Interpretation of MakerDAO’s development status: expected profits increase significantly, buyback rules may be adjusted to capture value in the protocol

Original title: "Interpreting the current development status of MakerDAO: Expected profits to increase significantly, buyback rules may be adjusted to capture value for the protocol"

Original author: Jiang Haibo, PANews

Maker is moving from a classic DeFi protocol to the RWA (real world assets) direction. After raising the DSR (DAI deposit rate) to 3.49%, it finally allows ordinary users to earn income from US Treasuries through the leading DeFi protocol.

Recently, MakerDAO has performed well in various data. According to data from makerburn.com, as of June 29, Maker's annual profit is expected to be US$73.67 million, the highest in more than a year. The current price-to-earnings ratio is 8.43, which is also the lowest in history, and it has strong competitiveness in DeFi projects.

Data in Maker

As shown in the figure below, MakerDAO's annual net profit is expected to be $73.67 million. According to current data, Maker's annual stability fee (including RWA) income is expected to be $118 million, MKR expenditure is equivalent to $4.26 million, DSR expenditure is expected to be $6.58 million, liquidation expenditure in the past year is $930,000, PSM transaction fee income is $150,000, and DAI expenditure is $33.13 million.

The expected returns from RWA and crypto-collateralized lending in Maker are increasing. On the one hand, Maker's investment in RWA has been increasing over the past year. When the short-term US Treasury yield exceeds 5%, Maker will use more than $2 billion of stablecoin reserves to purchase US Treasury bonds or hold them in other ways that can generate income (Coinbase Custody and GUSD PSM).

On the other hand, the rise in U.S. Treasury yields also prompted Maker to simultaneously increase the minimum interest rate for DSR and crypto asset collateral lending such as ETH and stETH from 1% to 3.49% on June 19. Therefore, the expected return on borrowing DAI through over-collateralization of crypto assets in Maker has also increased in the near future.

In addition, as Maker's final plan progresses, a series of cost-cutting and efficiency-enhancing measures are being implemented. As of June 29, the DAI expenditure this month was only $1.9 million, while the average monthly expenditure from March to May this year was about $5 million. Since the DAI expenditure part refers to the actual expenditure in the past year, this data has not yet been reflected in the increase in profits.

The changing status of stablecoin issuers such as Maker and Circle

A year ago, 51.7% of DAI issuance came from USDC in PSM, and Maker was criticized for bearing the centralized risk of USDC while failing to capture this value. However, Circle, the issuer of USDC, used the US dollar reserves of the issued stablecoin to purchase US bonds to earn income. With the advancement of Maker on RWA, this situation has changed. Currently, only 8.8% of DAI collateral is USDC in PSM.

Makerburn's RWA page shows that the DAI minted by RWA collateral has reached 1.42 billion, generating about $53.11 million in revenue per year. In addition, according to RWA014, the 500 million USDC stored in Coinbase Custody generates about $13 million in revenue per year; the 500 million GUSD in PSM generates about $10 million in revenue per year.

Currently, the unused stablecoins in PSM include 500 million USDP and 414 million USDC. Both USDP and GUSD in PSM have reached the set upper limit of 500 million, and Maker PSM holds 50.5% and 88.5% of the total issuance of these two stablecoins respectively.

Due to concerns about centralization and security issues, Maker has planned to reduce the upper limit of USDP and GUSD in PSM. USDP will be used in RWA015, and the upper limit of GUSD in PSM may be reduced to 110 million US dollars.

In its investment in RWA, Maker will first redeem stablecoins such as USDC in PSM for US dollars, and then use them to purchase US bonds. This process has also accelerated the reduction of USDC issuance in the past year. Since Maker PSM is already the main holder of USDP and GUSD, the reduction or even suspension of these two stablecoins will have a greater impact on the issuers of both.

During the period when short-term U.S. Treasury yields exceed 5%, Maker will increase DSR to 3.49%. Holders of stablecoins such as USDC can exchange stablecoins for DAI through PSM at a 1:1 ratio. Maker can then redeem these stablecoins for U.S. dollars to purchase U.S. Treasury bonds to obtain higher returns, which may create a win-win situation.

Adjustment of buyback and destruction rules

Recently, in addition to the growth of business, the benefits of Maker’s governance token MKR also include potential adjustments to the repurchase and destruction rules.

In addition to governance rights, MKR also serves as a tool to maintain system stability in the MakerDAO system. When the system's debt is greater than the system's surplus, new MKR needs to be sold to make up for the debt; when the Maker protocol's surplus funds exceed a certain limit, the proceeds will also be used to repurchase and destroy MKR.

Maker has a "surplus buffer" where the protocol's profits (DAI from income such as stability fees and liquidation penalties minus all expenses) are kept as reserves. According to current rules, the buyback and destruction of MKR will only be initiated when the funds in the surplus buffer reach 250 million DAI. The current surplus in the protocol is $70.5 million, and about $180 million in profits are needed to carry out the next buyback and destruction process.

