Ethereum-based MakerDao turns into loan-sharking platform

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When MakerDao was introduced, the Ethereum-based protocol promised to do what no one else could. It would offer programmatic lending at interest rates of only 0.5%, much less than what was possible with any type of lending program. The platform was supposed by its own DAI stablecoin, and, as has been seen with most stablecoin projects, the program has not been as stable as anticipated. Now, many early borrowers that took advantage of the low interest rates are calling out MakerDao, accusing it of being nothing more than a loan-sharking platform.

Interest rates for lending programs have increased to 19.5% and higher. However, DAI is still—as initially designed—a stablecoin. As such, it is pegged to the U.S. dollar. One DAI is equal to one U.S. dollar and, by definition, this cannot change.

Since this past February, fees associated with loans on MakerDao have increased to 19.5% and could go higher. These increases not only impact new customers looking for loans, but everyone on the platform. When protocol fees are adjusted upward, the original interest rate on loans increase in what is tied to MakerDAO’s “stability fee,” AKA interest.

One borrower explained to CoinDesk, “I believe that MakerDao was aware that in order to defend the stability of their coin the interest rates would have to vary wildly and as such it would be impossible for them to support real use cases. It was their responsibility to warn users that their loans are NOT suited for real-world use cases, and they might end up trapping users in the rates we see now.”

He added, “Borrowing using my ETH [Ether] looked like a safe solution to saving money and retaining ownership of my ETH, but there was no clear indication and no warning how quickly and how steep rates can come back.”

ETH prices drop frequently, which makes many loans at risk of being liquidated. This could result in losses incurred because of the higher interest rate payments, as well as liquidation penalties that can run 13% of the loan’s principal amount.

The borrower adds that the increases may not be malicious, but they are still a part of the process and are the reality now. He states, “What matters is, in the end, you end up in a loan shark situation.”