RWA narrative sweeps away all the haze? MakerDao under the shadow of long-term and near-term worries

This issue of Clips focuses on the recently popular RWA leader and DeFi blue-chip project MakerDao. The author tries to analyze the internal and external reasons for the rise of MKR, and evaluates its advantages, challenges and long-term hidden dangers from the perspective of Maker’s business.

*The content of the following article is the author’s staged opinion as of the time of publication. There may be errors and prejudices in facts and opinions. It is only for discussion and we look forward to corrections from other investment and research peers. *

1. MKR price rejuvenation: the result of the resonance of many factors

Recently, the secondary market prices of the older generation of DeFi have rebounded significantly, among which Compound and MakerDao have seen the most significant increases. Among them, although the surge of Compound has the background of founder Robert Leshner’s second start-up on the RWA track, this incident has limited impact on the fundamentals of Compound. The rise of Comp is more of a “dry pull”, and the analysis value is not great .

The rise of MKR is driven by comprehensive internal and external factors, the logic of fundamental business reversal, and the gradual fermentation of the long-term vision of the Endgame plan.

Specifically, the boosters for MKR’s recent rise include:

1. The monthly expenditure of the agreement has decreased, and the monthly expenditure has dropped from 5 to 6 million US dollars before, and dropped to about 2 million US dollars in June.

Maker’s token transfer payment statistics, image source:

2. Changing the collateral from non-interest-bearing stable currency to treasury bonds or stable currency wealth management has significantly increased financial income expectations, which is reflected in the decline in PE. According to makerburn’s statistics, MakerDao’s predicted annualized revenue from RWA alone is as high as nearly 71 million US dollars.

Maker’s RWA asset list, image source:

3. The founder, Rune, dumped LDO and other tokens in the secondary market and continued to repurchase MKR for many months, giving the market confidence.

4. Through governance, the project surplus pool (surplus) fund repurchase threshold has been reduced from 250 million US dollars to 50 million US dollars. Currently, the available funds in the surplus pool are 70.25 million US dollars, and there are about 20 million repurchase funds. However, according to Maker’s current repurchase mechanism, it has changed from repurchase and destruction to “repurchase market making”, so the actual repurchase amount of MKR is 2000/2, and the remaining 10 million Dai will be used to provide liquidity with MKR on Uniswap v2 It exists as treasury assets in the form of LP.

Maker’s system surplus data, image source:

In addition, since Rune Christensen, the founder of Maker, proposed Endgame’s Maker transformation plan last year, his narrative grand vision has also made many investors believe and pay after the performance of MKR and the recovery of currency prices.

The ultimate goal of MakerDao’s Endgame is to realize its vision of “the world’s fair and stable currency” by optimizing the governance structure and subsidizing sub-projects.

In addition, the recent narrative of RWA seems to be quite popular in the market. Although there are not many projects that have launched tokens around this business, the discussion has become more heated and has been favored by many investment institutions.

To sum up, this wave of MKR’s rise is the result of a combination of internal and external factors, of which internal factors are the main ones. As for the promotion of the RWA narrative level, the author prefers MakerDao’s practice of RWA business and good results in stages to promote the encryption market. RWA narrative development, not the other way around, where cause and effect are reversed.

2. The essence of MakerDao business

So, how should we view the long-term impact of the above factors on MakerDao? Can these positive factors push Maker to a higher level and realize its grand vision of creating a “world fair and stable currency”?

The author finds it difficult, starting from the nature of MakerDao’s business.

**MakerDao’s core business has never changed, and is essentially consistent with USDT, USDC, BUSD and other projects, that is, by promoting its own stable currency, it can obtain “seigniorage income” from the issuance and operation of stable currency. **

The so-called seigniorage can be broadly understood as the income obtained by the currency issuer through issuing coins. Different stablecoin projects obtain seigniorage income in different ways. For example, Liquity, another decentralized stablecoin project, users will be charged 0.5% when minting its stablecoin Lusd. For Tether users, there is a fee of 0.1% or 1000$ when depositing and withdrawing USD.

