Forward the Original Title ‘IOSG Weekly Brief｜MKR’s Rebirth: New Blockchain, RWA Stablecoin, and Spark Lending Unicorn #223’

TL,DR:

• In the past year, MakerDAO has achieved the best performance compared with BTC, ETH and other DeFi protocols. While the currency price of general DeFi participants has increased by 200%, MKR’s currency price has increased by approximately 500%.
• MakerDAO’s success is driven by its strong fundamentals and versatile business model, which have performed well in both RWA and crypto markets. In the current uncertain situation of traditional financial macro conditions and the DeFi track, we believe that MKR’s business layout in the two fields can enable it to resist risks and obtain considerable returns.
• Positive market sentiment and the Endgame roadmap suggest future growth. And MakerDAO Endgame: Launch Season makes the sentiment even higher.
• Endgame challenges include balancing innovation with risk and ensuring stakeholder understanding. It brings new tokenomics, governance framework, and a clear roadmap to improve growth, resilience and accessibility.
• We believe that despite simplifying operations, its core business focus remains largely unchanged. The benefits brought by the revenue side will not be particularly significant in the short term, but it may reduce internal communication costs and improve the professionalism of each business and operational efficiency.
• We believe that the effective execution of Endgame is crucial to MakerDAO’s ability to continue to lead the future DeFi landscape. The roadmap’s impact and MakerDAO’s commitment to innovation will define its future success.

Background

In the tumultuous tides of the last bear market, a few stalwarts stood firm, and Maker (MKR) was undoubtedly among them. While other blue-chip assets faltered, Maker not only held its ground but saw its value soar, doubling from March to October 2023. This remarkable resilience showcased its ability to not just survive but thrive under adverse conditions.

But Maker’s appeal isn’t confined to bear markets. As the crypto landscape shifted towards a bullish outlook in early 2024, Maker’s price leaped from 1400 to 2000. The momentum didn’t stop there; following the announcement of its visionary Endgame plan on March 13th, its price catapulted to 3000. This surge meant that holding MKR could have yielded a staggering 5X return over the past year!

So, what’s the secret behind MakerDAO’s robust performance across both bear and bull markets? Is it a testament to its solid fundamentals, or does it owe its success to shifting narratives? And perhaps most intriguingly, what exactly is the MakerDAO Endgame, and what should we anticipate moving forward? This article aims to unravel these questions, shedding light on the dynamics that make MakerDAO a standout in the ever-volatile crypto landscape.

MakerDAO: A Resilient DeFi Pioneer Bridging Crypto and Real-World Assets

In the ever-evolving DeFi landscape, MakerDAO has distinguished itself by adeptly navigating two pivotal trends: the integration of Real World Assets (RWA) and staked Ethereum (stETH). This strategic positioning has not only bolstered its standing in the decentralized finance sector but also underscored its resilience and adaptability.

Staked Ethereum (stETH) Integration

On the crypto part, MakerDAO locked approximately 600k wrapped staked ETH (wstETH) within its core protocol and an additional 600k through its subsidiary, Spark. This substantial integration positions MakerDAO as the entity with the third-largest Total Value Locked (TVL) of $11.67 billion ($8.67 billion from Maker and $3 billion from Spark), trailing only behind Lido’s $34 billion and Eigenlayer’s $11.801 billion. Unlike Lido and Eigenlayer, which concentrate on staking and restaking services, MakerDAO operates with a DeFi business model that extends beyond mere asset staking.

By locking in stETH, MakerDAO effectively leverages these assets as collateral to mint DAI, its native stablecoin. This process allows MakerDAO to generate revenue through stability fees (interest rates) charged on loans issued in DAI against the stETH collateral. As Ethereum yields fluctuate, MakerDAO adjusts its risk parameters and interest rates accordingly, ensuring a balanced approach to revenue generation while maintaining system stability. This method turns the volatility and yields of Ethereum into a steady stream of revenue, thereby reinforcing its position as a leader in the sector.

