can see evidence of users making less borrowing or minting of new DAI at MakerDAO. This trend is mostly due to a perception that ETH is ending a bull run, and also because users have migrated to secondary lending platforms.

Less DAI minted at MakerDAO, however, doesn’t tell us much about DAI selling pressures. Users have migrated to secondary platforms and are probably borrowing and selling DAI there. User behaviour is still something to watch, though – as seen below, users who locked ETH into CDPs haven't been aggressively issuing DAI and converting it to additional ETH as in the past (compare the blue line - ETH repledged from DAI, with red line - ETH pledged on that day).

This dynamic means that demand for leverage has evaporated at MakerDAO, or has partially migrated to secondary platforms that have lower rates. However, leverage made by selling DAI for other assets isn't causing strong supply pressures as it did in the past either, since a huge amount of DAI was simultaneously bought by people willing to lend it and earn interest (shown by the increased unutilized DAI at lending platforms). Some might say this has zero effect on the peg, but imagine if all borrowers at secondary lending platforms came back to MakerDAO and minted new DAI. In such a case, supply pressure wouldn’t be balanced by DAI savers and the peg would be under pressure.

Another factor contributing to lower DAI supply pressures is the emergence of USDC as the second most borrowed asset in DeFi. Around 21m USDC are borrowed in DeFi at the moment, compared to April when only 0.4m of USDC had been borrowed. Although USDC isn’t as censorship-resistant as DAI, rates are usually about 5 percentage points lower.

Finally, an important metric that speaks about DAI demand, and we introduced recently, is “percentage of active coins.” This metric shows the percentage of total DAI supply that moved within a defined period. In other words, it is a measure of velocity for different time periods. DAI velocity is very high even compared to other stable coins. About 5-7% of unique DAI coins move each day, whereas this figure stands at about 3-4% for USDC.

What’s most interesting is that there has been a significant increase of DAI holders who haven’t moved their tokens for the past 90 days. This could mean a lot of holders are using DAI as a hedge and saving strategy, depositing it to secondary platforms to make extra yield.

To conclude, it seems like DAI demand has started to pick up, mostly due to availability of interesting saving instruments, various synthetic assets and dapps built on top of the MakerDAO protocol. At the same time, DAI supply pressures have become less severe as borrowers have migrated to secondary platforms and also reduced their leverage as the recent ETH bull run ended. Plus, recent daily price spikes (well above $1) are connected to leverage ETH traders rushing to buy DAI to cover their collateral from getting liquidated (essentially a long ETH/DAI squeeze).