A Deep Dive into Borrowing + RWA: A Strategy for Bull and Bear Markets

TL; DR

• As one of the longstanding DeFi protocols, MakerDAO’s design embodies the core values of blockchain technology—transparency, decentralization, and resistance to censorship. Despite DeFi facing significant setbacks in 2022, MakerDAO continues to be a crucial participant in the stablecoin and decentralized lending markets. The integration of real-world assets has substantially increased the protocol’s revenue, showcasing robust market adaptability and innovation.
• To unlock the existing but often hidden and low-priority business potential, MakerDAO officially began implementing the Endgame plan in 2023. This involves segmenting business intricacies into specialized SubDAOs that are more tailored to their respective businesses and dynamic governance. This move significantly enhances risk management capabilities and capital efficiency, establishing a more efficient decentralized and transparent ecosystem for the increasingly expansive MakerDAO.
• The Endgame plan, to be executed through the Pregame, Early Game, Midgame, and Endgame stages, will progressively strengthen MakerDAO’s ability to withstand real-world risks. This includes running six initial SubDAOs and issuing their corresponding ERC20 tokens during the early stages, allocating liquidity through tokens such as $DAI, $MKR, and $ETHD.
• In the Early Game phase, expected in the first quarter of 2024, there are plans for a rebranding of $DAI and $MKR to further lay the foundation for the overall strategy. During this period, the token economic models of $MKR and $DAI will differ significantly from the current ones. MakerDAO and SubDAO will also lower governance barriers with the introduction of new tokens, further increasing the willingness of token holders to participate in governance.
• For risk management of current real-world assets, MakerDAO classifies them into Pigeon, Eagle, and Phoenix stances. We anticipate that MakerDAO will continue to maximize underlying asset returns through its RWA assets over the next two to three years.
• In mid-2023, MakerDAO altered the $MKR buyback and burn mechanism, introducing a Smart Burning Engine to utilize protocol surplus for $MKR buybacks. This surplus is then placed in Uniswap V2 to form the MKR/DAI trading pair, acting as an active market-making strategy. The engine aims to establish a dynamic balance in the future, ensuring that the annual issuance of new $MKR tokens equals the amount burned, supporting the healthy circulation of $MKR.
• Using discounted cash flow (DCF) and comparable valuation models, we have assessed the value of the $MKR token. After a series of assumptions and modeling, we conclude that by the end of the first quarter of 2024, the price of the $MKR token is expected to range between $3396.72 and $4374.21. MakerDAO’s fully diluted valuation (FDV) is estimated to be in the range of $3.321 billion to $4.277 billion. Despite the data on January 16, 2024, $MKR still has some potential for upward movement. This valuation is not intended as investment advice, and the actual market dynamics and MakerDAO’s operational performance will ultimately determine its true market value.
• While MakerDAO continues to innovate, it must remain vigilant about regulatory risks, especially considering its substantial inclusion of US government bonds as underlying assets. There is a significant possibility of ongoing scrutiny or regulatory measures from US government agencies. Additionally, MakerDAO’s Endgame plan, with fundamental changes to its governance token $MKR and stablecoin $DAI, may impact the protocol’s risk tolerance and future development pathways.

1. MakerDAO Overview

MakerDAO is a protocol based on the Ethereum blockchain, aiming to provide decentralized stablecoin DAI. The value of this stablecoin is pegged to the US dollar and is regulated through mechanisms such as over-collateralization and surplus buffer, without relying on the issuance or guarantee of central authorities.

The stability and value of DAI are ensured by smart contracts through automatic adjustment mechanisms involving the collateralization of cryptographic assets, such as Ethereum and other ERC-20 tokens locked and managed on the MakerDAO platform. This design aims to achieve the protocol’s robustness and reliability, providing users with a more trustworthy environment for digital currency transactions and asset management.

The governance token $MKR plays a crucial role in protocol governance and system stability within the MakerDAO ecosystem. $MKR token holders participate in key decisions through voting, such as the selection of collateral types, setting debt ceilings, adjusting stability fees, and other critical system parameters. Additionally, $MKR tokens serve as a mechanism for debt offset in times of system losses, enhancing the financial robustness of the protocol.

MakerDAO’s design embodies the core values of blockchain technology, namely transparency, decentralization, and resistance to censorship. The automated processes implemented through smart contracts reduce intermediaries, providing users with a more reliable and seamless financial services experience.