RWA strategy

In June 2023, MakerDAO integrated U.S. Treasuries into its portfolio, a move that means it is diversifying its revenue streams by leveraging RWA. Essentially, Maker’s governance is unwilling to have its balance sheet hold inefficient and “dangerous” USDC when a highly productive and risk-free alternative exists. This decision not only positions MakerDAO as a leader in RWA within the cryptocurrency industry, but also significantly boosts its revenue.

RWA, which includes real assets such as real estate and bonds, has become a significant part of MakerDAO’s revenue, contributing approximately 60% of its fee income. The inclusion of U.S. Treasuries proved to be a successful strategy, enhancing MakerDAO’s revenue stability, resulting in annual revenue exceeding $100 million.

In 2023, according to a report from Steakhouse, approximately 56% of revenue, totaling 76.3 million Dai, was generated from real-world assets (RWA). A closer examination reveals that 83% of RWA revenue was generated in the second half of the year, coinciding with a period of consistent increases in the 10-year federal rate.

Source: Steakhouse

MKR: An All-Weather Crypto Asset

MKR stands out as a versatile crypto asset, thriving in varied market conditions due to its strategic allocation on real-world assets (RWAs) and crypto-backed lending. In high interest rate environments, MKR proves resilient, benefiting from its RWA investments, unlike other cryptocurrencies that may suffer under such macroeconomic pressures. Should interest rates fall, potentially coinciding with a bull market due to the abundance of market liquidity, MakerDAO’s strategy is expected to pivot towards its strengths in crypto-native operations, particularly crypto-backed lending.

Thus, MakerDAO adeptly navigates through market cycles, focusing on crypto-backed lending in bull markets and optimizing RWA yields in bear markets, ensuring its position as a robust, all-weather crypto asset.

The graphs below reaffirm Maker’s asset allocation strategy. When interest rates peaked at around 5% in October 2023, Maker allocated the largest portion of its assets to RWA-related assets, capitalizing on yields from T-bills and other credit-related products.

As interest rates began to decline due to the Fed’s confidence in containing inflation, Maker strategically shifted towards the crypto-related field.

Currently, the situation is not as clear as we might think: with the U.S. Bureau of Labor Statistics announcing an inflation number that did not meet analysts’ expectations (CPI 0.4% in March 2024, expected to be 0.3%), expectations for a Fed rate cut continue to be delayed and even dampened. JPM’s CEO, Jamie Dimon, even mentioned the risk of interest rates rising to over 8%. The high-interest regime provides more profit opportunities for RWA projects to explore and take advantage of. There is a high probability that Maker will again profit from the RWA side.

Source: https://dune.com/queries/3569610/6008265

Multiples Expansion: Narrative Evolution from Endgame Launch

The previous sections highlighted MKR’s robust business model and impressive profitability, laying the groundwork for understanding its valuation. However, MKR’s price surge isn’t solely attributable to its financial performance, since the earnings estimate was just tripled, from 50m in April 2023 to 150m in March 2024.

A closer look at the data from Makerburn reveals a significant part of the story: the expansion of multiples. From June to August 2023, MKR’s P/E ratio hovered between 10 and 15. By September 2023, this figure began to climb, reaching around 20 by February 2024, and then dramatically jumping above 30 by the end of March 2024.

So, what fueled this remarkable expansion of multiples?

Source: https://makerburn.com/#/charts/revenue

Market Environment Revitalization

In our December 2023 article, we highlighted the start of the sixth crypto bull market, now over a year old, detailed in our analysis. This stage has promoted the activity of various DeFi projects, driven by enhanced market activity and growth expectations. This anticipated increase in interaction and transaction volume is not just speculative; it can be observed everywhere in the DeFi space. Projects such as Balancer, Synthetix, Sushiswap, and Curve Finance are experiencing significant multiple expansion, a trend confirmed by Token Terminal data.