In addition, Tether will also actively allocate the U.S. dollars deposited by users with it to purchase more liquid treasury bonds, reverse repurchase or monetary funds, and earn financial income on the asset side.

One of Dai’s previous main sources of income was the loan interest (stability fee) that users need to pay during the period when users obtain Dai through collateral. Later, a method similar to Tether was adopted to exchange stablecoin collateral such as USDC of its PSM module for It has become an income-generating asset, such as treasury bonds, or USDC current wealth management deposited in Coinbase.

However, the core of the stablecoin business lies in the expansion of the demand side of the stablecoin. Only by maintaining a relatively high issuance scale of the stablecoin can we obtain sufficient mortgage assets and use the assets that can be deployed to obtain financial income.

In addition, the main difference between Dai and USDT and USDC lies in its decentralized positioning. “Dai is more resistant to censorship and less regulatory exposure than USDT and USDC” is the most important differentiating value of Dai, and will A large number of Dai’s collaterals are replaced by RWA assets that can be seized by centralized forces, which essentially eliminates the differences between Dai, USDC and USDT.

Of course, Dai is still the largest decentralized stablecoin, with a market value of 4.3 billion, which is still far ahead of Frax (nominal market value of 1 billion) and LUSD (market value of 290 million).

3. The source of Dai’s competitive advantage

In addition to the active attempt to move closer to RWA on the asset side, the overall operation of Maker in Dai has been lacklustre in recent years. It can still firmly hold the competitive advantage of being the first transaction of decentralized stablecoins because of two points:

1. The legitimacy and brand of “the first decentralized stablecoin”: This allows Dai to be integrated and adopted by many leading DeFi and Cex earlier, greatly reducing its liquidity and business public relations costs. Taking Curve as an example, Dai, as one of Curve’s oldest stablecoin liquidity base pool (basepool) 3pool currencies, is defaulted as the base stablecoin by Curve, which means that Maker, as the issuer of Dai, does not need to provide Dai on Curve Not only that, but Dai also enjoys indirect subsidies provided by other liquidity bribers (when these projects purchase their own tokens and 3pool’s paired liquidity).

Curve’s 3pool stable currency pool, source:

2. The network effect of stable coins: people always tend to use the stable coins with the largest network scale, the largest number of users and scenarios, and the most familiar stable coins. In the segmented category of decentralized stable coins, Dai’s network scale is still ahead of Chaser.

However, Dai’s main opponents are not Frax and Lusd (they are also in a difficult situation). When users and project parties choose stablecoins to use and cooperate with, they often compare USDT\USDC with Dai. Compared to them, Dai is at a significant network disadvantage.

4. The real challenge of MakerDao

Although MakerDao has a lot of short-term positive factors, the author is still pessimistic about its future development. After discussing that the essence of Maker’s business is the issuance and operation of stablecoins, and Dai’s current competitive advantages, let’s face up to the real problems they face.

Problem 1: The scale of Dai continues to shrink, and the expansion of application scenarios has been stagnant for a long time

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The current market value of Dai has fallen by nearly 56% from the previous high, and there is still no trend of stopping the decline. Even in the bear market of USDT, its market value has reached a new high.

Data Sources:

The last wave of Dai’s growth came from the mining wave of DeFi summer, but where can the driving force for its next cycle of growth come from? Powerful scenes that seem to be hard to find as far as the eye can see.

Maker is not without thinking and planning on how to expand the use cases of Dai to be more widely accepted. According to Endgame’s design, the first means is to introduce renewable energy projects (Renewable energy projects) for Dai’s underlying assets, making Dai a “clean money”. **In Endgame’s deduction, this will allow Dai to have a brand element that is accepted by the mainstream, and it will also allow real-world administrative forces to have higher “political costs” when trying to seize and confiscate Dai’s clean energy projects. In my opinion, increasing the “green” content of collateral can increase the acceptance of Dai, which is obviously an overly naive idea. People may support environmental protection in thought or slogan, but when it comes to actual actions, they will still choose USDT or USDC, which are more widely accepted. It is so difficult to promote decentralized stablecoins in the highly decentralized web3 world, how can we expect residents in the real world to use Dai because of “environmental protection”?