As the DeFi sector rapidly evolves, MakerDAO continues to be a key player in the stablecoin and decentralized lending markets, demonstrating strong market adaptability and innovation. Starting from the end of 2022, the introduction of real-world assets such as US government bonds, known as RWA assets, has not only brought more stability to DAI through diverse real-world assets but has also generated substantial income for the protocol.

To enhance the protocol’s ongoing innovation, improve organizational structures to make governance decision processes more efficient, and leverage the protocol’s intangible value, MakerDAO initiated its comprehensive Endgame plan gradually starting from 2022 and formally implemented it in 2023. This article will consider aspects of the Endgame plan in evaluating the $MKR token.

2. Endgame

2.1 Underlying Logic of Endgame

Similar to the organizational structure of Google’s parent company, Alphabet, the holding company achieves stable growth and maximizes profit returns through Google while operating various independently functioning startups, each isolated from risks. Google and Alphabet provide technical and resource support to these startups.

By adopting a strategy of diversification and decentralized investments, a balance is struck between robust core businesses and riskier innovative ventures. This approach ensures that Alphabet not only addresses current market challenges but also prepares for future changes and opportunities.

Applying a similar strategy to MakerDAO involves separating valuable and promising ventures such as lending protocols, decentralized oracle networks, and real-world asset (RWA) initiatives into distinct SubDAOs. Each SubDAO would issue tokens based on its unique value and potential. By distributing these tokens, communities can be nurtured, unlocking the hidden and low-priority business potential that currently exists within MakerDAO.

Using RWA as an example, the current governance processes and efficiency of MakerDAO are unable to compete with traditional financial institutions when dealing with complex real-world financial transactions. However, SubDAOs enable MakerDAO to liberate itself from directly managing and navigating the complexities of real-world asset transactions. Instead, it can focus on incubating SubDAOs that can develop into more specialized entities with dynamic governance structures, overcoming the obstacles faced by MakerDAO.

Subsequently, MakerDAO can utilize a tested and understood Decentralized Direct Deposit Module (D3M) construct. D3M leverages automation and smart contracts to optimize interactions between MakerDAO and other DeFi protocols while managing risks and improving capital efficiency. This allows these SubDAOs to represent MakerDAO in RWA activities, reducing MakerDAO’s expenses and complexities.

The primary challenge then becomes comparing the performance of different SubDAOs and determining which ones to empower. In other words, it involves decentralizing decision-making, allowing for parallel innovation explorations. This approach helps MakerDAO establish a more efficient, decentralized, and transparent ecosystem amidst the growing complexity. In the less-than-ideal regulatory environment and uncertain risks of the cryptocurrency industry, this represents an effective way for MakerDAO to sustain itself in the market over the long term.

For a globally impactful decentralized ecosystem, efficiency in challenging the existing traditional financial system is just one aspect. More importantly, it revolves around the intangible value created around community member tokens and user experience.

In the cryptocurrency space, it’s evident that the value growth of top assets like Bitcoin, Dogecoin, and NFTs often surpasses the token value growth of MakerDAO and other robust DeFi protocols. Simply considering the fundamental aspects of cryptocurrency value would be biased. In other words, empowering tokens like $MKR by referencing meme coins is not only an effective means to address governance issues such as voter apathy but also a shortcut for the scaled application of SubDAOs.

2.2 Overall Planning

The Endgame Plan product roadmap consists of four main phases: Pregame, Early Game, Midgame, and Endgame. It aims to enhance efficiency, resilience, and engagement by creating a robust governance balance, providing a solid foundation for parallel growth and product innovation for SubDAOs. The plan promotes the optimization of governance structures and the diversification of product innovations within a gradually forming, community-driven ecosystem.

In the short term, the goal of Endgame is to increase the supply of Dai to over 100 billion within three years, ensuring the ecosystem continues to accelerate in an autonomous and vibrant DAO economy. Additionally, the plan aims to securely maintain governance balance, ensuring scalability to any size.

I Pregame

As a testing phase for the product, six initial SubDAOs will run to test their key functionalities before the official launch of the Endgame plan. Notable features include:

1. Issuing ERC20 tokens specific to each SubDAO, as well as three types of farms for token distribution by SubDAOs, namely utilizing $DAI, synthetic assets like $ETHD representing stETH, and $MKR tokens for liquidity mining.
2. Release of Meta Elixir I and Metanomics I, forming a liquidity pool of DAIMKR = 11, distributing $MKR tokens for SubDAO.
3. Establishing a MIP set, which can be regarded as the overall guideline outlining how the above measures will be specifically implemented, preparing for the future scalable and automated issuance of SubDAOs.