However, MKR’s remarkable journey of multiple expansion, particularly its surge to a P/E estimate of 30 by March 2024, isn’t solely a product of market dynamics. The launch of MKR’s Endgame plan at the onset of March 2024 marks a pivotal moment, driving its valuation to new heights and distinguishing its trajectory from broader market trends.

This leads us to delve deeper: What is the Endgame plan, and why has it sparked such high expectations, underpinning the significant increase in MKR’s multiples?

Source: https://tokenterminal.com/terminal/metrics/ps-circulating

Article:IOSG Research | BTC data shows that we have entered a new bull market cycle

MakerDAO Endgame: Ultimate Operational Efficiency, Clarity, and Risk Segregation

4.1 Background: Challenges Faced by MakerDAO

• Operation Inefficiency: Despite the widespread adoption of DAOs within crypto projects, operational inefficiencies persist. MakerDAO experienced significant challenges, including rejected proposals for centralized operations aimed at improving efficiency and communication barriers that obscured member understanding of votes and activities.
• Intensified Competition: The competition within the decentralized finance (DeFi) ecosystem is becoming increasingly fierce, highlighted by MakerDAO’s publicized conflicts with Aave. MakerDAO has countered Aave’s introduction of its stablecoin, GHO, by supporting the development of Spark and collaborating with Morpho to establish new lending pools. These moves underline the intense competitive landscape in DeFi, raising questions about the robustness of MakerDAO’s competitive moat in a rapidly evolving market.
• Change of Risk Profile: In a recent shift, MakerDAO’s Dai Savings Rate (DSR) experienced notable fluctuations, rapidly rising from 5% to 16%, then dropping to 13%, before settling at 10%, which challenged the community’s expectations for stable and predictable interest policies. Furthermore, their aggressive expansion of the D3M’s limit to 2.5 billion DAI, along with their collaboration with Morpho to establish the USDe pool, reflects a strategic pivot towards higher risk tolerance. These moves, aligning more closely with hedge fund tactics than with traditional central banking, reveal MakerDAO’s efforts to contend with external DeFi competitors but at the potential cost of foundational stability.

To combat these challenges while maintaining its decentralized nature, MakerDAO introduced the Endgame framework in Q3 2022, with its initial phase launching in Q1 2024. This framework is designed to enhance scalability, resilience, and user engagement within MakerDAO.

4.2 What’s on the roadmap

Key changes:

• Maker Core has no direct relationship with its business, even Dai lending is conducted through Spark (a subDAO)
• The Maker’s Endgame Plan introduces two types of SubDAOs: major SubDAOs, which include AllocatorDAOs and FacilitatorDAOs, and minor SubDAOs, known as MiniDAOs. Major SubDAOs feature a substantial token supply primarily distributed through Genesis farming and allocated for workforce bonuses, with ongoing emissions supporting farming initiatives. MiniDAOs also follow a Genesis farming model but differ in their specific distribution strategies among various farming channels.
• The Endgame Plan introduces key updates to MKR usage: it allows for the purchase of liquidity pool tokens to align Maker Core with SubDAOs, annual minting to support SubDAOs and staff incentives, and a new module where locked MKR enables governance participation and earns rewards, with a burn on withdrawal.

The whole proposal is quite lengthy with many technical details. But the key features and considerations of improvements can be summarized into these categories:

4.2.1 Business side

1.Incentivized Long-Term Participation

• MKR as Collateral: The use of MKR as collateral within the Sagittarius Engine is a significant shift. It is a component of Maker Endgame that enables MKR to be used as collateral, incentivizing long-term staking with rewards and penalties to enhance stability and governance within the Maker ecosystem.
• Rewards and Penalties: Different from past models, Sagittarius Engine introduces a 15% slashing penalty for un-staking, promoting stability and aligning holder interests with ecosystem sustainability.

