MakerDAO is the largest DeFi protocol by value locked (or TVL), with over $2.5 billion in collateral. Maker is also perhaps the oldest DeFi project, pioneering on-chain governance and financial dApps. The supply of DAI, Maker’s native stablecoin, crossed the coveted $1 billion threshold recently, and Maker’s collateral base grew at an astounding 15% per month between Jan 2018 and Dec 2020.

Yet Maker’s native governance token, MKR, underperformed the so-called blue chips by a wide margin during this year’s DeFi run up. Let’s dive into a few reasons why that might have happened.

Source: TradingView

Competing Against Secondary Markets

First, a short introduction to Maker’s design.

Users can deposit any of several accepted tokens in a Maker vault and borrow the DAI stablecoin against the value of those tokens. The protocol charges borrowers a stability fee for borrowing / minting DAI. This fee is variable and subject to the discretion of Maker governance.

The stability fee collected is used to buy MKR from the open market and burn it. This is the primary source of value accrual for MKR.

DAI is a debt credit that’s pegged to the value of the US dollar. But if you abstract DAI from the Maker stack and replace it with any other stablecoin, it becomes apparent that Maker’s real product is leverage. Most borrowers on Maker deposit assets like ETH and WBTC and use