II Early Game

Following the Pregame phase, the Endgame plan adjusts and moves into the Early Game phase, which can be subdivided into five periods:

Phase 1:

Rebranding $MKR and $DAI into a single cohesive concept that better communicates and embodies Endgame’s vision. The two tokens will be maintained, and new versions of $DAI and $MKR will be issued, temporarily called NewStable and NewGovToken.

Phase 2:

Six tested SubDAO and NewStable token farms will be officially launched, and SubDAO tokens will also be distributed through NewStable farms. The main tasks of all SubDAOs are to acquire users and maintain decentralized front-ends, but SubDAOs can be divided into FacilitatorDAOs and AllocatorDAOs according to different business focuses:

Phase 3:

After SubDAO is launched, MakerDAO will introduce Atlas to participate in governance and decision-making, making the process more friendly and efficient for NewGovToken holders. Atlas is a giant governance rulebook built as a unified data structure that contains all principles, rules, processes, and knowledge for the entire MakerDAO ecosystem. This data is optimized for use with specialized governance AI tools that modify, improve, summarize and interpret Atlas.

Phase 4:

The launch of the governance participation incentive plan at this stage is a key part of MakerDAO’s final plan, mainly through the Sagittarius Lockstake Engine, referred to as SLE, to incentivize NewGovToken holders to participate more actively in DAO governance. At this stage, NewGovToken holders are encouraged to lock up their tokens and delegate voting rights in support of specific governance strategies, a process that occurs through a user-friendly, gamified frontend for easy access.

To reward active contributions to the governance process, SLE users will receive 30% of the protocol surplus as NewStable revenue, or receive SubDAO tokens as rewards. In addition, to encourage long-term participation and problem solving, SLE has set a 15% exit fee. During the first six months of SLE’s launch, a one-time reward boost will be provided to compensate for the early stages when only NewStable users will be able to farm SubDAO tokens.

Phase 5:

“NewChain launch and final Endgame state” is the final stage of the Endgame Plan. This phase includes deploying NewChain, a brand new blockchain designed to be the hub of all backend tools for SubDAO token economics and MakerDAO governance security. The launch of NewChain ensures that NewStable and NewGovToken, as well as $DAI and $MKR, continue to function normally on Ethereum, while gaining additional governance protections through an advanced two-stage bridge.

The core features of NewChain include the use of hard forks as a governance mechanism to address significant governance disputes, providing the ultimate security guarantee for users relying on Dai and NewStable. Additionally, NewChain incorporates AI-assisted governance features such as smart contract generation, state leasing, and governance lockstake systems for each SubDAO, fostering innovation and growth across the ecosystem.

The above is the step-by-step plan for MakerDAO starting from Early Game. At present, we have no way to ensure whether Phase 1 to Phase 5 represents the main plan from Early Game to Midgame and finally to Endgame. Therefore, in this $MKR valuation report, we have Contents beyond the currently foreseeable scope will not be discussed.

2.3 Collateral Types

For a short-term analysis of MakerDAO’s income and expenses, understanding the underlying assets it introduces is crucial. In the Endgame plan, collateral is categorized into two types: decentralized assets that can ensure unbiased characteristics and real-world assets that can provide reliable liquidity and stability.

$MKR：

As the utility of $MKR as liquidity support for DAI decreases, the mechanism shifts from mandatory to optional based on governance decisions. Instead, in case of losses in the MakerDAO system, it might distribute these losses by lowering the target price of DAI (its peg to the USD).

$MKR in the Endgame plan becomes a valuable form of decentralized collateral through the surplus collateral vault. It generates stability fees for the protocol, participates in governance, and can be used for farming SubDAO tokens.

Cash-like RWA:

Currently, cash-like RWA is the most widely used RWA asset by MakerDAO, including centralized stablecoins and short-term government bonds. This asset type is crucial for maintaining the stability of the DAI exchange rate and appears to be a significant source of MakerDAO revenue based on recent performance in U.S. government bonds.

However, this category of assets poses the highest risk of being confiscated or facing regulatory challenges. This is why MakerDAO undergoes three different stages to minimize the proportion of such assets in its balance sheet.

2.4 Three Stances

Terminology:

DSR: DAI Savings Rate

SFBR: Stability Fee Base Rate (similar to the stability fee loan rate in this article )

TR: Target Rate, a mechanism that gradually changes the target price of DAI over time. A positive TR increases the demand for DAI and decreases the supply. The main purpose of TR is to control MakerDAO’s exposure to RWA assets and encourage the generation of DAI through more decentralized collateral like ETH.