2.Risk Management Mechanisms

• Hard Liquidation Ratio: Set at 200%, vaults are liquidated if they fall below this threshold.
• Soft Liquidation Ratio: A preventive 300% threshold, liquidating vaults if not restored within a week.
• Risk Controls: The hard and soft liquidation triggers in Maker Endgame aim to protect the interests of all stakeholders, such as MKR holders and DAI users, by ensuring the system remains well-collateralized and resilient to market volatility. However, introducing endogenous collaterals poses significant risks. Price volatility could trigger death spirals of selling pressure on MKR, further increasing its volatility as collateral.

4.2.2 Operation side

1. SubDAO

• Relationship with Maker: SubDAOs are autonomous organizations within the Maker ecosystem, each with their own governance tokens and focus areas. For example, the Spark subDAO specializes in lending and DeFi products, operating at scale with Maker’s infrastructure.
• Relationship with MakerCore: The relationship between MakerCore and SubDAOs has changed, with MakerCore stepping back from frontend maintenance to focus on overseeing DAI distribution through these SubDAOs. MakerDAO allocates credit lines to SubDAOs, enabling them to provide liquidity. MakerCore sets the risk parameters, including acceptable collateral types and over-collateralization requirements, ensuring DAI’s stability. In exchange for these services, MakerDAO earns deposit fees from the DAI managed by SubDAOs, creating a symbiotic system that enhances liquidity provision and generates revenue for MakerDAO.
• Value Distribution: Value is shared between SubDAOs and MakerDAO through a designated inflation mechanism, allocating a portion of new MKR to SubDAOs. These SubDAOs commit to reinvesting in MKR and DAI, bolstering market liquidity and the ecosystem’s currency value. This distribution depends on the volume of staked MKR/DAI liquidity pool tokens, harmonizing the incentives of Maker and its SubDAOs.

Distribution of New Stablecoin (NST)

Profit transfer and distribution

2.SubDAO categories

AllocatorDAOs:

• Capable of generating DAI directly from Maker.
• Discretion to allocate DAI across the DeFi ecosystem, pending Maker core approval.
• Serve as entry points for new participants in the Maker ecosystem.
• Have the potential to create miniDAOs for added autonomy and flexibility.

MiniDAOs:

• An experimental concept without a practical example to date.
• Intended to provide AllocatorDAOs with the option for more independent structures when needed.

FacilitatorDAOs:

• Responsible for organizing and managing the internal mechanisms of DAOs and the Maker core.
• Handle various aspects including community management, product development, and legal compliance.

The structure of different DAOs

List of SubDAOs

4.2.3 Risk Segregation:

MakerDAO’s Endgame Plan manages risk through a well-defined operational and governance structure that maintains the alignment within the Maker Ecosystem. This structure outlines the roles of MKR holders, Maker Core, and SubDAOs, focusing on the management of capital flows and asset allocation. MKR holders, particularly Aligned Delegates, are crucial in setting governance practices that ensure consistent and aligned decision-making across the ecosystem.

Maker Core implements these governance decisions by directing capital to Allocator Vaults within established risk parameters. This process helps mitigate financial risks by ensuring that capital management is not centralized but rather distributed through partnerships with Arrangers.

By introducing SubDAO governance tokens, MKR is in a safer position where it only needs to intervene in cases of significant turmoil that the SubDAO governance tokens alone cannot resolve (e.g., a huge depeg). And SubDAO becomes the firewall between the real business and Maker Core.

Source: Steakhouse

4.3 Different Phases:

This narrative is definitely unprecedentedly grand, and this transition will take place in 4 phases.

Beyond the Buzz: A New Era or Just Old Wine in a New Bottle?

