The Maker Direct Deposit Dai Module (D3M)

Greetings Aave! Sam from the MakerDAO smart contracts team here. I am pleased to introduce the proposed Maker Direct Deposit Dai Module (D3M) in cooperation with the Aave team. This module will allow the Maker protocol to enforce a maximum variable borrow rate for the DAI market on Aave. It does this by calculating how much DAI supply is required to drop the interest rate down to the desired level and then minting that amount against the returned aDAI. All of this is performed by a fully automated vault with a target interest rate specified by Maker governance.

Why is this useful?

As I’m sure you all know, one of the biggest problems for Aave’s users is the unpredictability of the stablecoin borrow rate. Due to the volatile nature of DeFi, the interest rates can surge to double digits and remain there for weeks. By enforcing a maximum borrow rate, users will be able to take on leverage without fear of being stuck paying high interest rates. In exchange, Maker will be able to earn interest on the demand surges.

How this works

The D3M is deployed like a special aDAI vault with a specific target borrow interest rate - say 4%. Whenever the variable borrow rate on Aave DAI goes above 4% anyone can call the vault’s exec() function to re-adjust the amount of DAI in the pool. In this case it will calculate the amount of DAI needed to be minted to hit the target interest rate and put that into the Aave’s lending pool. This will continue to add DAI until either the debt ceiling is reached or the 4% target is hit.

In the reverse direction, when the variable borrow is under 4% and we have previously added liquidity, the exec() function will calculate how much liquidity to remove to bring the target interest rate back up to 4%. It will continue to remove liquidity until either the vault debt is fully paid back or the pool runs out of liquidity. In the event the pool runs out of DAI liquidity the module will wait until it fills up again and continue to unwind.

To the end user this will all be performed in the background. They will just magically get the benefit of predictable interest rates.

Code

For the technically inclined, I have submitted a Maker Improvement Proposal (MIP) for inclusion in May’s governance cycle. You can read about the MIPs process here.

Aave / Maker Alignment

Beyond the immediate benefit of having a stable borrow rate, I feel this is a great first step for both protocols to join together in future collaboration. Aave and Maker are currently dominating their respective market segments. By joining together we can become an unstoppable force securing the future of DeFi. I invite you all to join us over on the Maker forum.

21 Likes

I support the idea of D3M and posted the specifications in the MakerDAO forum. The idea behind D3M in short is that D3M is a Vault in MakerDAO that allows to mint DAI directly to Aave Protocol and hold aDAI as a collateral in the D3M Vault.

Essentially this means that DAI liquidity shortages in Aave Protocol could be covered by D3M Vault across different Aave markets including the cross-chain markets such as Polygon - where supply of DAI is critical for the adoption of Aave Protocol in these new markets.

The beauty of the D3M is that the Vault simply acts as amongst one of the depositors and the amount D3M supplies is based on MakerDAO governance and based on the MakerDAO community risk assessment over Aave Protocol meaning that risk-averse culture both in Aave and Maker would increase the liquidity and adoption both for Dai and Aave Protocol. The better Aave community handles risk (and Maker community assess risk), the more liquidity can be obtained from D3M over the long run.

Bringing Aave and Maker community is a win-win for DeFi adoption on Ethereum and L2s where lot of usage will be in the future. D3M is the first initiative to strengthen these two communities closer together to ensure strategic upside in highly innovative space.

9 Likes

I fully support this idea. A great innovation between Maker and Aave that will benefits both sides.

1 Like

I support this as well. This enhances efficiency and should also appeal to more users.

1 Like

(Great_opportunnity_for_everyone.)

Does this mean MakerDao is offering aave a non collateralised loan? Is there a debt ceiling for this special Dai vault for minting aDai?

Just read the proposal. Governance noob here. That sounds like it. Is the minted dai essentially not collateralised is that correct? If this is being done on a large scale it would imply that the borrowing rate of stablecoins is always extremely attractive on Aave and that a huge amount of dai would flow into the system. But I guess at some point it would be too risky for Maker to do this.

The Dai minted from the D3M module would be collateralized by aDAI which in turn is collateralized by the collateral pool in Aave (ETH, WBTC, etc).

Btw this proposal has passed in the Maker monthly governance cycle: https://vote.makerdao.com/executive/approve-may-2021-governance-cycle?network=mainnet#proposal-detail

We will be working to implement this in the coming weeks.

1 Like

Thanks for the reply!

A few moments ago I realized that as well; so basically DAI is collateralised by the assets that people provided as collateral to Aave. Under the assumption that all collateral assets have perfectly working liquidation mechanisms and if we ignore platform risks (bugs etc.) then what Aave does is essentially a risk-free operation, right? Thus, someone should fund all of these borrowing activities to make a small fee. So far Aave relied on private individuals to provide stable coins (relatively inefficient and volatile) and will now use Maker to do that automatically. Is that correct?

This is actually absolutely huge, isn’t it? I mean Aave would always have low and predictable rates for borrowers that only reflect the risk of bugs or issues related to liquidations. Is that correct?
It would mean that Aave has already solved the “stablecoin deposits” part of the equation as a platform. And could continue to work on use cases that make borrowing more attractive.

Is that a correct assessment?

I was also wondering why there is such a strong inflow of DAI to Aave recently? Does it have anything to do with this?

Thank you very much for the help!

1 Like

Yes this is basically correct.

I think it’s pretty huge. Aave can get predictable rates and Maker can get additional Dai supply earning interest. It’s a win-win.

Probably the stkAAAVE liquidity mining.

No problem. Let me know if you have anymore questions. :slight_smile:

2 Likes

Thank you very much!! :ok_hand: :slightly_smiling_face:

1 Like