The Revival of MakerDAO: Unpacking The MKR Thesis

Introduction

MakerDAO has historically been punished for its lack of innovation and stagnant culture, but it could be on the brink of a meaningful re-rating.

Maker’s forthcoming rebranding efforts, launch of new governance and stablecoin tokens, yield farming opportunities, and numerous other catalysts accompanying “Endgame” present a confluence of potential tailwinds for MKR.

Additionally, as discussed in our “The Rise of Ethena” report, the recent integration with USDe and sUSDe seem to have granted Maker an embedded “call option” on the success of Ethena with the potential to 2-3x the protocol’s 2023 revenue.

In this memo we will revisit Maker’s core business model, outline the potential impact of Ethena and future LRT integrations, unpack Maker’s “Endgame,” and highlight pending catalysts for MKR.

MakerDAO 101

While Maker looks deeply complex on the surface, the core protocol is actually quite simple. Distilled down, Maker is very simply a decentralized bank that operates a Net-Interest-Margin (NIM) business. In other words, the entire protocol can be reduced to a balance sheet made up of assets and liabilities. The delta between what Maker generates from its assets and pays out on its liabilities is essentially Maker’s entire business.

On the liability side of Maker’s balance sheet is DAI. Users mint DAI by issuing a debt position against their collateral. DAI can either be utilized freely throughout DeFi markets or locked into the DAI Savings Rate (DSR) contract. Maker pays DSR deposits a fixed rate set by governance based on market conditions.

Maker’s assets on the other hand are composed of the collateral backing DAI. These assets can be broadly categorized into three groups: stablecoins, crypto assets and real world assets (RWAs).

Stablecoins mainly back the price-stability-module (PSM). The PSM is a specialized vault primarily backed by USDC that ensures stablecoins can be swapped seamlessly for DAI at a 1:1 fixed rate. While Maker governance has the ability to charge fees through the PSM, the “fee switch” is currently turned off.

RWAs on the other hand are primarily composed of public credit (i.e., t-bills) with a small allocation to private credit. T-bills serve as a highly liquid instrument that can help offset lower crypto-native yields during bear markets. This fosters a “counter-cyclical” dynamic.

Crypto loans are composed of vaults where users deposit collateral (e.g. ETH, wBTC) to mint DAI. Maker charges a fee until the user ultimately returns the borrowed DAI and closes out their loan. The fee is set by governance based on market conditions. Given that DAI is often borrowed to leverage one’s exposure, borrow rates tend to distill down to demand for leverage. Accordingly, these rates can quickly eclipse t-bill rates during bull markets.

In addition to traditional vaults, Maker’s crypto loans are also composed of loans made through the Direct Deposit Module (D3M). The D3M serves as an extension of the Maker Protocol by enabling Maker to inject DAI into lending pools on other protocols such as Spark and Morpho Blue. Users are subsequently able to borrow DAI against other assets through said pools.

It is important to note that Maker is