About Maker Protocol
"Maker" is a lending platform that issues the stablecoin $DAI, which is always valued at $1.00, backing its underlying value with collateral from borrowers. Increasingly, borrowers are backing their debt with real-world assets.
The platform is led by a Decentralized Autonomous Organization (DAO) which manages the platform through proposals, discussions, and votes using the DAO's native governance token, $MKR. The Maker Governance protocol is in charge of adding new collateral types, regulating smart contracts that enforce collateralized debt positions, and adjusting risk parameters of the protocol, such as the liquidation ratio, debt ceiling, and savings rate.
The issuance process for DAI stablecoin is quite simple: Users deposit Maker Governance-approved collateral into Maker Vaults, resulting in the creation of a new DAI. Each DAI in circulation is backed by more collateral value than the debt issued - the dollar value of the collateral must be greater than 150% of the value of the DAI issued (Collateralization Ratio). Once generated, DAI can be freely sent to others, used as payments for goods and services, or held as long-term savings. If at any point, the value of the collateral drops below the collateralization ratio, the debt position is subject to liquidation where anyone can come in and purchase the underlying collateral to repay the debt.
Upon repayment of the loan, the DAI in circulation is subsequently burned and borrowers receive their collateral minus any protocol Stability Fees. Stability Fees are calculated as an interest rate against the amount of DAI borrowed within each collateralized debt position and are collected by MakerDAO as protocol revenue.
Maker’s portfolio of collateralized Real-World Assets (RWA) includes various traditional asset managers and debt instruments ( e.g., investment-grade bonds, short-term Treasury bond ETFs, business loans, and more). These real-world assets currently held in Maker Vaults are rated at BBB or higher, meaning that they are “investment-grade” credit quality or better.
Despite its complex modular smart contract architecture with distinct contracts for each function, MakerDAO remains easy to understand and verify. There is currently a separate contract for each token approved as a collateral asset.
Protocol Revenue
On May 03, 2021, MKR reached an all-time high price of $6,065 per token and has since declined, failing to regain its peak. Near that same time, the protocol reached $190 million in annualized revenue, as depicted in Chart 2 at the first peak.
Maker's new real-world asset collateralization feature, which gained traction around July of 2022, has boosted revenue back to $188 million at the present moment. Not only this, but MakerDAO now generates 70-80% of its revenue from Stability Fees charged on real-world asset collateralized debt positions, and 50% comes from Treasury Bills alone. At its current trajectory, the revenue of MakerDAO is expected to at least double by 2025.
Maker’s “Smart Burn” Mechanism
The MakerDAO Smart Burn Engine (SBE) operates as a sophisticated, automated system designed to enhance the intrinsic value and market stability of the MKR token.
In the MakerDAO system, borrowers pay Stability Fees (interest) when they take out loans. This fee is also paid in DAI, the stablecoin of the platform. Over time, these fees accumulate, leading to a surplus of DAI within the MakerDAO system. Ideally, DAI should maintain its peg to $1.00. However, an excess supply of DAI can potentially push its price below this peg. If there's more DAI in circulation than demanded, its value could start to drift from the $1 mark.
The Smart Burn Engine comes into play to counteract this potential imbalance. It uses the surplus DAI to purchase and "burn" MKR tokens. "Burning" means permanently removing these tokens from circulation. By reducing the supply of MKR, the SBE indirectly stabilizes DAI. With a reduced supply of DAI in the market (since surplus DAI is used to buy MKR), the value of each remaining DAI is better supported, helping it stay close to its $1 peg.
This supply reduction is intended to create deflationary pressure on the MKR token, potentially increasing its value over time and enhancing the economic resilience of the MakerDAO ecosystem.
MakerDAO introduced its Smart Burn Engine on July 5, 2023, designed to "burn" MKR by leveraging protocol surplus. The mechanics activate when the protocol surplus exceeds $50M. Here’s how it works:
This translates to a notable addition of $32.4M DAI in liquidity to the Uniswap v2 DAI-MKR pool. This deepens the liquidity available while ensuring a steady buy pressure on MKR, contingent on the protocol’s surplus remaining above $50M. Based on this growth rate, Delphi Digital projects that the Smart Burn Engine will purchase an estimated $72.7M worth of MKR over the next year, as seen in Chart 3 below.