In summary, SFBR and TR can be understood as rates for all stability pools and specifically for stability pools related to decentralized assets. Increasing SFBR and TR is equivalent to raising DSR indirectly, increasing the cost of obtaining DAI through collateral and reducing DAI supply, while also fostering DAI demand, thereby increasing the DAI price.

Pigeon Stance:

In a scenario with low regulatory risk and stable global economic conditions, MakerDAO aims to create revenue and accumulate ETH in the treasury using Cash-like RWA assets as much as possible to prepare for future crises. The pigeon stance was initially planned to continue until 2025, extending further if no significant regulatory risks exist to accumulate more capital.

Source: https://forum.makerdao.com/t/endgame-plan-v3-complete-overview/17427

Eagle Stance:

By ensuring that seizable RWA exposure does not exceed 25% and depegging DAI from the U.S. dollar if necessary, DAI can withstand the harshest regulatory crackdowns without cutting off its connection to real-world assets.

Source: https://forum.makerdao.com/t/endgame-plan-v3-complete-overview/17427

Phoenix Stance:

As a measure to deal with extreme situations, using only decentralized assets and Physically Resilient RWA assets as collateral, DAI’s target exchange rate will be adjusted based on market price deviations, rather than relying on collateral in the PSM.

Source: https://forum.makerdao.com/t/endgame-plan-v3-complete-overview/17427

Given the current regulatory attitudes and MakerDAO’s operational status, we predict that MakerDAO will be in the Pigeon stance for the next three years. The planned proportion of RWA assets during the Pigeon stance may not be entirely applicable. In this valuation report, we make predictions based on its current asset allocation and the general plan to maximize returns during the Pigeon stance.

Moreover, until MakerDAO empowers $MKR, we temporarily consider $MKR as a project token closely tied to MakerDAO’s revenue.

3. Tokenomics

3.1 $MKR Use Cases

The $MKR token is the core of the MakerDAO ecosystem, serving two crucial functions. Firstly, it represents governance voting rights, allowing holders to vote on proposals within MakerDAO, directly participating in the protocol’s decision-making processes. This includes decisions on system parameters, protocol upgrades, and governance policies.

Secondly, in situations where the system lacks funds to repay DAI debt, MakerDAO can issue new $MKR tokens to offset losses, maintaining the stability of the economic system.

This mechanism ensures the health of the stablecoin $DAI and the overall stability of the system while providing $MKR token holders the ability to directly influence the protocol’s future.

3.2 $MKR Token Allocation

MakerDAO manages and regulates the supply of $MKR tokens through its unique stock buyback model. At the core of this model is a mechanism called the “Surplus Buffer”, which is the primary destination for all revenue from the MakerDAO protocol. The primary purpose of the surplus buffer is to provide a first line of defense against loan shortfalls.

When a loan gap occurs, funds from the surplus buffer will first be used to cover the gap. Only if the surplus buffer is insufficient to cover the shortfall, the Maker protocol will make up the difference by issuing additional $MKR tokens.

It is worth noting that the surplus buffer has a set upper limit. When the funds in the surplus buffer exceed this limit, additional Dai will be used to repurchase $MKR tokens, and the repurchased $MKR tokens will be destroyed before June 2023. This mechanism is designed to reduce the total supply of $MKR, thereby providing value to existing $MKR holders. In the long term, this buyback and burn mechanism will result in a reduction in the supply of $MKR.

To date, 22,368.96 $MKR tokens have been repurchased and burned, which represents 2.237% of the total supply. This ongoing buyback and burn activity reflects the financial health of the MakerDAO protocol and the scarcity of the $MKR token, making a somewhat positive impact on the market value of $MKR.

Since June 2023, in MakerDAO’s updated Smart Burn Engine, funds exceeding the newly set surplus buffer will be used to purchase $MKR tokens, and the purchased $MKR will be composed of the corresponding amount of ¥DAI trading pairs and provide liquidity on Uniswap V2. The generated liquidity provision tokens (LP Tokens) are then transferred to addresses owned by the protocol.

The main purpose of this move is to further control the supply, liquidity and other mechanisms of the circulation of $MKR tokens and DAI tokens under the protocol. In essence, it is to regulate the supply of $MKR tokens in the open market, which can be understood as active market making.

Additionally, the Smart Burn Engine iis based on a valuation model that optimizes the process of burning tokens when the $MKR token price is low. When $MKR market cap falls below its valuation target, the protocol will burn accumulated Elixir ($MKR/$ETH/$DAI liquidity tokens).

