MakerDAO: Changes Are Coming (Cryptocurrency:MKR-USD)

It has been said by some within the crypto ecosystem that crypto’s “killer app” is actually stablecoins. Stablecoins are essentially fiat-denominated tokens that live on public blockchain network rails. The two largest stablecoins in the crypto market are Circle’s USD Coin (USDC-USD) and Tether (USDT-USD). There are many ways that stablecoins can be utilized within the crypto ecosystem. When interests rates were zero, market participants could utilize stablecoins for lending and yield generation. Elsewhere, stablecoins are used for payments.

As we saw in March when the banking sector was stressed, stablecoins were not immune from counterparty risk in the world of traditional finance. Several stables, including USDC, lost their dollar pegs as collateral backing those stablecoins was held with some of the regional banks that were impacted by depositor outflow problems. However, there are stablecoins in the market that aim to be decentralized and crypto-collateralized rather than fiat-backed. One such coin is DAI (DAI-USD). With a $4.7 billion market cap, DAI is the largest crypto-collateralized stablecoin by far. DAI is managed by the MakerDAO (MKR-USD) protocol.

In this article, we’ll dive into the token-economics of MKR, the key metrics concerning DAI, Maker’s proposed “Endgame,” and highlight some concerns.

MKR Tokenomics

Maker was launched in 2015 by Rune Christensen. The protocol is the engine that drives DAI. The MKR token plays an important role in the DAI ecosystem. MKR is both the governance token of the protocol and token holders take the fees that are paid by borrowers of DAI. MKR’s token supply is just over 1 million coins and those coins are all in circulation according to CoinMarketCap:

• Total Token Supply: 1,005,577
• Circulating Supply: 977,631 (97%)
• Token Price: $730
• Market capitalization: $714 million
• Circulating Market Cap Rank: 60

Unlike many other coins in the cryptocurrency market, MKR never had an ICO or public token offering. That said, the MakerDAO protocol has received roughly $55 million in venture capital funding through the years from entitles like a16z and Polychain Capital among others.

There is a very high level of token concentration with MKR and we’ll explore that more in the concerns section. Purely from a supply standpoint, Maker does have a token burn mechanism when a user creates a loan. This means MKR is theoretically a deflationary token that should ultimately move higher in price provided the protocol is generating fees. And therein lies the problem:

Over the last year, fees in the Maker protocol have declined by 74%. Though I will admit that fees in June will end at the highest level in the last 12 months. This fee spike is due in part to a recent change to the savings rate of DAI.

DAI Collateral & Key Metrics

As a concept, I really like DAI. However, in reality, DAI has struggled with truly being censorship resistant. Fiat-backed stablecoins are freezable by the contract owner. This theoretically isn’t a problem for stablecoins that are sufficiently decentralized, but DAI has historically been highly reliant on fiat-backed stablecoins like USDC:

As recently as mid-March, over 68% of MakerDAO collateral was held in stablecoins. That figure is now closer to 30%. Over the last several months, there has been a clear shift in prioritizing RWA, or real world assets, as collateral backing.

About $167 million of those assets are held through BlockTower and Huntingdon Valley Bank. However, the largest RWA bucket by far is over $1 billion held in US Treasuries (reflected by MIP65). As I alluded above, June has been a strong month for fees for the Maker protocol.

A big driver of that fee spike has been a recent proposal to raise the “DAI Savings Rate,” or DSR, from 1% to 3.49%. As a result of that proposal, funds in DSR have increased from $100.7 million at the start of June to over $173 million as of article submission on June 23rd. The payout funds from the DSR would come from the RWA revenue held as collateral.

Centralization Concerns

Maker has a whale problem. Despite being one of the largest and most important protocols in all of DeFi, there is very little interest in holding MKR from retail. Just 18 whale addresses hold 57.6% of the MKR in circulation and 88 investor addresses control 27.4%.

This is problematic because it means an entity that is supposed to be a “decentralized autonomous organization” is closer to a centralized entity that it would probably like. Maker is currently experiencing one of the problems that many DAOs experience: participation. Most DAOs in the crypto ecosystem don’t have active communities voting on every proposal. I touched on this briefly in a Uniswap (UNI-USD) article in mid-June. Only 17% of the MKR is staked in the governance contract. And this is actually down from roughly 22% in April. Basically, MKR holders aren’t voting and decisions are being determined by just a few people.

The Endgame Plan

In May, Rune Christensen proposed the “5 phases of Endgame” plan in the MakerDAO forum. It is a long, but interesting read that I will try to briefly summarize before providing my thoughts.

• Phase 1: Rebrand and new token launch.
• Phase 2: Launch of 6 “SubDAO” entities.
• Phase 3: AI governance tools
• Phase 4: Governance participation incentive.
• Phase 5: New chain launch.

Christensen from the post:

The new brand, the new websites and the names of the new tokens are being developed by the Accessibility governance process, and will be revealed before Phase 1: Beta Launch. The goal will be to simplify the brand towards the basic stablecoin product and highlight its unique value proposition: The ability to farm tokens of DAOs powered by AI Governance.

There is a lot to digest from all of this. I’m not even going to touch on the “AI” component but I’m not surprised we’re seeing it show up in crypto roadmaps and I’ll just leave it at that. It’s important to note that even after Phase 5 is theoretically finalized, DAI and MKR will continue to function as currently designed and can be used to redeem the new tokens from Phase 1. In listening to interviews with Christensen through various media outlets, he appears to be concerned with branding and centralization in my view. For me, the launch of “SubDAO” groups is a bit of a head-scratcher since the participation in the current DAO structure is already so low.

I think incentives for participation, or paying people to vote, is a dangerous avenue to go down and doesn’t necessarily prioritize good outcomes over simply creating outcomes. But I think the biggest problem from all of this is that Maker is so dependent on a small amount of people. I suspect shifting the attention of those people so dramatically to another coin, chain, and DAO structure will not be good for Maker long term.

Summary

Currently, the investment case for MKR is that holders can govern the platform and generate revenue from protocol fees. As I see it, those fees are becoming increasingly linked to yield from US Treasuries. One then would have to wonder why the user can’t simply buy the debt direct and keep all of the yield. From where I sit, MakerDAO is at a crossroads and I suspect Rune Christensen knows it.

The optics here aren’t great, in my opinion. We’ve seen cryptocurrency projects rebrand in the past. Polygon (MATIC-USD) and Elrond/MultiversX (EGLD-USD) are two examples. Despite their rebrands, they kept using the same tokens. In a lot of ways, the MakerDAO Endgame plan feels like a bit of a Hail Mary pass. DeFi worked wonderfully when the US 2-year was at the floor. Times are different now and I think that’s why we’re seeing MakerDAO proposing and implementing drastic changes. I don’t think it’s going to end well.

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