MakerDAO is home to DeFi’s largest native stablecoin. And while the MKR token has been the subject of many jokes on crypto Twitter, a recent governance proposal promises to bring a flavor of value accrual that MKR holders are used to.
Ten days ago, a person from MakerDAO’s risk unit proposed the “smart burn engine”. In a nutshell, this engine will tap into the DAI surplus buffer to perform open market operations. The activity entails buying MKR on Uniswap v2, pairing it with an equivalent amount of DAI from the surplus buffer, and providing it as liquidity in Uniswap v2. Per the proposal, the burn engine will activate when the surplus buffer has over 50M DAI. The max amount of MKR buying per annum is set to 100M DAI worth, equating to to 200M DAI when you factor in the DAI required to provide liquidity with.
The governance poll passed with 100% of voters voting “yes”. So it’s now green lit for an executive vote. If the proposal passes, it will be put into action instantly given the current surplus buffer sits at roughly 71M DAI.
Right, so this is obviously positive for the MKR token. Since the MKR buyback and burns were paused, there has been no source — direct or indirect — of value accrual for MKR. But that changes now. The effect of this will vary over time, however,
At the present moment, there is a grand total of $130 of liquidity in the DAI-MKR market where this is supposed to happen. The assumption is that external LPs will allocate liquidity there to take advantage of this. As this happens, the early effects of the smart burn engine could be very impactful — depending on the total DAI-MKR liquidity base when it begins. But there will be a lot of value leakage to arbitrageurs as Maker prioritizes using a single pool rather than finding optimal execution over a variety of DEXs.
As time goes on, liquidity in the pool will build up making it one of, if not the, deepest MKR pool. The end result is less value leakage to arbitrageurs, but also less impact on MKR’s price action. So the opportunity in the market to capitalize on this — whether by holding MKR to take advantage of this sustained buying activity, or by providing liquidity to the pool — seems to diminish quite significantly over time. It’s a strong short-term impact, but quite quickly fades away.
To be fair, it’s unlikely that the DAO cares about this. Their objective seems to be to build up long-term (protocol owned) MKR-DAI liquidity in DeFi, which shields MKR from sudden price drops caused by large sells. Overall, this proposal will bring indirect value accrual to MKR while also building up liquidity for the asset.
Maker’s on track to hit $100M in revenue over the next year. As demand for leverage amps up, so too will this number as more people borrow DAI against their assets. Maker has fully embraced the RWA narrative which could bring in even more in revenue (and DAI issued) over the next year. The amount of revenue brought in affects the amount of DAI in the surplus buffer. And the amount of DAI in the surplus buffer determines how much MKR buying the smart burn engine can facilitate.