Additionally, the plan introduces annual issuance of new $MKR tokens to counteract concentration caused by burning. This mechanism aims to create a dynamic balance where the quantity of $MKR burned and issued each year is equal, supporting the healthy circulation of the token. The value of $MKR is driven by its burning mechanism, SubDAO token income for active voters, and the ability to generate low-interest, high-collateral $DAI for active voters.

3.3 MakerDAO’s Profit Model

3.3.1 Stability Fee

Before the introduction of RWA assets, MakerDAO’s main source of income was loan interest income, which is the loan interest paid when users stake crypto assets in exchange for $DAI. The following is MakerDAO’s on-chain staking ppool and corresponding interest:

Source: makerburn

Combining this data with Dune’s information, it is observed that until October 2022, most of MakerDAO’s revenue came from interest income in several $ETH lending pools. In 2022, due to the collapse of $UST, many users exited the crypto market, leading to a substantial decrease in stablecoin TVL. MakerDAO had to lower interest rates to retain users and stabilize its financial situation, aligning with competitors such as Aave, where lending rates also dropped to 0%. Additionally, MakerDAO started implementing plans to replace reserves in stablecoins like $USDC with interest-generating assets such as government bonds.

With stability fees almost at 0% in 2022, MakerDAO faced financial challenges throughout the year. Starting in 2023, revenue from RWA assets such as government bonds gradually began dominating MakerDAO’s total income.

Source: https://dune.com/steakhouse/makerdao

3.3.2 RWA Income

Since the end of 2021, the yield on US Treasury bonds has gradually increased, leading to a corresponding rise in income from MakerDAO’s US Treasury reserve, which now accounts for over half of MakerDAO’s total revenue.

Source: https://dune.com/steakhouse/makerdao

3.3.3 Liquidation Income

When the prices of users’ crypto assets rapidly approach the liquidation threshold, MakerDAO initiates liquidation of these assets and charges a certain fee. This source of income proved beneficial for MakerDAO during significant market downturns in 2022 but is not expected to sustain MakerDAO’s operations during periods of relatively stable market conditions.

Source: Makerburn

3.3.4 PSM (PSM Revenu)

Users can swap $DAI for other stablecoins (such as $USDC) through the PSM at a ratio close to 1:1. The small fee collected during this swapping process is known as the PSM turnover fee. This fee helps regulate the supply of $DAI, aiding in maintaining its value stability and serving as part of the system’s revenue. During market fluctuations, the PSM allows MakerDAO to effectively adjust the liquidity and price pegging of $DAI.

Source: Makerburn

4. Valuation Model

Our valuation is based on the Discounted Cash Flow (DCF) analysis, with a detailed derivation provided in our MKR Valuation Model. The valuation can be adjusted based on actual market conditions in the future. The details and explanations of the valuation method are outlined below.

4.1 Discounted Cash Flow (DCF) Analysis

For ease of understanding, MakerDAO can be viewed as a temporarily unregulated, bank-like currency issuance institution. Initially, users need to obtain $DAI by over-collateralizing assets in a decentralized stablecoin manner and pay interest to MakerDAO. Simultaneously, MakerDAO uses the interest paid by borrowers to provide the Dai Savings Rate (DSR), offering depositors of $DAI the opportunity to earn interest on their deposits.

Initially, MakerDAO’s primary sources of revenue were users over-collateralizing crypto assets and real-world assets lending stablecoin $DAI, collecting stability fee. Additionally, MakerDAO collected liquidation income when the value of user-collateralized assets fell below the liquidation threshold, and stablecoin transaction fees from the PSM revenue.

Starting from the end of 2022, MakerDAO gradually replaced most of its PSM underlying assets from stablecoins like USDC with real-world assets like US Treasury bonds and US Treasury ETFs, providing stable income. This additional RWA income is currently the largest revenue source for MakerDAO, followed by interest income from ETH lending.

Based on these conditions, we believe the Discounted Cash Flow (DCF) method is most suitable for valuing the $MKR token price. The DCF is an absolute valuation method used to estimate the value of an asset based on the expected future cash flows, discounted by a rate that reflects its risk.

Our model uses data up to December 31, 2023, as the basis, with a 3-year forecast period and a terminal value representing the protocol’s long-term cash flow under continuous operation, estimating the value of the $MKR token on March 1, 2024.