On June 26, a nominal survey vote on the "Smart Burn Engine startup parameters" was conducted in the Maker forum, hoping to change the current repurchase and destruction rules. The new governance plan sets the upper limit of the surplus buffer to 50 million DAI. When the upper limit is exceeded, the Smart Burn Engine will automatically use DAI to purchase MKR in the DAI/MKR trading pair of Uniswap V2, and the resulting MKR and DAI will form a trading pair to provide liquidity on Uniswap V2, and the LP tokens will be transferred to the address owned by the protocol.

As of June 30, the nominal survey vote has ended with a 100% approval rate. If this proposal is passed and takes effect in the subsequent executive vote, since the existing surplus has exceeded the new upper limit, MKR will be purchased directly with the surplus.

Limitations and opportunities of Maker development

Maker's investment in RWA has consumed a lot of funds in PSM, which leaves few stablecoins in PSM. This may be one of the reasons why Maker has significantly increased DSR, hoping to attract more funds with higher interest rates. However, the increase in crypto-collateralized lending rates caused by the increase in DSR may also reduce Maker's competitiveness in crypto-collateralized lending and limit Maker's future development.

1. DAI issuance continues to decline

According to galssnode data, the issuance of DAI has been decreasing in the past year or so, from 10.3 billion in February 2022 to the current 4.68 billion, a decrease of 54.6%. The scale of DAI determines the upper limit of the Maker protocol. The DAI minted through over-collateralization provides Maker with continuous stable fee income, and most of the reserves in the DAI minted through PSM have also been used to purchase government bonds to generate income. The decline in the issuance of DAI has an adverse impact on Maker.

2. The number of DSR deposits has increased

In addition to minting stablecoins, Maker also shares part of the protocol's revenue with stablecoin holders through the DSR contract, which is part of Maker's expenditure. After the DSR interest rate increased from 1% to 3.49%, deposits in the DSR increased from 106 million DAI to the current 188 million, which also led to an increase in Maker's expenditure.

According to Dune@steakhouse, 67.9% of DAI is held by external addresses. Etherscan data shows that the address holding the most DAI is PulseX:Sacrifice, which is controlled by the Pulsechain team. If such DAI holders increase their deposits in the DSR, Maker's spending will increase.

3. Decline and growth of stablecoin reserves

As mentioned above, the proportion of DAI minted by USDC through PSM has been reduced from 51.7% to 8.8%, and the remaining part must also ensure sufficient liquidity for the normal redemption of DAI. At the same time, USDP and GUSD in PSM will also drop sharply in the near future, and there is not much money available for investment in RWA.

As DSR increases, Maker's competitiveness in on-chain stablecoin deposits increases, and it may also attract new users to mint USDC into DAI through PSM to obtain higher returns. The deposit rate for DAI on Aave is 2.6%, the deposit rate for USDC is 2.83%, and the deposit rate for USDT is 2.69%, all lower than Maker's DSR rate. If the funds used to mint DAI with USDC through PSM increase, the funds used by Maker to purchase U.S. bonds will also increase, increasing the income of the protocol and creating a win-win situation.

4. Opportunities brought by liquidity staking

Although the issuance of DAI is declining, the DAI minted by certain collaterals is still rising, such as wstETH. In the past three months, the DAI minted by wstETH-B Vault increased from 90.87 million to 261 million; the DAI minted by wstETH-A Vault increased from 181 million to 201 million. During the same period, the DAI minted by ETH-C Vault decreased from 295 million to 290 million, with no significant decline. This shows that the new collateral in the wstETH Vault does not come from the funds in the original ETH Vault, and new funds have indeed entered.

5. Impact of SubDAOs such as Spark

MakerDAO's first SubDAO Spark has been launched. According to DeFiLlama data, Spark's TVL is currently $15.04 million and is growing. Due to the special composability brought by Spark, DAI (sDAI) deposited in DSR can also be used as collateral to further improve capital utilization.

summary

Maker is shifting from a classic DeFi project to RWA. The recent adjustments to the interest rates for crypto-collateralized lending such as DSR and ETH and stETH will further enhance Maker's competitiveness in RWA and weaken its competitiveness in crypto-collateralized lending.

In the process of business transformation, stablecoin issuers such as Circle face significant competition and may have to consider distributing more profits to stablecoin holders. For USDP and GUSD, Maker PSM holds more than 50% of the shares of these two stablecoins. Adjustment of the PSM caps of these two stablecoins will cause the issuers of both to suffer heavy losses.

Since there is not much money available for RWA, this may be an important reason why Maker has recently increased the DSR. If it can attract more funds, the amount of investment in RWA may continue to grow in the future.

The MakerDAO forum is voting on a proposal to change the buyback and destruction rules. The current surplus has exceeded the upper limit of the new rules. If the new rules come into effect, buybacks will begin, which will be beneficial to MKR.

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