Author: Ouroboros Capital; Translation: Golden Finance 0xxz

MKR’s Outperformance: MKR is currently testing new highs. It has gained 32% since our update report on August 17. Meanwhile, BTC fell -1% and ETH fell -5%. Since our first MKR report on July 17, MKR is up 61%, while BTC is down -12% and ETH is down -15%.

As of September 28, 2023, data source: Coingecko.

In our most recent update, we highlighted our expectations for buying opportunities in MKR in an environment where front-end interest rates are expected to remain elevated. We predict that DAI supply and profits will hit new highs. DAI supply has indeed reached a new peak, while profits are recovering and are expected to be close to their highs. We also called for the coin to test the $1,500 to $1,600 levels, a view that is currently coming to fruition. Although we will take some profits at current levels, we still maintain our bullish view in the long term. We have adjusted the position from a heavy position to a more balanced core position (>20%). Our strategy going forward will be to trade around the position, using pullbacks to accumulate, and we think a 20-30% upside is possible over the next 6 months.

In this second update, we will review recent developments, highlighting insights that support our long-term bullish outlook for MKR.

Insight 1: DSR is working.

Over the past month, according to our view, DAI stored in Saving DAI (sDAI) as well as DAI supply have been hitting new highs. This suggests that the Dai Savings Rate (DSR) is effectively achieving its dual goals: first, increasing the perception of sDAI as the preferred on-chain venue to access US Treasury yields, and second, stimulating the generation of new DAI. Overall, these factors pave the way for profit creation for makers in the long term.

As mentioned in our view, DAI supply hits a new high. Data source: MakerBurn.

Profits are also recovering after a brief 8% EDSR. Data source: MakerBurn.

While we emphasize that the increased supply of DAI through sDAI deposits does lead to higher profits in the long term, we also recognize a common objection: that the current creation of DAI and its deposit into sDAI does not increase MKR’s profits, but rather drags them down. This is indeed true, given that the sDAI distribution rate is 5% and MKR can only earn a maximum of 4.5% through BlockTower Andromeda. However, we agree with Maker founder Rune that this is temporary pain for a more promising long-term plan. Our analysis suggests that the DSR will soon transition to Level 3, at which point the interest rate will be calibrated to 4.1%. With protocols paying 4.1% on the DSR and earning 4.5% through treasuries like BlockTower Andromeda, this will subsequently make new DAI creation and deposits profitable for MKR.

We extrapolate the recent utilization growth of the DSR and conclude that utilization could reach the 50% level within 6 months. Over the past month, the 7-day rolling average of daily DSR utilization growth has varied between 0.11% and 0.42%, with an average of 0.21%. If DSR utilization continues to grow by 0.11% per day (which represents the lower bound observed over the past month), it would take 45 days to reach 35%, triggering a DSR reduction. Furthermore, at a daily growth rate of 0.11%, utilization would reach 50% after approximately six months (181 days), with a further move to Level 3 to follow.

At 35% utilization, the Dai Savings Rate drops to 4.72%. Data source: Maker Governance.

Insight 2: DAI supply growth means makers can earn 20% annual compound interest.

We have observed that over the past 3 months, the DAI supply has grown by $250-290 million per month. If we extrapolate this number, it would imply at least $3 billion of growth per year. Assuming all $3 billion of DAI growth is deposited in sDAI at 4.1% interest (Level 3), and earns 4.5% through BlockTower Andromeda, this would imply an incremental profit of $11.95 million per year (or a 20% increase relative to current estimated profits). While 20% growth is indeed a good number, we believe it is still quite conservative, which brings us to our next section.

DAI supply grows by about $250 million to $290 million per month. Data source: MakerBurn.

Insight 3: sDAI has a multi-trillion dollar scale.

We believe that sDAI adoption has yet to see explosive growth and believe that DAI’s current market cap of $5.5 billion is still insignificant compared to the global demand for on-chain US Treasury yields. For context, according to the 2023 UBS Global Wealth Report, the global wealth share of non-millionaires is approximately 55.5% (about $115 trillion). While US Treasury yields are easily accessible to the privileged in traditional banking channels, they are generally out of reach for ordinary people in non-US countries. For the 55.5% of the global wealth share, providing easy access to on-chain US Treasury yields is a highly desired product with a huge market size (US$115.44 trillion according to the above statistics).

DAI’s growth is still in its early stages, and it has yet to see explosive growth at the inflection point.

in conclusion

DAI has a clear growth trajectory as it taps into the multi-trillion dollar US Treasury market with a lot of people hungry for US Treasury yields. However, we expect there could be a catalyst gap of 3-6 months before the DSR fully kicks in (when the DSR drops to Level 3). As a result, we have trimmed our position. Nonetheless, it remains a core holding as we do not rule out further re-rating, especially since this token is one of the best assets to hold in a high interest rate environment.