4.1.1 Assumptions

This model is built on a series of key assumptions, incorporating data from the Endgame plan regarding the proportion of RWA assets at different stages and the interest rate reduction cycle of US Treasury bonds, reflecting predictive valuation of MakerDAO’s development trends over the next three years. These assumptions are the cornerstone of the model evaluation and have been integrated into our valuation framework, allowing for flexible adjustments to adapt to evolving market conditions. Detailed assumptions can be found in the following sections.

DAI Total Supply:

The growth of DAI’s total supply significantly impacts the valuation as it directly drives the second-largest income source, total stability fee, and indirectly affects liquidation income). According to the previous report, we predict DAI’s total supply based on the market share of stablecoins in the stablecoin market and DAI’s market share in CDP stablecoins.

Firstly, regarding stablecoin TVL, we divide the growth rate from April 2021 to April 2022 into three scenarios:

Current: 130,646.0 million

Bear: 2024 - 10%；2025 - 20%；2026 - 30%

Base: 2024 - 15%；2025 - 30%；2026 - 45%

Bull: 2024 - 20%；2025 - 40%；2026 - 60%

Our perspective is that we are currently in a tightening cycle. A mechanism like MakerDAO, which brings off-chain risk-free interest income to on-chain and allocates it to stablecoin holders through DSR, is more favorable in the market compared to traditional $USDC and $USDT, which retain this portion of income as project profit. However, due to ongoing challenges in the ecosystem, such as difficulties in on/off-ramping and user unfriendliness associated with decentralized stablecoins, its market share remains around a relatively low level of 7%. (Most of the interest from DSR comes from MakerDAO’s collateralized lending income, but theoretically, it can also use additional income from RWA for DSR interest.)

Given that the introduction of RWA assets enables CDP stablecoins to generate stable returns, we predict the market share of CDP stablecoins in the stablecoin market under three different scenarios:

Bear: 2024 - 12%；2025 - 15%；2026 - 18%

Base: 2024 - 17%；2025 - 20%；2026 - 23%

Bull: 2024 - 22%；2025 - 25% ；2026 - 28%

In the CDP stablecoin market, since July 2022, when CDP TVL stabilized, the share of DAI in CDP stablecoins has consistently ranged from 60% to 70%. It is predicted that the increase in market share in the CDP stablecoin market will encourage more projects, such as Aave, to introduce similar stablecoin projects. With intensified competition and the relatively negligible technological barriers for leading projects, the market share of DAI in the CDP stablecoin market over the next three years could be divided into three scenarios:

Bear: 2024 - 65% ；2025 - 55% ；2026 - 45%

Base: 2024 - 65% ；2025 - 60% ；2026 - 55%

Bull: 2024 - 65% ；2025 - 70% ；2026 - 75%

RWA Asset Ratio:

Currently, RWA assets account for 46.40% of MakerDAO’s total assets. According to the Endgame plan, the proportion of US Treasury assets will gradually decrease due to different regulatory conditions, and it is expected to decrease to 15% around 2025. We assume the RWA asset ratio for the next three years as follows:

Bear: 2024 - 40% ；2025 - 22% ；2026 - 4%

Base: 2024 - 44% ；2025 - 30% ；2026 - 16%

Bull: 2024 - 58% ；2025 - 63% ；2026 - 68%

The remaining numerical predictions are detailed in the table below:

$MKR Token Deflation

Considering that MakerDAO will begin the rebranding of the $MKR token in early 2024, with the expectation of issuance and the deflation expectation of the Smart Burn Engine, it is planned to maintain the circulating supply of $MKR tokens unchanged. The valuation is calculated based on the existing circulating supply.

4.1.2 DCF Model

The corresponding DCF analysis consists of the following three scenarios:

Bear case:

In the bear case, the $MKR token price is expected to be $1,334.96, with the protocol valuation on March 1, 2024 at $1.231 billion.

Base case:

In the base case, the $MKR token price is expected to be $2,820.03, with the protocol valuation on March 1, 2024 being $2.600 billion.

Bull case:

In the bull case, the $MKR token price was expected to be $5,349.17, with the protocol valuation on March 1, 2024 at $4.933 billion.

4.1.3 Probability-weighted DCF Analysis

We allocate a probability of 25% each to the bull and bear cases, with the base case having a 50% probability. The probability-weighted DCF analysis for the $MKR token price is $3,081.05, and the valuation for the protocol is $2.84 billion. As of January 16, 2024, the $MKR token’s price is $1,989.35, indicating a potential upside of 54.88%.

4.2 Comparable Analysis

Comparable analysis is a commonly used valuation method that involves comparing a project to similar companies in the industry based on metrics such as Price/Sales (P/S) and Price/Earnings (P/E) ratios.

