Article source: IOSG Ventures

Special thanks to Mindao (@mindaoyang) for his suggestions for revision. Special thanks to Mindao and Momir for their suggestions for revision of this article.

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TL,DR:

  • In the past year, MakerDAO has achieved the best performance compared to BTC, ETH and other DeFi protocols. While the price of MKR among general DeFi participants has increased by 200%, the price of MKR has increased by about 500%.

  • MakerDAO's success stems from its solid fundamentals and diversified business model, and it has performed well in both the RWA and cryptocurrency markets. In the current uncertain situation of traditional financial macro conditions and the DeFi track, we believe that MKR's business layout in both areas can enable it to resist risks and obtain considerable returns.

  • Positive market sentiment and the Endgame roadmap bode well for future growth. The release of MakerDAO Endgame: Launch Season has further boosted market sentiment.

  • The challenges facing Endgame include striking a balance between innovation and risk, and ensuring stakeholders understand its purpose. It brings a new token economic model, governance framework, and a clear development roadmap to improve its growth, risk resistance, and public acceptance.

  • We believe that despite simplifying operations, its core business focus remains basically unchanged today. 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 and professionalism of each business. Operational efficiency.

  • We believe that the effective execution of Endgame is crucial to MakerDAO’s continued leadership in the future DeFi landscape. The impact of the roadmap and MakerDAO’s commitment to innovation will determine the direction of its future success.

background

Few cryptocurrencies have held up well during the last bear market, and Maker (MKR) was undoubtedly one of them. While other blue-chip assets fluctuated, Maker not only held its value, but also achieved astonishing growth, doubling from March to October 2023. This remarkable resilience proves that it can not only survive adversity, but thrive under difficult conditions.

But Maker’s allure isn’t limited to bear markets. As the cryptocurrency market turned bullish in early 2024, Maker’s price rose from $1,400 to $2,000. The momentum didn’t stop there; after the announcement of the much-anticipated Endgame plan on March 13, the price surged to $3,000. Such a surge means that holding MKR could have brought up to 5x returns over the past year!

So what is the secret to MakerDAO’s strong performance in both bear and bull markets? Is it its solid fundamentals, or is it success driven by a shifting narrative? Most intriguingly, what exactly is the MakerDAO Endgame, and what should we expect in the future? This article aims to answer these questions and uncover the dynamics that make MakerDAO stand out in the ever-changing cryptocurrency market.


MakerDAO: A highly adaptable DeFi pioneer, a bridge between crypto and real-world assets

In the rapidly evolving DeFi space, MakerDAO has successfully distinguished itself by deftly addressing two key trends: integrating real-world assets (RWA) and staking Ethereum (stETH). This strategy not only strengthens its position in the decentralized finance space, but also demonstrates its resilience and adaptability. Staked Ethereum (stETH) integration

In the crypto space, MakerDAO has locked up around 600k wrapped staked ETH (wstETH) through its core protocol and subsidiary Spark. This important integration makes MakerDAO the third largest entity in terms of total value locked (TVL) at $11.67 billion ($8.67 billion locked in Maker and $3 billion locked in Spark), behind only Lido’s $34 billion and Eigenlayer’s $11.801 billion. Unlike Lido and Eigenlayer, which focus on staking and re-staking services, MakerDAO’s DeFi business model goes beyond simple asset staking.

By locking up stETH, MakerDAO effectively uses these assets as collateral to mint its native stablecoin DAI. This process enables MakerDAO to earn revenue through stability fees (interest rates) charged on loans issued with stETH as collateral. As Ethereum earnings fluctuate, MakerDAO adjusts its risk parameters and interest rates to ensure that the system remains stable while generating revenue. This approach transforms Ethereum's volatility and earnings into a stable revenue stream, solidifying its position as a leader in the industry.

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.

RWAs, which include physical assets such as real estate and bonds, have become an important part of MakerDAO's revenue, contributing approximately 60% of its fee income. The inclusion of U.S. Treasuries has proven to be a successful strategy, enhancing MakerDAO's revenue stability, resulting in annual revenue of more than $100 million.

According to a report from Steakhouse (https://www.steakhouse.financial/projects/makerdao-financial-report-2023), in 2023, about 56% of revenue, totaling 76.3 million Dai, came from real world assets (RWA). Further analysis shows that 83% of real world asset revenue is concentrated in the second half of the year, coinciding with the period of continued growth in the 10-year federal interest rate.

