In December last year, I wrote about the flaws in Maker’s core mechanics and how that led to MKR underperforming its DeFi counterparts. What I didn’t realize at the time was that MakerDAO was in the process of implementing a proposal that would fix those flaws. Naturally, that article marked the bottom, and MKR is up 5x since.

At the end of 2020, Maker deployed the Peg Stability Module (PSM) – a liquidity pool where anyone can mint DAI against accepted stablecoins or redeem DAI for stablecoins. This is almost identical to how current stablecoin vaults work on Maker.

However, in the PSM, DAI can always be minted or redeemed at a 1:1 ratio against other stablecoins. As the name suggests, the goal of the PSM is to enhance DAI’s stability and make it more usable. It does this by making arbitrage around DAI’s peg much easier.

Previously, arbitraging DAI was cumbersome, and only existing borrowers could take advantage of arbitrage opportunities. With the PSM, DAI arbitrage across secondary markets becomes straightforward, which makes it much more likely for traders to take advantage of the opportunity and reinforce DAI’s $1 peg.