Introduction

As a veteran DeFi star project, MakerDAO has proposed the “Endgame Plan” concept with the goal of restructuring its asset business within the next decade to achieve complete decentralization of DAI. This article provides a brief introduction to MakerDAO’s mechanism, elaborates on the “Endgame Plan,” and delves into the protocol’s ecosystem business changes and current financial situation.

What is MakerDAO?

Established in 2015, MakerDAO is headquartered in San Francisco, US. Initially, the protocol was developed under the leadership of the Maker Foundation, which transitioned to fully decentralized governance in July 2021, handing over all operations to MakerDAO. The foundation was officially dissolved a few months later, leaving MakerDAO to manage the protocol through voting.

The core product launched by the protocol is the over-collateralized stablecoin DAI. DAI is an ERC-20 token minted and issued by collateralizing on-chain assets at a certain over-collateralization ratio, pegged 1:1 to the US dollar. In 2017, the team introduced the Single Collateral DAI system (SCD), allowing users to mint DAI using ETH as collateral. In 2019, they launched the Multi-Collateral system (MCD), accepting collateral assets other than ETH, and renamed Collateralized Debt Positions (CDP) to Vaults. Additionally, the official DAI Savings Rate (DSR) was introduced, allowing users to earn interest by depositing DAI.

In July 2020, to increase DAI’s liquidity, the protocol introduced the Peg Stabilization Module (PSM). This product essentially facilitates fixed-price currency swaps based on DAI, allowing users to deposit stablecoins like USDC and mint DAI at a 1:1 ratio, with a 0.1% transaction fee. The deposited USDC serves as a reserve asset, governed by MKR token holders through voting.

Currently, the PSM supports assets like USDC, USDP, and GUSD. With a total DAI supply of 5.288 billion, 3.346 billion DAI are minted through the PSM, accounting for 63.28%. This implies that over half of DAI is backed by USDC, revealing the protocol’s excessive reliance on USDC.

source：https://daistats.com/#/overview

source：https://daistats.com/#/collateral

Reducing USDC Dependency

In August 2022, Tornado Cash faced sanctions from the U.S. Department of Treasury, leading major stablecoin issuers to freeze assets in Tornado Cash wallets, including Circle, the issuer of USDC. Due to USDC being the most prominent collateral in the MakerDAO system, Circle’s freezing of user addresses raised concerns among community members. As a result, several proposals were put forth to adjust the capital structure and lessen reliance on USDC as a singular asset. These proposals include the following:

1. Initially, adjustments were made to the risk parameters of the ETH vault, increasing the debt ceiling and reducing the stability fee to attract users.
2. Subsequently, the support of Real World Assets as collateral for loans was endorsed, encompassing tokenized real estate, bonds, and receivables, among others. The MIP65 proposal was passed, allocating $500 million for investment in short-term government and corporate bonds.
3. In September 2022, a collaboration with Coinbase was established, and through the MIP81 proposal, $1.6 billion USDC held in the PSM pool was to be deposited into Coinbase Prime, with an annual interest rate of 1.5%.

New Lending Business: Spark Protocol

As MakerDAO has evolved, its ecosystem blueprint has progressively matured, with over 400 applications and service providers integrating DAI. Beyond the stablecoin market, the protocol is venturing into lending. The team has established Phoenix Labs, a development company, and is on the verge of launching its first lending protocol, Spark Protocol.

The first lending product with a front-end in the “Endgame Plan,” Spark Lend, is built atop Aave V3 smart contracts. Users can deposit highly liquid decentralized assets (such as ETH and wBTC) as collateral to borrow DAI according to the interest rate model. The team has stated that, within the next two years, once the DAI lending volume reaches $100 million, 10% of the profits in the DAI market will be distributed to Aave.

Spark Lend’s front end supports MakerDAO’s PSM and DSR, allowing USDC holders to use the PSM directly through Spark Protocol’s homepage to convert USDC to DAI and earn deposit interest via DSR.

Another crucial function of Spark Lend is to guide the utilization of collateral derivatives EtherDAI launched by the protocol. This product includes ETHD and EtherDAI Vault, with ETHD being backed by liquid staking tokens, such as Lido’s stETH. Users can wrap stETH into ETHD and deposit it as collateral in the EtherDAI Vault to mint DAI, while also being able to redeem stETH with ETHD. EtherDAI is MakerDAO’s product for entering the LSD track, potentially incentivizing liquidity by setting up ETHD/DAI liquidity mining on Uniswap and guiding demand by setting the stability fee to zero.