Source: Steakhouse

MKR: An all-weather crypto asset

MKR has performed well in different market environments due to its strategic configuration on RWA and crypto market lending. In a high interest rate environment, MKR has shown strong resilience and benefited from its RWA investment, unlike other cryptocurrencies that may suffer under such macroeconomic pressures. When interest rates fall, market liquidity increases and the crypto market enters a bull market, MakerDAO's strategy is expected to shift to its strengths in crypto-native operations, especially crypto lending.

As a result, MakerDAO deftly rides market cycles, focusing on lending cryptocurrencies in bull markets and optimizing RWA returns in bear markets, securing its position as a strong all-weather crypto asset.

The chart below reconfirms Maker's asset allocation strategy. When the Fed rate peaks at about 5% in October 2023, Maker will allocate the largest portion of its assets to RWA-related assets, gaining returns from Treasury bonds and other credit-related products.

As interest rates begin to fall due to the Federal Reserve’s increased confidence in controlling inflation, Maker has strategically turned to crypto-related fields.

The current macro situation is not as clear as we might think: expectations for a Fed rate cut continue to be postponed or even suppressed, as the inflation figures announced by the US Bureau of Labor Statistics fell short of analysts' expectations (CPI for March 2024 was 0.4%, expected to be 0.3%). Jamie Dimon, CEO of JPMorgan Chase, even mentioned the risk of interest rates rising above 8%. The high interest rate environment provides more profit opportunities for RWA projects. It is very likely that Maker will profit from RWA again.

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

 

Valuation expansion: Market recovery and narrative evolution after Endgame release

The previous sections highlighted MKR’s solid business model and impressive profitability, laying the foundation for understanding its valuation. However, the surge in MKR’s price cannot be attributed solely to its financial performance, as earnings estimates were raised from $500 million in April 2023 to $1.5 billion in March 2024, yet the price increased by as much as 5 times.

A closer look at the data from Makerburn reveals another important part of the story: valuation expansion. From June to August 2023, MKR's price-to-earnings (P/E) ratio hovered between 10 and 15. By September 2023, the number began to climb, reaching around 20 by February 2024, and then jumped sharply to over 30 by the end of March 2024.

So what's driving this eye-catching valuation expansion?

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

Recovery of market environment

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 extraordinary journey of valuation expansion is not simply a product of market dynamics, particularly its surge to an estimated 30 P/E ratio by March 2024. The full launch of MKR Endgame in early March 2024 marks a pivotal moment, driving its valuation to new highs and differentiating its growth trajectory from broader market trends.

This prompts us to dig deeper: What exactly is Endgame, and why does it inspire such high expectations and support a significant increase in MKR's valuation multiple?

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: The Final Plan for Operational Efficiency, Clarity, and Risk Isolation

4.1 Background: Challenges Facing MakerDAO

  • Inefficient operations: Despite the widespread adoption of DAOs in crypto projects, operational efficiency remains a problem. MakerDAO has also encountered major challenges, including rejected proposals for centralized operations aimed at improving efficiency, and these communication barriers have also obscured members’ understanding of voting and activities.

  • Intensified competition: Competition within the decentralized finance (DeFi) ecosystem is growing, highlighted by MakerDAO’s public clash with Aave. In response to Aave’s launch of its stablecoin GHO, MakerDAO responded by supporting the development of Spark and partnering with Morpho to build a new lending pool. These moves highlight the fiercely competitive landscape in DeFi and raise questions about the robustness of MakerDAO’s competitive barriers in a rapidly changing market.

  • Changes in risk control: Recently, MakerDAO’s Dai Savings Rate (DSR) has experienced significant fluctuations, rapidly rising from 5% to 16%, then correcting to 13%, and finally adjusting to 10% at the end of April, which challenges the community’s understanding of the Expectations of stable and predictable interest policy. Additionally, they significantly expanded D3M’s limit to 2.5 billion DAI and partnered with Morpho to establish a USDe pool, reflecting a strategic shift toward higher risk tolerance. These moves, which are closer to a hedge fund strategy than a traditional central bank, demonstrate MakerDAO’s efforts to deal with external DeFi competitors while potentially sacrificing fundamental stability.

To address these challenges while maintaining its decentralized nature, MakerDAO introduced the Endgame framework in Q3 2022, with its initial phase launched in Q1 2024. The framework aims to improve MakerDAO’s scalability, risk tolerance, and user engagement.

4.2 Contents of the roadmap

Key changes:

  • Maker Core will have no direct relationship with its business, and even Dai loans are made through Spark (a SubDAO).

