Go2Mars Research

Spark Protocol is one of the many innovations that will bring prosperity to the MakerDAO ecosystem in the Endgame era.

On May 9, 2023, the decentralized stablecoin protocol MakerDao announced that the front-end Spark Protocol for DAI to interact and perform various operations was officially launched. Its first product is Spark Lend (Aave v3 fork), and currently the collateral supports ETH, stETH, DAI, and sDAI. The protocol achieves a fixed interest rate of 1.11% by connecting to the D3M module of Maker DAO. The starting point of this protocol is to provide DAI users with functions that Maker has not provided before, and to expand the scope of application of DAI to expand DAI's share in the stablecoin market.

So, what does the launch of Spark Protocol mean for the overall MakerDAO ecosystem? How does it play its unique role? And what lessons can it teach other ecosystems about innovation?

Spark Protocol’s Ecosystem Background: MakerDAO and DAI

Maker DAO is a decentralized platform running on the Ethereum blockchain that provides users with the opportunity to generate Dai, a stablecoin pegged to the US dollar. Users can use their digital assets (such as ETH) as collateral to generate Dai according to their needs.

In addition, Maker DAO has issued a governance token called MKR, which is used to pay interest, fees, and participate in voting on system parameters. Maker DAO's goal is to build a fair, transparent, and intermediary-free financial system.

Dai is a stablecoin whose value is stable relative to the U.S. dollar. Stablecoins are digital currencies pegged to a “stable” reserve asset, such as the U.S. dollar or gold, and are designed to reduce the price volatility of unpegged cryptocurrencies such as Bitcoin.

Maker DAO is the creator of Dai, which uses the decentralized nature of the Ethereum blockchain to allow users to borrow Dai using their own digital assets as collateral. Dai is backed by transparent crypto collateral, and all collateral information can be viewed on the Ethereum blockchain. In addition, Dai is managed by a community of MKR token holders who vote to determine the parameters of the system.

As of now, Maker DAO has become the second largest lock-up protocol in the decentralized finance (DeFi) ecosystem, with a lock-up volume of $7.1 billion. The stablecoin Dai it issued ranks first in circulation among all decentralized stablecoins.

EndGame

MakerDAO's "EndGame" is a long-term restructuring improvement proposal that aims to decentralize and diversify the Maker ecosystem. It involves the introduction of new features and products to enhance the functionality and adoption of DAI, including clarifying specific rules (implemented immediately after the Maker Constitution MIP proposal is passed), governance participation incentives (implemented later in 2023), and transferring operational complexity from MakerDAO to SubDAO (implemented in 2024).

Spark Protocol is one of the many innovations that the Endgame era will bring to the MakerDAO ecosystem.

Spark Protocol’s first trial: Spark Lend

Mechanism Overview

The first version of Spark Protocol is Spark Lend. As a decentralized non-custodial liquidity market protocol, Spark Lend allows users to participate as suppliers or borrowers. Suppliers provide liquidity to the market to earn passive income, while borrowers can borrow in an over-collateralized (permanent) or under-collateralized (single-block liquidity) manner.

Spark Lend is linked to Maker’s D3M (Direct Deposit Dai Module), a system that supports interactions between the Maker ecosystem and third-party lending pools. The connection between the Spark Protocol and Maker’s D3M is designed to connect Maker’s liquidity with a complete DeFi solution, enabling users to borrow DAI at a more competitive rate, starting at just 1.11% APR, using MakerDAO’s credit line.

The D3M (Directly Deposit Dai) module is a tool that allows MakerDAO to create Dai and deposit it in other lending protocols on the Ethereum blockchain, such as Aave and Compound. With this tool, MakerDAO can influence the DAI interest rate in these protocols and provide more liquidity and stability for DAI users.

As a Maker Vault, D3M uses deposit tokens from lending protocols (such as aDAI or cDAI) as collateral. The amount of DAI minted and deposited by D3M depends on the target borrowing rate set by Maker governance.

Regarding the connection between Spark Protocol and Maker’s D3M, the MakerDAO post states: “This direct wholesale line of credit in DAI injects and automatically balances fresh DAI liquidity into Spark Lend and enables its users to earn the best interest rates in the market.

sDAI

Spark Protocol’s Spark Lend product also introduces a tokenized version of the DAI stablecoin, deposited in the form of the DAI Savings Rate (DSR). The tokenized version is called sDAI. However, the yield is currently low, at only 1.1% for DAI deposits. It also uses the Peg Stability Module to help connect liquidity infrastructure and provide instant swaps of DAI and sDAI with USDC.

DSR (Dai Savings Rate) allows Dai holders to earn interest on their Dai deposits. DSR is a special module in the MakerDAO smart contract system that continuously pays Dai Savings Rate deposits on each block. DSR is set by Maker Governance, which can balance the supply and demand of DAI and affect the stability of DAI by adjusting DSR. DSR is an attractive option for DAI users who want to earn passive income through stablecoins.

While current yields may be low, decentralized finance users are already wary of protocols that offer risky, high and often unsustainable yields. As such, Maker is focused on providing stability, liquidity, and significantly reduced risk.

After launching Spark Lend, Phoenix Labs aims to continue delivering new products and features. Included in the 2023 roadmap are Spark fixed interest rates, elastic oracles, cross-chain support, Maker transfer support, and the bootstrapping of EtherDAI.

Phoenix Labs

Phoenix Labs, the development team of Spark Proocol, aims to introduce new decentralized products to the Maker ecosystem. Our mission is to help MakerDAO grow and innovate in the decentralized space, and everything Phoenix Labs will build will be centered around DAI.

MakerDAO will own every product created by Phoenix Labs; therefore, they will inherit Maker’s already well-established governance system. On the other hand, Maker Governance will manage all smart contracts through voting to adjust system parameters and add new collateral.

Summary

MakerDAO is moving towards its vision of becoming a fully decentralized platform by expanding its user base and product lines by expanding its products and services, such as the launch of Spark Protocol. The introduction of Spark Protocol not only enhances MakerDAO's DAI lending capabilities, but also further enhances its attractiveness to users.

In addition, through the "EndGame" plan, Maker DAO will split its business into multiple SubDAOs according to different matters to enhance the flexibility of the protocol. The emergence of Spark Protocol just shows the potential of Creator SubDAOs to innovate and create value on the Maker protocol under this model. These SubDAOs can innovate within the framework of the protocol and provide more services and value to users.

These innovations and new services enhance the use cases of DAI, further consolidating its leading position in the decentralized stablecoin field. These initiatives show that MakerDAO is not only expanding its business scope, but also enhancing the value of its products through innovation to meet the needs of more users and maintain its competitiveness in the market.

references:

[1] Maker DAO: MIP116: D3M to Spark Lend 

[2] Maker DAO: Announcing Phoenix Labs and Spark Protocol

[3] Spark Document Hub