The second means, which is also the focus of Endgame, is incubated by Maker, and the community develops a sub-project (subDAO) around Dai. On the one hand, subDAO undertakes the parallel and diverted governance and coordination work that is currently concentrated on the mainline of MakerDao, turning centralized governance into sub-section and sub-project governance; on the other hand, subDAO can set up separate commercial projects to explore new sources of income , and these projects provide Dai with new demand scenarios. However, this is also an important challenge for the second Maker.

Question 2: How can the subDAO project succeed in starting a business while transfusing MKR and Dai?

Many subDAOs that Maker will incubate in the future will use the subDAO’s own new tokens to stimulate Dai’s liquidity mining to improve the use of Dai. At the same time, MakerDao will also provide Dai loans for subDAO commercial projects at low or zero interest rates to help the projects complete early start. In addition to low-interest capital support, subDAO also inherits MakerDao’s brand credit and community. The endorsement of this credit and the introduction of seed users are very important for the start-up period of DeFi. Compared with hoping to introduce environmental protection projects to increase the adoption of Dai, the subDAO solution sounds more executable, and there are already precedents in the DeFi field. For example, Frax has developed its own Fraxlend, which supports lending Frax with various collaterals and provides usage scenarios for Frax.

Fraxlend asset loan list, image source:

However, the problem is that it is not easy to develop a subDAO project that meets market demand under the background that the “low-hanging fruits” in the DeFi field have been picked off by entrepreneurs. More importantly, these subDAOs also need to shoulder the responsibility of delivering value to Dai and MKR while developing the project, because they have to allocate additional project tokens to Dai, ETHD (the repackaged version of the LST token planned in Endgame, used as Dai’s collateral) and MKR as incentives. Under the premise of such a “tribute task”, it is difficult to imagine the difficulty of completing the task of meeting the needs of users and defeating competitors’ products. Among them, Spark, the loan product incubated and launched by MakerDao, deducts the 20 million Dai provided by MakerDao’s direct casting, and Spark’s current actual TVL is only more than 20 million.

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5. Other hidden concerns of MakerDao

In addition to the two challenges mentioned above, MakerDao also faces other hidden worries.

First of all, there are not many stablecoins left in MakerDao’s account that can be used to continue to purchase RWA, and it is difficult to continue** increase positionsU.S. debt. **

According to Makerburn’s statistics, the stable currency held in its PSM currently has about 912 million US dollars (USDC+GUSD). Among them, GUSD of 500 million US dollars is already enjoying Gemini’s annualized 2% income subsidy. Although it is much lower than the interest rate of other RWAs, due to complicated factors (such as GUSD held by Makerdao PSM accounts for 89% of the total circulation), %, if forcibly liquidated and sold into US dollars, there will be a large price loss), and this part of the funds will not change much in the short term.

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Therefore, the flexible cash that Maker can use to continue buying yield assets is only 412 million USDC in PSM. The worst thing is to exchange the 500 million USDC in Coinbase with an annualized rate of 2.6% for US bonds, so Maker can increase its position when it is full. The funds in U.S. bonds are only about 900 million. In fact, in order to deal with the redemption of PSM, the amount of funds that Maker can use to buy U.S. bonds will not be too much. Otherwise, once users redeem USDC with a large amount of Dai, Maker will need to sell U.S. debt assets are accepted, and the transaction wear and bond price fluctuations faced here will cause losses to Maker. And if the market value of Dai further declines, Maker’s investable assets will also be forced to decline further.

