FAQ: Interest - Kauri
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POSTED 03 May 2018 03:17

# FAQ: Interest

## Does the Maker system charge CDP owners interest on Dai debt?

Yes. Interest, which Maker calls a Governance Fee, is compounded continuously at a rate of 0.5%, and is measured against the total DAI currently drawn on your CDP. The outstanding balance owed on a CDP is shown in the Governance Debt column on the Dai Dashboard.

When you pay down your debt (by returning DAI to your CDP) you will be charged accrued interest proportional to the amount of DAI being returned, which is payable in MKR. In this context, the MKR token is required to use a feature of the system, and thus behaves as a utility token.

It's important to ensure you have enough MKR in your wallet to cover the interest charges or the transaction will fail.

## How is it calculated?

Given that:
• A CDP exists with a Stability Debt of 1000 DAI
• The CDP has been open for 30 days
• The current value of a MKR token is 100 DAI
• The Governance Fee is 0.5%
• A user pays back a debt of 50 DAI
The total MKR required to complete the transaction is 0.020547945

## A Detailed Example

You can use the following simplified formula to determine how much interest has accrued on a CDP:

(((Total Stability Debt in DAI * (1 + Current Governance Fee in decimal format)) ^ (Age of Stability Debt in days/365)) - Total Stability Debt in DAI ) = Total Governance Debt owed in DAI

When we plug in the values we've already used above:

(1000 * (1 + 0.005) ^ (30÷365)) - 1000 = 0.410018954 DAI

Now that we have the total interest in DAI we can convert that to MKR. Assuming an exchange rate where 1 MKR is worth 100 DAI:

0.410958904 ÷ 100 = 0.004109589 MKR

Therefore, as the user is repaying 50 DAI, they will be expected to pay the interest accrued on that amount:

(50 * (1 + 0.005) ^ (30÷365)) - 50 = 0.020500948 DAI

The DAI value converted to the current price of MKR according to the Oracle feeds will be:

0.020500948 ÷ 100 = 0.000205009 MKR

The user will need 0.000205009 MKR in their wallet to cover the accrued interest on 50 DAI after 30 days.

After the transaction has been completed, the total amount of interest remaining in the CDP will be:

0.004109589 - 0.000205009 = 0.00390458 MKR

Note that users are not required to perform these calculations. The total outstanding interest fee is always shown in the Governance Debt column on the Dai Dashboard, and the proportional amount owing is displayed when users return DAI to their positions.

## Will it always work like this?

No. In a future iteration of the system called Multi Collateral Dai, accrued interest will automatically be withdrawn from funded CDPs. This fee will then be used to purchase MKR on the open market, which will then be burnt.
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