  • Maker's Endgame introduces two types of SubDAOs: major SubDAOs, including AllocatorDAO and FacilitatorDAO, and minor SubDAOs called MiniDAOs. Major SubDAOs have a large token supply, which is mainly distributed through Genesis farming and used for employee bonuses, and ongoing distributions based on later proposals. MiniDAOs also follow the Genesis farming model, but the specific distribution strategies in various farming channels are different.

  • Endgame makes key updates to MKR usage: it allows the purchase of liquidity pool tokens to align Maker Core more closely with the interests of the SubDAO, new minting every year to support the SubDAO and employee incentives, and a new module in which locked MKR enables governance participation and rewards, with some of it being burned when withdrawn.

The entire proposal is quite long and contains many technical details. However, the key features and considerations for the improvements can be summarized into the following categories:

4.2.1 Business side

1. Incentivize long-term participation

  • MKR as collateral: Using MKR as collateral in the Sagittarius engine is a major change. It is an integral part of the Maker Endgame, enabling MKR to be used as collateral, incentivizing long-term staking for rewards and penalties to enhance stability and governance within the Maker ecosystem.

  • Rewards and Penalties: Unlike past models, the Sagittarius Block Engine introduces a 15% slashing penalty for unstaking, promoting stability and aligning holders’ interests with the sustainability of the ecosystem.

2. Risk management mechanism

  • Hard Liquidation Ratio: Set to 200%, if it falls below this threshold, the vault will be liquidated.

  • Soft Liquidation Ratio: Precautionary 300% threshold, if not recovered within a week, the vault is liquidated.

  • Risk Control: The hard and soft liquidation trigger mechanisms in Maker Endgame are designed to protect the interests of all stakeholders, such as MKR holders and DAI users, by ensuring that the system remains well-collateralized and resilient to market fluctuations. However, the introduction of endogenous collateral carries significant risks. Price fluctuations could trigger a death spiral of MKR selling pressure, further increasing its volatility as collateral.

4.2.2 Operations

1. SubDAO

  • Relationship with Maker: SubDAOs are autonomous organizations within the Maker ecosystem, each with its own governance token and area of ​​focus. For example, Spark SubDAO focuses on lending and DeFi products, operating at scale alongside Maker’s infrastructure.

  • Relationship with MakerCore: The relationship between MakerCore and SubDAOs has changed, with MakerCore stepping down from front-end maintenance to focus on distributing DAI through these SubDAOs. MakerDAO allocates credit lines to SubDAOs, enabling them to have sufficient liquidity. MakerCore sets risk parameters, including acceptable collateral types and over-collateralization requirements, to ensure the stability of DAI. In exchange for these services, MakerDAO earns deposit fees from the DAI managed by SubDAOs, creating a symbiotic system with both strong liquidity and income.

  • 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 reinvest in MKR and DAI, enhancing market liquidity and the monetary value of the ecosystem. This distribution depends on the amount of staked MKR/DAI liquidity pool tokens, aligning the incentives of Maker and its SubDAOs.

Distribution of New Stablecoin (NST)

Profit transfer and distribution

2. SubDAO Category

AllocatorDAOs:

  • Ability to generate DAI directly from Maker.

  • After approval by the Maker core, it has the right to distribute DAI in the DeFi ecosystem.

  • Providing an entry point for new participants to enter the Maker ecosystem.

  • Ability to create miniDAOs for increased autonomy and flexibility.

MiniDAOs:

  • An experimental concept with no real examples to date.

  • Intended to provide the option of a more independent structure for the AllocatorDAO if needed.

FacilitatorDAOs:

  • Responsible for organizing and managing different DAOs and the internal mechanisms of the Maker core.

  • Handling all aspects including community management, product development and legal compliance.

The structure of different DAOsList of SubDAOs

4.2.3 Risk Isolation:

MakerDAO's Endgame manages risk through a clearly defined operational and governance structure that maintains consistency 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, especially Aligned Delegates, are critical in setting governance practices that ensure uniformity and consistency in 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 risk by ensuring that capital management is not overly concentrated and that capital is decentralized through collaboration with Arrangers.

By introducing the SubDAO governance token, MKR is in a safer position where it only needs to intervene in the event of major disruptions that the SubDAO governance token itself cannot resolve (e.g., a huge decoupling). SubDAO becomes a firewall between the actual business and Maker Core.

Source: Steakhouse

4.3 Different stages:

Such a narrative is undoubtedly unprecedentedly grand, and this process will be divided into four stages.

To be brief: Is this the beginning of a new era, or just old wine in new bottles?

  • Token Economics: The shift in MKR’s token economics warrants closer scrutiny. Plans to use MKR as collateral and allow governance participation to trade ETH via zero-interest loans introduce an element of risk. Additionally, the proposed annual inflation rate of approximately 6% could have unforeseen consequences on the token’s value.

