As Aave’s stablecoin GHO and Curve’s stablecoin crvUSD are about to be launched, MakerDAO is preparing to expand its lending business and enter the liquidity staking market through Phoenix Labs and Spark Protocol.
On February 9, the MakerDAO forum announced the establishment of Phoenix Labs and the development of Spark Protocol, which will focus on the decentralized lending market. How do Phoenix Labs and Spark Protocol work and help MakerDAO? Currently, there is no detailed information on the Spark Protocol official website. The following content comes from my understanding of the MakerDAO forum and the Twitter of the founder of Spark Protocol.
What are Phoenix Labs and Spark Protocol?
After the founder of MakerDao proposed the Endgame plan in June last year, MakerDAO needed to continue to expand while maintaining maximum flexibility, so some core unit team members of MakerDAO created Phoenix Labs. Phoenix Labs is a research and development company that aims to introduce new decentralized products into the Maker ecosystem. All products developed by Phoenix Labs will be owned by MakerDAO, will inherit Maker's governance system, and vote to manage smart contracts through Maker Governance.
Spark Protocol is Phoenix Labs' first solution that will enable fixed and variable rate lending of crypto assets, support EtherDAI, and implement elastic oracles to enhance MakerDAO's functionality. After MakerDAO's Creator SubDAO model is established, Spark Protocol will transition to Creator SubDAO.
Related reading: MakerDAO’s dangers and opportunities: losses, regulatory risks, and MetaDAO’s redemption
Spark Lend: A lending market forked from Aave V3
Spark Protocol's first product is Spark Lend, a lending market with a front-end. According to the official roadmap, Spark Protocol's basic functions, including product launch, will be completed in April this year. Fixed-rate lending, elastic oracle, cross-chain support, and EtherDAI guidance will also be added this year.
Spark Lend is built on Aave V3. Spark Protocol will allocate 10% of the profits earned in the DAI market to Aave in the next two years after DAI borrowing reaches US$100 million. Spark Protocol has also initiated a proposal on the Aave forum.
Spark Lend supports Maker's D3M and PSM, allowing projects to have cheap liquidity, and others can borrow DAI at the DAI Deposit Rate (DSR). DSR allows users to deposit DAI and earn deposit interest, currently 1% annualized. USDC holders can also directly exchange USDC for DAI through PSM through the Spark Protocol official website and earn interest through DSR.
Spark Lend will focus on highly liquid collateral types and will support lending in the following five markets at launch: DAI, ETH, Lido wstETH, WBTC, and DSR locked DAI. Among them, ETH and wstETH will support Aave V3's E-Mode, and 98% of ETH can be borrowed by pledging wstETH, supporting higher leverage.
It is expected that in the second half of this year, Spark Protocol plans to cooperate with Deco, Sense Finance, Element Finance, etc. to support fixed-rate lending.
Guide to the use of EtherDAI
In the Endgame plan, Maker decided to create EtherDAI, a liquid staking derivative (LSD) of ETH. With the Shanghai upgrade approaching, the staked ETH will be available for withdrawal, which is considered a good time to enter the LSD track. One of the main purposes of Spark Protocol is also to guide the use of EtherDAI.
According to Spark Protocol's liquidity staking plan, EtherDAI will be similar to Frax Finance's liquidity staking plan, with an EtherDAI pegged 1:1 to ETH and a yield-earning version sEtherDAI. Since only a portion of the staked tokens share all staking rewards, the yield of sEtherDAI may be higher than other LSDs, just like sfrxETH.
In addition, EtherDAI will also have a PSM. In Maker, PSM allows tokens such as USDC and GUSD to be swapped 1:1 with DAI. Here, PSM will allow ETH or other ETH liquidity pledge derivatives to be easily exchanged for EtherDAI.
To support the rapid launch of EtherDAI, Maker can also provide liquidity mining subsidies (in MKR or DAI) for EtherDAI.
Issuing new tokens
In the previous Endgame discussion, due to the high staff costs and the urgent need for expansion, Maker decided to split the core units of Maker into MetaDAOs. Each MetaDAO needs to be self-sufficient and issue its own tokens. Although Sprak Protocol did not introduce the token-related part in the MakerDAO forum, it may have its own token.
Phoenix Labs founder mentioned in a tweet that there will be multiple competitive SubDAOs, and the relevant tokens are linked to the cash flow of SubDAO products, and the income generated by Spark Protocol will flow to these token holders. All tokens will be distributed through liquidity mining, without pre-allocation.
Compared with the past, after the establishment of SubDAOs such as Spark Protocol, Maker's cost expenditure will be reduced, and each SubDAO will still work around the Maker ecosystem.
After various SubDAOs issue their own tokens, the original assets in MakerDAO, such as MKR and DAI, may become mining tools, which may also be the reason for the recent rise in MKR. The tokens issued by SubDAO may have the right to distribute the profits of their own projects.
Summary
MakerDAO core unit members established Phoenix Labs and developed Spark Protocol. Spark Protocol will first have a lending market forked from Aave V3. Because it supports D3M and PSM, it can obtain liquidity at a low cost. Another important purpose is to guide the use of Maker's liquidity pledge derivative EtherDAI.
After the establishment of SubDAOs such as Spark Protocol, the cost pressure of MakerDAO may be greatly alleviated. SubDAO will issue its own tokens, which will be distributed fairly through liquidity mining. MKR and DAI may become mining tools.