**Secondly, the author is skeptical about whether Makerdao’s cost control can continue to be maintained. **As far as Endgame’s current plan is concerned, although it tries to disperse the governance process and power of DAO from the “Maker Center” to each subDAO, it has set up complicated roles, organizations and arbitration departments in the subDAO governance units. The collaboration link is the most complex of all the projects I have ever known, and it is a veritable “governance maze”. Interested readers can visit the full version of Endgame V3 for a brain-burning reading experience. In addition, the introduction of RWA business has resulted in the convergence of DeFi and offline traditional financial entities and the creation of a large number of high-paying outsourcing jobs, superimposing the current very serious problem of centralization of governance rights (the Endgame plan vote passed in October 2022, of which 70% The yes vote came from a voting group related to Maker founder Rune), and the issue of MakerDao’s interest transmission is already the elephant in the room. For example, Maker’s largest RWA investment management vault is currently in the charge of a small institution called Monetalis Clydesdale, but it manages $1.25 billion in Maker funds, is responsible for allocating funds into national debt assets, and contacting other traditional financial institutions. Nearly 1.9 million USD/year service fee, Maker was its only customer at the time, and Rune Christensen, the founder of Maker, was the main shareholder of the company.

Rune is the main investor of monetalis, image source:

A similar example is that Maker pays a service fee of nearly 5 million U.S. dollars per year (Dai+MKR) for its risk management service provider Block Analitica. What is even more paradoxical is that Block Analitica is not only a provider of risk management services, but also a risk management service provider. As an evaluator of management services, the dual identities of athletes and referees make Maker’s risk control service a lucrative monopoly business. The remaining problem is probably only what to do between Block Analitica and the interest groups that monopolize the governance of MKR Share in the lucrative benefits from the Maker treasury. Similar incidents, combined with Endgame’s grand plan that made a16z shake his head, the devious loss of treasury funds may be further intensified in the future, but with the decentralization and decentralization of organizations, interest groups may empty the treasury and divide accounts. Stealth and detour.

Source: coindesk

In addition, Dai’s stable fee rate has recently been raised from 1%+ to over 3%, which further reduces users’ demand for lending through MakerDao, which is not conducive to the maintenance of Dai’s scale.

**Finally, from Endgame to large purchases of treasury bonds and RWA, to the founder’s high-profile repurchase in the secondary market, and the initiation of a vote to significantly lower the threshold for withdrawing repurchase funds from the treasury, all The series of combined punches has made the market value of MKR have a short-term improvement, but it also left many hidden dangers:

1. The treasury surplus reserves are insufficient, and the ability to deal with bad debt risks has declined.

2. The exposure to RWA has been radically increased, which has greatly increased the risk of assets being seized by centralized institutions, and Dai’s vulnerability has been further amplified.

3. The huge and complicated Endgame plan, which is constantly being revised, has severely divided the community. In the Endgame stage-one roadmap released by Rune Christensen in May, “AI governance” and the release of “new brand” stablecoins and governance tokens ( Retaining the original Dai and MKR) and MakerDao’s own chain and other “wonderful ideas”.

6. Endgame is not the endgame

In the comment area of the Endgame roadmap released by Rune Christensen in May (related reading: “Detailed Explanation of the New Roadmap of MakerDAO’s Endgame Plan Endgame, AI-assisted Governance and New Chain Deployment”), in the comment area of the forum Xiongwen, in addition to the common praise and other governance In addition to the perplexing questions, the comments of 2 users are particularly eye-catching:

• "Precious money and energy that [we] once had is wasted funding useless people and crap instead of creating value for MKR and scaling Dai. All that money and research should go to making Understand how to make Dai and MKR run autonomously! Get rid of bloated personnel and complicated governance, this is the right way.”*

• “Why do we think a global pre-planned ‘end game plan’ would be better than solving current problems and incremental improvements? This plan is all about ‘what we do’ except for the blockchain part. It’s very specific and very little about ‘why you’re doing it’.”*

For the Web3 project based on the blockchain, it should take advantage of the efficiency brought about by transparency and low trust costs, instead of building a new high wall and fumigated a new thick fog, behind the wall and in the fog for rent-seeking.

Endgame is not the end that DeFi should be, it is just the wall and fog of MakerDao.

7. References and Acknowledgments

During the writing process of the article, the author discussed the topic of Maker with @ryanciz233, a researcher of @DigiFTTech, and thanked him for providing a lot of important information. @ryanciz233’s research on Maker’s RWA part will also be published in the near future.

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