Maker's Dai approaches $1 peg following aggressive interest rate hikes and Tether fallout

Interest rates for MakerDAO have exploded to 19.5 percent over the course of three months to combat its stablecoin Dai from trading below its $1 peg.

MakerDAO's Ethereum-backed stablecoin Dai has had chronic difficulties maintaining its peg.

With interest rates initially set at a highly competitive 0.5 percent, borrowers locked up their ether in mass in exchange for the token.

Within one year, an impressive 2 percent of all circulating ether was locked up in Maker contracts.

Maker has said, thus far, that the interest rate increases have had "Little attributable impact" on the price of Dai.

MakerDAO has continued to fight against bloated inventories and it is likely that interest rates will continue to increase so long as Dai trades below its peg.

The recent investigation of iFinex and its two subsidiary companies, Bitfinex and Tether, has resulted in an exodus out of USDT. Following news of the investigation, the price of USDT dropped as low as $0.975 while other stablecoins absorbed fleeing market share.

The major stablecoins enjoyed large premiums during the fallout, averaging 6.5 percent between USDC, TUSD, and PAX. Similarly, Dai enjoyed additional demand as USDT holders swapped their tokens for other stablecoins.

USDT is once again trading at par while the premium on other fiat-backed stablecoins has diminished to 1 percent or less.

Although Dai is narrowing the gap with its peg, the discount still fluctuates at a meaningful 1-2 percent; Expect more interest rate increases in the coming weeks.