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

Some within the crypto ecosystem have said that the "killer app" of cryptocurrencies is actually stablecoins. Stablecoins are essentially fiat currency-denominated tokens that live on the rails of the public blockchain network. The two largest stablecoins on the cryptocurrency market are those of Circle. USD currency (USDC-USD) and Tie (USDT-USD). There are many ways that stablecoins can be used within the crypto ecosystem. When interest rates were zero, market participants could use 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 to counterparty risk in the world of traditional finance. Several stablecoins, including USDC, lost their pegs to the dollar as the collateral backing those stablecoins was held with some of the regional banks that were affected by depositor outflow issues. However, there are stablecoins on the market that aim to be decentralized and crypto-secured rather than fiat-backed. One of those currencies is DAI (USD-DAI). With a market capitalization of $4.7 billion, DAI is the largest crypto-collateralized stablecoin by far. DAI is managed by MakerDAO (USD-MKR) protocol.

In this article, we'll dive into the MKR token economy, key DAI-related metrics, Maker's proposed "Endgame," and highlight a few concerns.

MKR tokens

Maker was released 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 paid by DAI borrowers. The MKR token supply is just over 1 million coins and all of those coins are in circulation according to CoinMarketCap:

• Total token supply: 1,005,577
• Circulating Supply: 977,631 (97%)
• Token price: $730
• Market Cap: $714 million
• Current Market Cap Range: 60

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

There is a very high level of token concentration with MKR and we will explore this further in the concerns section. Purely from an offer point of view, Maker has a token burn mechanism when a user creates a loan. This means that, in theory, MKR is a deflationary token that should ultimately increase in price whenever the protocol generates fees. And therein lies the problem:

Over the past year, fees on the Maker protocol have been reduced by 74%. Although I admit that rates in June will end up at the highest level of the last 12 months. This fee increase is due in part to a recent change in the DAI savings rate.

Dai Collateral and Key Metrics

As a concept, I really like DAI. However, in reality, DAI has struggled to be truly resistant to censorship. The contract owner can freeze the Fiat-backed stablecoins. In theory, this is not a problem for stablecoins that are sufficiently decentralized, but DAI has historically relied heavily on fiat-backed stablecoins like USDC:

As recently as mid-March, over 68% of MakerDAO's collateral was held in stablecoins. That figure is now closer to 30%. In recent months, there has been a clear shift in the prioritization of RWA, or real world assets, as collateral.

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 in US Treasuries (reflected in MIP65). As I mentioned earlier, June has been a strong month for Maker protocol fees.

A big driver of that rate increase has been a recent proposal raise the "DAI Savings Rate", or DSR, from 1% to 3.49%. As a result of that proposal, funding in DSR increased from $100.7 million in early June to more than $173 million as of the June 23 article filing. DSR payment funds would come from RWA proceeds held as collateral.

Centralization concerns

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

This is problematic because it means that an entity that is supposed to be a "decentralized autonomous organization" is closer to a centralized entity than it would probably like. Maker is currently experiencing one of the issues many DAOs experience: participation. Most DAOs in the crypto ecosystem do not have active communities that vote on every proposal. I touched on this briefly on a Uniswap (UNI-USD) article in mid june. Only 17% of the MKR is invested in the government contract. And this is actually down from about 22% in April. Basically, MKR holders don't vote and decisions are determined by a few people.

the ultimate plan

In May, Rune Christensen proposed the "5 Phases of Endgame" plan on the MakerDAO forum. It's a long but interesting read that I'll try to summarize briefly before giving my opinion.

• Phase 1: rebranding and launch of a new token.
• Phase 2: Launch of 6 "SubDAO" entities.
• Phase 3: AI governance tools
• Phase 4: Incentive for the participation of Governance.
• Phase 5: Launch of a new chain.

Christensen's post:

The new branding, new websites, and new token names are being developed by the Accessibility governance process and will be revealed prior to Phase 1: Beta Launch. The goal will be to streamline the brand towards the stablecoin staple and highlight its unique value proposition: the ability to farm DAO tokens powered by AI Governance.

There's 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 appear on crypto roadmaps and I'll leave it at that. It is important to note that even after Phase 5 theoretically ends, DAI and MKR will continue to work as currently designed and can be used to redeem the new Phase 1 tokens. Listening to interviews with Christensen through various media communication, seems to care about branding and centralization in my opinion. For me, the release of "SubDAO" groups is a bit perplexing since participation in the current DAO structure is already very low.

I think that incentives for participation, or paying people to vote, is a dangerous path and doesn't necessarily prioritize good results over simply creating results. But I think the biggest problem with all of this is that Maker is very dependent on a small number of people. I suspect that shifting those people's attention so dramatically to another coin, chain, and DAO structure will not be good for Maker in the long run.

Summary

Currently, the investment case for MKR is that holders can govern the platform and generate revenue from protocol fees. The way I see it, those fees are increasingly tied to the yield on US Treasuries. So one would have to wonder why the user can't just buy the debt outright and keep all the yield. From my point of view, MakerDAO is at a crossroads and I suspect Rune Christensen knows it.

The optics here are not very good, in my opinion. We have seen renowned cryptocurrency projects in the past. Polygon (MATIC-USD) and Elrond/MultiversX (USD-EGLD) are two examples. Despite their rebranding, they kept using the same tokens. In many ways, the MakerDAO Endgame plan feels like a Hail Mary pass. DeFi worked wonderfully when the US 2 years were in the ground. Times are different now and I think that is why we see MakerDAO proposing and implementing drastic changes. I don't think it's going to end well.

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