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# The Burn Rate

All CDP holders accrue interest on their outstanding DAI loans they have taken out. This Stability Fee has varied from 0.5%, to 2.5%, back to 0.5%, and now all the way up to 11.5%. This fee changes as a result of MKR holders voting to increase, or decrease the cost of spending; a mechanism that balances DAI supply with DAI demand, as well as a way to mitigate systemic risk.

## Calculating MKR Burn Rate

[DAI Market Cap] x [Stability Fee] x [Time] = DAI-denominated MKR burn rate. I.e., how much USD-worth of MKR will be burned, per unit-time. This equation tells us how much cash flow the MakerDAO system takes in via MKR burning.

# The MKR Auction

In order to source the MKR on the behalf of CDP holders repaying their debt, the MakerDAO system takes the stability fee out of the DAI being repaid, and purchases MKR with it on a decentralized exchange (this process entirely automated by a smart contract). Like the user, the smart contract is agnostic to the price of MKR, it just needs to source the USD value of MKR that is owed from the stability fee. If a CDP owner owes \$35, the MakerDAO smart contracts puts \$35 up for auction, and burns whatever MKR it gets for \$35.

# What Happens When You Mix a Perpetual Auction with a Decreasing Supply?

The perpetual auction executes a Market-Buy of MKR to repay the Stability Fee. It will take the most MKR the market will allow it. Therefore…

## Imagine a world where there is only one MKR holder…

…that person has unhindered access to the MKR auction. No other person is able to sell MKR to the Perpetual Auction, as no other person has MKR. Therefore, no one is able to undercut the auction offer. Remember, the Perpetual Auction MUST purchase MKR at whatever the market price is. If there is only one MKR holder, that MKR holder can determine how to price MKR on their terms.

## That’s an insanely large number.

The point: The incentive to be the last holder of MKR is INSANELY high. So high, that there will likely never be just one holder of MKR. The incentive to be the last holder of MKR will incentivize hoarding and secondary market removal, which will drive price up, as well as slow down the burn rate of MKR (because MKR burn rate is inversely proportional to the value of MKR vs DAI).

# Game-Theory will be the primary driver of MKR valuation

The value of MKR is something like Double-Compound Interest.

1. Interest accrued by the Stability Fee, after all previous Stability Fees have bought out other peoples MKR

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