It is important to note that using this valuation method in the decentralized finance (DeFi) sector to assess these lending protocols may have certain limitations since reliable sales revenue data may not be obtainable.

When conducting a comparable analysis, selecting companies that are as similar as possible in terms of industry, business model, risk profile, and market dynamics is crucial. By ensuring comparability in these aspects, the impact of external factors is reduced, allowing us to focus on the intrinsic value drivers of the analyzed companies.

If the chosen comparable companies belong to the decentralized lending industry and have similar business nature and risk conditions as MakerDAO, it can enhance the effectiveness of the comparative analysis. Here, we have selected AAVE, Curve Finance, and Compound—three leading companies in the lending industry with a certain degree of business similarity to MakerDAO—for a comparable analysis.

4.2.1 Valuation Assumptions and Variable Considerations

Price/Earnings Ratio (P/E Ratio):

The P/E ratio helps investors evaluate the investment value and risk level of the project by considering the relationship between the token price and the protocol profit. The P/E ratio of different industries and project types may be very different, so it is usually necessary to compare it with those of the same industry. Blockchain projects or market averages are compared.

Price/Sales Ratio (P/S Ratio):

The P/S ratio is commonly used to assess the valuation of companies in the same industry based on revenue. For decentralized lending protocols, protocol revenue (analogous to “sales revenue” in traditional companies) is a key factor in evaluating financial performance and sustainability. The P/S ratio provides insights into how the market evaluates the protocol’s revenue-generating ability.

PEG Ratio (Price/Earnings to Growth Ratio):

For lending protocols like MakerDAO, the recent introduction of U.S. debt assets as underlying assets has significantly increased protocol revenue. Using past average protocol revenue to calculate the price-to-earnings/price-to-sales ratio for valuation is inevitably biased.

We introduce the PEG indicator to make up for the shortcomings of PE valuation in evaluating the dynamic growth of protocols. When PEG > 1, the price-to-earnings ratio is higher than the protocol’s profit growth rate, which is overvalued; when PEG < 1, it means that the company is developing rapidly, but this development is temporary. It is not reflected by the price-to-earnings ratio and is undervalued. Based on the PEG indicator, we can roughly make a more comprehensive judgment on comparable valuations.

Average P/S ratio:

We adopt a market multiplier approach commonly used in the crypto industry, taking the weighted average of the price-to-sales ratios of four comparable protocols as the market multiplier of 1. By calculating the weighted average of the price-to-earnings or price-to-sales ratios derived from a protocol through FDV/Market Cap, we essentially take into account the upper and lower bounds of comparable items and the weighting of items of different market caps, providing a more balanced estimate of market multiples.

Therefore, we choose to use the weighted average of comparable items as a quantitative market multiplier to avoid the potential bias that may arise from relying solely on the maximum or minimum value. However, please note that due to the accuracy limitations of revenue and other data, this value is for comparative reference only. .

Median:

Statistically speaking, the median is not affected by extreme values ​​in the distribution sequence, which improves the representativeness of the distribution sequence to a certain extent. Therefore, we believe that choosing the median as the market multiplier of 2 is reasonable.

Annualized Total Revenue:

By analyzing the revenue generated by a blockchain project, one can evaluate its ability to generate revenue and maintain operations. Revenue is a key indicator of a project’s financial health and growth potential. The evaluation of protocol fee income helps to understand the revenue streams directly related to lending activities and the profitability of the lending protocols

Protocol income can come from various sources within the lending protocols, including lending interest, RWA proceeds, etc. By considering protocol fee revenue as a variable, analysts can evaluate the diversification of revenue streams. This helps assess a protocol’s ability to withstand market fluctuations and long-term viability.

Annualized Revenue to $MKR Holders:

In traditional stock markets, “earnings” in the Price/Earnings (P/E) ratio refers to the actual net profit earned by a company during a specific period (usually a quarter or a year). This is a crucial financial metric investors focus on to measure a company’s profitability and financial health. However, in the blockchain space, the concept of “earnings” may not be directly applicable.

This is because DeFi projects do not generate profits in the traditional sense and typically lack net profits or earnings per share comparable to traditional companies. Instead, their economic models often involve net income in the form of token transaction fees, liquidity mining rewards, lending interest, etc., transferred to the project or token holders. When valuing the $MKR token using the P/E ratio, we refer to Makerburn’s method, which utilizes its net profit for calculations.

