Target Rate Feedback Rule (TRFR)

The Target Rate Feedback Rule (TRFR) is a proportional-integral-derivative (PID) controller that algorithmically manages the Dai Savings Rate (DSR). Its primary objective is to correct deviations of the Dai market price from its $1 USD peg. When Dai trades below $1 (a state of surplus), the TRFR increases the DSR, incentivizing users to lock Dai in the DSR contract, thereby reducing circulating supply and increasing demand. Conversely, when Dai trades above $1 (a state of shortage), the rule decreases the DSR, discouraging savings and encouraging Dai to re-enter circulation.

This mechanism operates continuously and autonomously, without requiring manual governance votes for every rate adjustment. The TRFR calculates the necessary change to the DSR based on the magnitude and duration of the peg deviation. This feedback loop is designed to be more responsive and predictable than purely manual governance, creating a market-driven force for stability. The rule's parameters, such as its sensitivity and update frequency, are set and can be adjusted by Maker Governance, which retains ultimate control over the system's monetary policy.

The TRFR is a critical component of Maker's Endgame Plan, representing a shift towards greater decentralization and automation of the protocol's core stability mechanisms. It works in concert with other levers like the Stability Fee (the interest rate on Vault debt) and Surplus Auctions. By programmatically managing the opportunity cost of holding Dai, the TRFR aims to create a robust, non-custodial alternative to traditional central banking operations within the DeFi ecosystem, where monetary policy is executed by transparent, on-chain code.

The Target Rate Feedback Rule (TRFR) is a core algorithmic mechanism, pioneered by EIP-1559, that dynamically adjusts a blockchain's base transaction fee to regulate network congestion and target a specific block size. It functions as a PID controller for the network, using the utilization of the previous block—specifically, whether it was more or less full than a predefined target gas limit—as its primary feedback signal. If the previous block was over 50% full, the rule increases the base fee; if it was under 50% full, it decreases it. This creates a negative feedback loop that steers block utilization toward the long-term target, making fee estimation more predictable.

The mathematical formula for the TRFR is base_fee_per_gas[block] = base_fee_per_gas[block-1] * (1 + (gas_used[block-1] - target_gas) / target_gas / base_fee_max_change_denominator). The target gas is typically set to 50% of the block's maximum gas limit. The base_fee_max_change_denominator is a constant (e.g., 8 in Ethereum) that caps the maximum percentage change per block, ensuring fee stability. This deterministic calculation occurs at the protocol level in every block, making the base fee a mandatory, protocol-enforced component of every transaction, which is subsequently burned.

The primary goal of the TRFR is to achieve long-term predictability in transaction pricing and network throughput. By targeting 50% block utilization, the system maintains headroom for sudden spikes in demand, preventing the extreme fee volatility and unpredictable confirmation times seen in first-price auctions. This design also enables wallets to provide users with more reliable fee estimates, as the base fee's trajectory is governed by a transparent, on-chain rule rather than opaque market bidding. The rule's effectiveness is measured by how closely it can maintain the moving average of block gas used around the target over time.

A key consequence of the TRFR is the creation of a base fee burn. Since the base fee is destroyed (burned) rather than paid to miners/validators, it introduces a deflationary pressure on the native cryptocurrency's supply. This transforms transaction fees from a pure miner reward into a network resource cost, aligning economic incentives. The rule works in tandem with a priority fee (tip), which users can add on top of the base fee to incentivize validators to include their transaction in the next block, especially during periods of high demand.

The following pseudocode outlines the core logic of a Target Rate Feedback Rule (TRFR) mechanism, which is a control algorithm used in transaction fee markets to stabilize network congestion. The primary function, update_base_fee, is called at the end of each block. It calculates the utilization ratio by comparing the actual block size (block_gas_used) to a predefined target block size (TARGET_GAS). This ratio is then fed into a PID controller-style formula to compute a new base fee for the subsequent block, aiming to drive utilization toward the target.

The algorithm's key components include the adjustment quotient (ADJ_QUOTIENT), which determines the aggressiveness of the fee adjustment—a larger denominator creates a slower, more dampened response. The pseudocode shows a simplified version where the adjustment is proportional to the deviation from the target. In more sophisticated implementations, integral and derivative terms can be added to the controller to improve stability and reduce overshoot, ensuring the base fee does not oscillate wildly in response to transient demand spikes.

This example highlights the feedback loop central to TRFR: high utilization raises the base fee to discourage future transactions, while low utilization lowers it to encourage usage. The block_gas_used variable acts as the system's sensor, the base_fee is the control variable, and the TARGET_GAS is the setpoint. Developers implementing such a system must carefully tune parameters like the target size and adjustment quotient based on network-specific goals and observed economic behavior to achieve a stable equilibrium.

In practice, TRFR mechanisms, such as Ethereum's EIP-1559, incorporate additional safeguards. These include enforcing a minimum base fee (MIN_BASE_FEE) to prevent it from reaching zero and a maximum change limit per block to bound volatility. The pseudocode's max and min functions represent these clamping operations. The final output is a new base_fee that is enforced in the next block's header, creating a predictable and transparent fee adjustment process for users and wallet software.

Understanding this pseudocode is essential for protocol engineers designing fee markets and for analysts modeling blockchain economics. It demonstrates how algorithmic monetary policy can be applied at the protocol layer, autonomously managing a critical resource (block space) without requiring manual intervention. The TRFR's success depends on its parameterization and its interaction with user and miner incentives within the broader cryptoeconomic system.