  • Simpler or More Complex: While the detailed plan for MakerDAO’s ultimate strategy demonstrates a well-thought-out evolutionary plan, it also presents a significant shortcoming. While the move to Maker Core was visionary, there seemed to be an overemphasis on long-term goals at the expense of immediate practical actions, resulting in a gap between strategic plans and current implementation. Furthermore, changes in governance structures introduce another layer of complexity, leading participants to question whether this new approach simplifies the system or makes it more complex in another way.

  • The essence of the business remains unchanged after the rebranding: Despite the changes in the operating structure, MakerDAO essentially still sticks to its familiar crypto lending business area, especially the expansion into the Spark protocol. Similarly, in terms of RWA, its business has not changed in the short term. This raises doubts about business innovation, as the plan does not detail future projects. It leaves a large part of the roadmap to people's imagination, indicating that the strategic focus is on perfecting existing operations rather than exploring unknown business avenues. At least at this stage, its business is still focused on DeFi lending/borrowing and RWA. Therefore, we cannot judge whether the launch of this ultimate plan is just a rebranding or whether it really brings more value.

  • Riskier or Safer: SubDAOs act as a firewall between Maker Core and the actual business. But at the same time, Maker has taken riskier steps. The market’s view of MakerDAO has shifted from viewing it as a stable central bank to an entity that increasingly takes on risk in order to remain competitive. This shift in perception, reflecting a reassessment of DAI’s risk, has led to a repricing of MKR to align it with broader market trends. This shift highlights the delicate balance MakerDAO faces between innovation and maintaining underlying stability.

in conclusion

MakerDAO's outstanding performance over the past year is a testament to its robust all-weather business model, which excels in navigating volatile crypto markets. Its strategic shift to utilizing RWAs during periods of high interest rates, as well as its focus on crypto markets during market upturns, highlights its business acumen that surpasses other blue-chip tokens. With unparalleled revenue generation capabilities - generating approximately $230 million in revenue per year - MakerDAO is at the pinnacle of financial efficiency in the DeFi space.

The expansion of MakerDAO’s valuation, driven by positive market sentiment, highlights the potential for its price-to-earnings (P/E) ratio to grow. The proposed MakerDAO Endgame roadmap further fuels this momentum, heralding a brighter future.

However, Endgame’s vision is not without its challenges. The key to success lies in finding a delicate balance between innovation and rigorous risk management, especially when MKR steps into the role of collateral. The complexity of implementing such an ambitious plan requires excellent communication to ensure stakeholder buy-in.

While Endgame introduces a simplified operating model, it does not stray from the core essence of MakerDAO. Of course, given that its business model is undoubtedly one of the best, a commercial transformation may not be necessary. It aims to enhance and expand the established business framework rather than explore new ventures in the short term.

Looking ahead, whether MakerDAO can alleviate these concerns and demonstrate the real benefits of Endgame will be key. Effective execution could further solidify its leadership in the DeFi space, presenting a more robust, user-centric platform ready to respond to the dynamic changes in the crypto world.

The ultimate measure of Endgame’s success will be its impact — can it deliver on its promise, enrich stakeholder returns, and maintain MakerDAO’s position as a beacon of resilience and innovation in the decentralized finance space? At least for now, it seems that the launch of this program has nothing to lose, with clearer division of labor for each role, increased professionalism in each area, and some risks isolated at the same time. Perhaps this is just the end of the prologue, and competition between large DeFi projects will become more intense. Only time will tell the answer, but the journey ahead is undoubtedly full of hope.

Reference：

“CPI Home : U.S. Bureau of Labor Statistics.” Accessed April 25, 2024. https://www.bls.gov/cpi/.
“MakerDAO Endgame.” Accessed April 25, 2024. https://start.makerdao.com/.
“Overview | Maker Endgame Documentation,” August 4, 2023. https://endgame.makerdao.com/endgame/overview.
“Steakhouse Financial.” Accessed April 25, 2024. https://www.steakhouse.financial/projects/makerdao-financial-report-2023.
The Maker Forum. “MakerDAO Endgame: Launch Season - General Discussion,” March 12, 2024. http://forum.makerdao.com/t/makerdao-endgame-launch-season/23857.
“US 10-Year Treasury Yield and Bitcoin Price Show Significant Negative Correlation | Binance News on Binance Square.” Accessed April 25, 2024. https://www.binance.com/en/square/post/2024-04-02-us-10-year-treasury-yield-and-bitcoin-price-show-significant-negative-correlation-6216009372625.