4.2.2 Valuation of Comparable Analysis

The chart above illustrates project valuations and token prices based on the Price/Earnings Ratio (P/E) and Price/Sales Ratio (P/S). We estimated the project’s annual fee income and net income using data from January to December 2023. MakerDAO’s projected annualized total revenue is $211 million, indicating its substantial revenue-generating capability as one of the leading projects in the lending industry, especially given the current significant yields on US Treasuries.

Furthermore, $MKR’s P/E ratio is relatively lower compared to the average ratios of the selected decentralized lending protocols, as also reflected in the PEG ratio. In comparison to the other three protocols, $MKR’s value may be undervalued. Based on the P/E ratio, the potential $MKR token price range is $8,737.18 - $10,678.78; based on the P/S ratio, the potential range is $3,131.64 - $7,047.86.

4.3 Comprehensive Analysis

Combining the results of DCF valuation and comparable analysis, we conduct a comprehensive analysis of the $MKR token:

Firstly, we conducted a sensitivity analysis on the key variables in the DCF valuation model. Based on the sensitivity analysis results, we selected the maximum and minimum values of the probability-weighted DCF valuation under different terminal P/E ratios and discount rates. In the comparable analysis, given the significant difference in MKR’s P/E and P/S ratios compared to other protocols in the industry, and considering the accuracy of the data, we assigned 10% weight to both the P/E and P/S valuation models, with the remaining 80% assigned to the weighted DCF valuation. The comprehensive analysis results indicate that the price range for $MKR tokens is $3,396.72 - $4,374.21, and the fully diluted valuation (FDV) range is $3.321 billion - $4.277 billion.

Furthermore, as indicated by the PEG ratio mentioned above, our current valuation of $MKR tokens based on the P/E ratio is relatively conservative. Compared to the situation of rapid growth in net income after the introduction of RWA assets, the current P/E valuation is considered undervalued.

The establishment and derivation of the valuation model and token prices are based on the data and market operations provided at the moment. Future market dynamics and MakerDAO’s operational performance will ultimately determine its true market value.

5. Risks

5.1 $MKR Token Allocation

$MKR Token Dilution Risk:

MakerDAO’s operational mechanism includes a crucial measure of issuing new $MKR tokens in case of a loan shortfall. While this measure aims to maintain system stability and liquidity, it introduces the risk of $MKR token dilution.

Additionally, the issuance of new tokens may lead to the existing token holders facing the risk of value depreciation. This dilution effect could have a negative impact on the market price of $MKR, especially if demand for $MKR in the market remains unchanged.

5.2 Regulatory Risks

Impact of the Endgame Plan:

MakerDAO’s current considerations of the Endgame plan involve various operational stances, including eagle and phoenix stances. The choices and implementation of these strategies will have a significant impact on MakerDAO’s overall revenue and market positioning. In particular, adopting a eagle and phoenix stance may lead to fundamental changes in operational strategies and risk management methods, potentially affecting the value and attractiveness of the $MKR token.

Potential Implications of DAI Depegging from the US Dollar:

The strategic adjustment of the stablecoin $DAI depegging from the US dollar is a major initiative that could result in short-term user attrition and market uncertainty. $DAI, as a crucial DeFi asset, has its stability and user trust directly influenced by its connection to the US dollar. Any depegging action needs careful management to avoid negative impacts on the overall ecosystem.

6. Conslusion

This article employs Discounted Cash Flow (DCF) analysis to reasonably estimate the value of the $MKR token. Through probability weighting, MakerDAO is valued at $2.84 billion, with an expected price for $MKR of $3,081.05, presenting a potential upside of nearly 54.88%. Lastly, combining P/E and P/S valuation methods, a comprehensive analysis indicates a potential $MKR token price range of $3,396.72 - $4,374.21 after the first quarter of 2024. Compared to the current market price of $MKR tokens, there remains a considerable upside potential.

In the rapidly evolving and highly competitive DeFi market, MakerDAO’s long-term survival and success will heavily depend on its ability to adapt to regulatory changes and market demands. The Endgame plan represents a substantial step for MakerDAO, and whether it can truly become an efficient, innovative organization in its ideal form remains to be seen. We will continue to monitor developments in the relevant areas to provide investors with accurate and timely market analysis.

Disclaimer：

1. This article is reprinted from [Gryphsis Academy], the original title is “Decoding MakerDAO Valuation: A Deep Dive into Borrowing + RWA: A Strategy for Bull and Bear Markets”. The copyright belongs to the original author [@yelsanwong]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
2. Liability Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.
3. Translations of the article into other languages are done by the Gate Learn team. Unless mentioned, copying, distributing, or plagiarizing the translated articles is prohibited.