‘A Loan Shark Situation’: MakerDAO Is Leaving Crypto Borrowers With Rising Bills – And They’re Crying Foul

The Takeaway

  • An ethereum protocol for programmatic lending, MakerDAO emerged as a clear market leader in part for its rock-bottom interest rates of 0.5 percent.
  • But the code behind MakerDAO requires interest rates to do more than extract business from borrowers, it’s a technological necessity for keeping its DAI stablecoin worth $1.
  • With interest rates rising to 19.5 percent, and DAI still worth below $1, some early borrowers are angry, feeling as though they were misled.
  • Describing the project’s marketing tactics as akin to digital “loan sharks,” they argue their experience with decentralized finance has been worse than with traditional banking.

When credit cards give borrowers an unusually good deal, the companies tell cardholders how long that deal is going to last. In the world of crypto, however, that practice hasn’t exactly ported over.

That’s becoming more relevant given recent changes in the market that have created a rise in the number of companies offering loans in cryptocurrency as part of their business model. So far, this includes startups with traditional products (they hold crypto and loan cash) as well as blockchain protocols offering more exotic fare.

The leader in the latter category is undoubtedly MakerDAO, a years-in-the-making protocol built on ethereum that programmatically enables borrowers to take out loans, called collateralized debt positions (CDPs), with code. To date, 2 million ether is locked up in the protocol, and $82 million in DAI, the protocol’s stablecoin, are in the market now, all backed by active loans.

But while investors and developers love to tout MakerDAO as perhaps the best-working example in the evolving field of decentralized finance (DeFi), some borrowers don’t feel as if they’ve gotten as good of a deal.

In fact, the cost of borrowing on MakerDAO has risen rapidly recently and this has been especially painful for those who took out loans in order to make consumer purchases (rather than…

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