According to the roadmap, the product will launch in April 2023, with collaborations with fixed-rate lending protocols like Sense Finance and Element Finance planned for the latter half of the year. Additionally, enhancements such as flexible oracles and cross-chain support are expected in the future.

source：https://forum.makerdao.com/t/announcing-phoenix-labs-and-spark-protocol/19731

Financial Analysis

Revenue

MakerDAO’s current revenue sources are threefold: stability fee income from Vaults, liquidation penalty income collected from the Liquidation Vault, and stablecoin transaction fees obtained through the PSM.

Previously, the main sources of income were the stability fees and liquidation fees collected from ETH Vaults. However, as the protocol’s investment in Real World Assets (RWA) gradually increased, profitability began to rely more on RWA, with RWA now making the highest contribution to the protocol’s revenue.

Increasing investment in RWA can boost revenue, but it may also deviate from the original goal of a “decentralized stablecoin” and potentially introduce regulatory risks and loan default risks.

source：https://dune.com/SebVentures/maker---accounting_1

Expenditures

The protocol’s primary expenditures stem from team member salaries, protocol governance, and future development, among others, with the most significant portion being developers’ compensation.

Previously, during the bull market, MakerDAO’s revenue far exceeded its expenses, resulting in a surplus. However, due to market fluctuations and diminishing demand for DAI, revenue has declined. Following the introduction of RWA asset investments, the increasing proportion of RWA in the asset portfolio has notably improved the financial situation. Due to reduced revenue in bear market conditions and significant team expenditures, the protocol remains in a net loss state.

Endgame Plan

The Endgame Plan is a structural reorganization concept proposed by the MakerDAO team in June 2022, aimed at achieving decentralization over the next ten years. The core idea is to divide the protocol into multiple smaller communities with Maker functionality, called “MetaDAOs.” Each MetaDAO would have its token and treasury, operating its front-end and managed by a committee independent of the Maker governance system, thus transitioning MakerDAO from a dual-token system to a multi-token system.

source：Community Proposal https://forum.makerdao.com/t/endgame-plan-v3-complete-overview/17427

There will be three types of MetaDAOs: Governor, Creator, and Protector, each serving different functions. Governors will be responsible for organizing decentralized employee governance and on-chain governance, creators will focus on product feature development and ecosystem enhancement, such as the Spark Protocol team, and protectors will manage RWA Vaults and handle related legal affairs.

MetaDAO’s internal governance will resemble MakerCore, utilizing ERC-20 for voting governance. According to the Endgame Plan, there will be a total of 2 billion MDAO tokens, distributed through mining, with 20% allocated to DAI mining, 40% to ETHD mining, and 40% to MKR mining, thereby attracting more collateral. Although MetaDAOs will have their MDAO tokens for voting governance, they will still be built upon the MakerCore governance process, implying that MKR holders retain the right to appeal and ultimate control.

The Endgame Plan also aims to address the current financial deficit in the MakerDAO protocol, primarily by increasing investment in RWA assets. However, considering the likelihood of increased regulation on RWA, founder Rune has proposed three collateral strategies:

• Pigeon Stance: This is essentially Maker’s current status, focusing on generating income for approximately three years, with unrestricted exposure to RWA assets, while maintaining a 1:1 peg between DAI and the US dollar.
• Eagle Stance: If DAI’s credibility is questioned after three years, this strategy will be adopted, limiting RWA risk exposure to 25% and possibly breaking the DAI-US dollar peg at this stage.
• Phoenix Stance: If all RWA collateral is confiscated, this strategy will be implemented.

The entire Endgame Plan is divided into four phases, with the Pregame phase launching within 12 months, including building ETHD, launching six MetaDAOs, and initiating liquidity mining, among other initiatives.

Conclusion

In conclusion, MakerDAO, as a DeFi star project, has a mature product mechanism. Its expanding ecosystem blueprint includes a series of solutions to reduce USDC’s share as a reserve asset, such as introducing investments in Real World Assets (RWA).

With an increased proportion of RWA investments, the protocol’s revenue has improved, leading to a better financial situation. However, this approach deviates from the goal of complete decentralization and introduces default and loan risks. Additionally, due to the bear market’s impact and substantial developer salary expenditures, the protocol remains in a net loss.

In response to a series of existing protocol issues, the founder proposed the “Endgame Plan” aimed at achieving asset restructuring within the next decade, promoting DAI as an unbiased global currency through diversified development. The lending product Spark Protocol, as the first application of the “Endgame Plan,” is about to be launched, marking the beginning of MakerDAO’s business transformation and directly competing with veteran star projects like Aave and Compound.