The annual burn rate of MakerDAO's Smart Burn Engine, given the expected buyback and burn of $72.7 million worth of MKR over the next year, would be approximately 4.27% of MakerDAO's current Circulating Market Cap. This means that 4.27% of the total MKR in circulation is expected to be bought back and burnt in 2024.
This will amplify Maker's Uniswap v2 MKR-DAI LP holdings by approximately $145M.
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These buy-backs have essentially decreased the outstanding MKR tokens in circulation over time.
Compare this to that of Ethereum and Bitcoin, whose supply is still increasing year-over-year, although at marginal rates. MakerDAO's supply will continue decreasing.
Revenue Per Share
The key point to notice is the difference between MakerDAO's revenue per share and the price of its MKR token. The revenue per share is nearing its past peak (around $200 per share), yet MKR's price is still relatively low. This suggests that either the market isn't fully valuing MakerDAO's revenue prospects, or there are other outside factors impacting MKR's price. It's also possible that the wider cryptocurrency market's mood is overshadowing MakerDAO's progress and its potential for future growth.
Revenue Per Share has reached new record levels, hitting $200 per share. Considering the current MKR price of $1,784.65, and assuming an annual dividend of $200 per share, MakerDAO's coin would have a dividend yield of around 11.21%. This yield is comparable to some of the highest dividend-paying stocks in the S&P 500.
Price to Earnings Ratio
Looking at the provided chart and the accompanying information, we can discern that MakerDAO's valuation in relation to its earnings is notably low at the moment. MakerDAO's P/E ratio is currently around 12, which is relatively low. If we compare this with historical data, it seems that MakerDAO could be considered as trading on a 'discount,' especially when we look at its past Price to Earnings (P/E) ratios.
MakerDAO's current market capitalization of $1.6 billion categorizes it as a 'small-cap' entity in the stock market's terminology which implies that MakerDAO, despite its significant presence in the crypto space, is comparatively small when placed alongside traditional equity investments. Comparatively, MakerDAO's P/E ratio suggests that it's priced more attractively than the Vanguard Small-Cap Index Fund ($VSMAX) but is on par with the broader valuation of small-cap value stocks represented by the iShares S&P Small-Cap 600 Value ETF ($IJS). This could indicate an investment opportunity for those who believe in the protocol's fundamentals and are looking for exposure to assets with growth potential that may not be fully appreciated by the broader market.
MakerDAO's Relative Price Performance YTD
The recent market trends have shown a growing recognition of real-world asset (RWA) tokenization, with MakerDAO standing out as a notable example. In 2023, MakerDAO's performance surpassed that of Bitcoin, suggesting that as the protocol continues to gain traction and expand, it may well continue this trend.
Digging into the details of MakerDAO's relationship with other cryptocurrencies since the start of 2021, we notice that it has a relatively low correlation with Bitcoin. To be more specific, it shows an even lower correlation with other major cryptocurrencies, such as:
avalanche: 0.469227binancecoin: 0.497101cardano: 0.526474bitcoin-cash: 0.556188bitcoin: 0.563218litecoin: 0.575433chainlink: 0.581685ethereum: 0.681190 The low correlation figures suggest that MKR moves independently of these cryptocurrencies to a significant degree. This independence is particularly valuable for investors seeking to diversify their portfolios. By investing in MKR, they could potentially reduce risk, as its price movements are not tightly linked to those of Bitcoin or the other listed cryptocurrencies.
From the standpoint of investment diversification, MKR presents a compelling option. Its lesser alignment with Bitcoin—and even more so with second-layer (L2) alternatives—implies that it could be an effective way to spread risk across a portfolio that includes traditional assets.
DISCLAIMER: The information provided in this article regarding MakerDAO and its revenue breakdown is for educational and informational purposes only. It should not be construed as financial, investment, or professional advice. Cryptocurrency investments are inherently risky and subject to market volatility. I strongly advise conducting your own research and/or consulting with a qualified financial advisor before making any financial decisions. The author and publisher of this article bear no responsibility for any losses or gains incurred as a result of the information presented herein.