• Tokenomics: The shift in MKR token economics warrants a closer examination. Plans to utilize MKR as collateral and allow governance to engage in leverage trading of ETH through zero-interest loans introduce elements of risk. Additionally, the proposed annual inflation rate of approximately 6% could have unforeseen consequences on the token’s value.
• Simplicity or Complicity: While the detailed granularity of the MakerDAO Endgame strategy showcases a well-thought-out plan for evolution, it presents a notable downside. The shift towards Maker Core, though visionary, seems to over-emphasize long-term goals over immediate practical actions, creating a gap between strategic plans and current implementations. Additionally, changes to the governance structure introduce another layer complexity that leaves stakeholders questioning whether this new approach simplifies or complicates the system in another way.
• The Business is NOT Fundamentally Changed After Rebranding: Despite shifts in operational structure, at its heart, MakerDAO continues to anchor itself in its familiar territory of the crypto borrowing and lending business, with a notable expansion into the Spark Protocol. Likewise, on the real-world asset (RWA) side, its activities persist unchanged. This raises questions about the strategy’s scope for innovation on its business, as the plan stops short of detailing future projects. It leaves a considerable portion of the roadmap to the imagination, suggesting a strategic focus on refining existing operations rather than exploring uncharted business avenues. At least at the current stage, its business still focuses on DeFi lending/borrowing and RWA. And because of this, we cannot tell whether this Endgame launch is just a rebranding, or it really brings more value.
• Risk or Safety: SubDAOs become the firewall between the Maker Core and the real business. But Maker takes riskier moves at the same time. Market perceptions of MakerDAO have shifted from viewing it as a stable central bank to one increasingly taking on risks to remain competitive. This perception change, reflecting a reassessment of DAI’s risks, has led to a repricing of MKR, aligning it with broader market trends. This shift underscores the delicate balance MakerDAO faces between innovation and maintaining foundational stability.

Conclusion

MakerDAO’s exceptional performance over the past year is a testament to its robust, all-weather business model, adept at navigating the volatile crypto markets. Its strategic shift between capitalizing on Real World Assets (RWA) during high-interest periods and focusing on the crypto market during upswings highlights a business acumen that outshines other blue-chip tokens. With an unparalleled ability to generate revenue — approximately $230M annually — MakerDAO stands at the pinnacle of financial efficiency within the DeFi sector.

The excitement surrounding MakerDAO’s valuation expansion, driven by positive market sentiment, underscores the potential of its Price-to-Earnings (P/E) growth. The proposal of the MakerDAO Endgame roadmap further propels this momentum, promising an even brighter future.

Yet, the ambitious vision of the Endgame is not without its challenges. Success hinges on striking a delicate balance between pioneering innovation and meticulous risk management, especially as MKR steps into the role of collateral. The intricacies of implementing such a grand plan demand exceptional communication to ensure stakeholder buy-in.

While the Endgame introduces a streamlined operational model, it doesn’t divert from MakerDAO’s core essence, though it might not need to given that its business model is one of the best admittedly. It aims to enhance and broaden the established business framework rather than exploring new ventures.

Looking ahead, MakerDAO’s ability to mitigate these concerns and showcase the Endgame’s real-world benefits will be crucial. Effective execution could further cement its leadership in the DeFi space, presenting a more formidable, user-centric platform ready to tackle the dynamic shifts of the crypto world.

The ultimate measure of the Endgame’s success will be its impact — can it fulfill its promises, enrich stakeholders, and uphold MakerDAO’s legacy as a beacon of resilience and ingenuity in decentralized finance? For now, at least, it seems that the introduction of the plan is beneficial, the division of roles is more clear, increasing the specialization of each area, while also isolating some risks. Perhaps this is just the end of the beginning, with intensified competition among large DeFi projects. Only time will tell, but the journey ahead is undeniably promising.

Disclaimer：

1. This article is reprinted from [IOSG Ventures]. Forward the Original Title‘IOSG Weekly Brief｜MKR的涅槃重生：新公链和RWA稳定币与Spark借贷独角兽 #223’. All copyrights belong to the original author [[IOSG Ventures]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
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