A DECENTRALISED LENDING PROTOCOL - MAKERDAO
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Quick background what is MakerDAO
MakerDAO is a lending platform, that powers a decentralised stablecoin DAI. DAI is soft-pegged to the USD.
The protocol works by allowing anyone to take out loans in DAI using other cryptocurrencies as collateral. These loans are overcollateralised, meaning that borrower needs to deposit more cryptocurrency (eg. ETH) in USD value than DAI loan.
The use of such loans is further to place DAI into yield farming opportunities, while not selling own ETH.
Interest – upon withdrawal of collateral users returns DAI+ accrued stability fee that is immediately used to buy back MKR tokens.
Liquidation penalties – in case loan breaches collaterisation rate it is liquidated and in addition to interest user is charged liquidation penalty that is as well used to buy back MKR.
Messari.io started financial reporting coverage for MakerDAO, let's dive in to it.
MakerDAO PL Q3-22: loss making, first since 2020. Q4-22 will be most likely negative as well.
Interest revenue is on a decline pass. Since Q1-22, dropping to $4.0m in Q3-22 vs $11.7m same quarter last year and $12.3m in Q2-22. There is less demand for loans.
Liquidation revenue smoothed declining interest revenues in H1-22: H1-22 has been a great deleveraging fueled by Terra-Luna collapse that generated whopping $40.4m of revenue over that period, outpacing interest rate revenue of $35.3m for the same period.
Liquidation revenue looks as a material component of the inflows for the protocol in the last twelve month (LTM) 39% of revenue came from liquidations.
This raises a thinking on a design risk, as protocol is interested in liquidations as a faucet of quick and large revenues.
Expenses picked up in 2022. Are fixed in nature: Material acceleration since Q1 2022, Q3-22 landed at $13.5m vs $5.8m same quarter last year.
No details in the Messari report, but based on makerburn.com there most material item is Oracle Unit. Per budget request there has been expected increase of the oracle team from 6 FTE to 15.5 FTE that was budgeted at $5m. Per makerburn.com there has been $10m spent on Oracle Team over 9 months 2022, the next large spend is Protocol Engineering $6.3m for 9 months 2022.
Bottom line: MakerDAO has seen a loss in Q3-22 at ($9.4m). According to Cointelegraph this the a first loss making quarter since 2020.
MakerDAO Balance Sheet
Segwaying into TradeFi
According to Dune over October-November protocol continued to be in a loss zone. However at current PL burn levels MKR Treasury still has run-way for 18 months.
Protocol works on increasing its top line without taking risk associated with crypto volatility.
Coinbase: $1.6b will be deposited in Coinbase’s institutional platform Prime, in exchange for an annual yield of 1.5%. Earlier this year Coinbase partnered with BlackRock for its clients to use Prime for crypto-trading.
Monetalis Clydesdale: $500m will be placed in US Treasury bonds. The deployment is done via Monetalis Clydesdale (UK firm). According to Company House, the firm is relatively fresh – established in Nov-21 with GBP1,000 capital. For this exercise ETF’s chosen are also from BlackRock.
~30% of the MakerDAO TVL is in USDC, centralised stablecoin that is issued by Circle, and BlackRock is investor in Circle and primary asset manager of its cash reserves.
Huntingdon Valley Bank: in Q3’22, the Huntingdon Valley Bank got from MakerDAO $100m loan facility at 3% yield. The interesting point is that subseuqntly in Oct-22 bank has been sold for $67m to First Citizens Community Bank.
Societe Generale FORGE: Expected to have $30m facility in Q4-22. Loan will be drawn down against digital covered bonds that are backed by a pool of AAA-rated French home loans.
Diversification into TradeFi is an interesting experiment we still to see how it plays out, but in a short run it can help to increase interest revenues, while setting up case to be a first mover from DeFi to TradeFi and taking a large market share if successful.
Having said that the question is how this will effect DAI peg stability. As the more centralised entities are involved the less immediate liquidity is available to support DAI and react to highly volatile crypto-market.
Revenue focus is well understood, but on the other hand MakerDAO might need to review its cost base, that is in nature fixed (not reacting to the revenue trend) and right size if needed. While we see material lay-offs in real sector, we have not yet seen it been executed in a DAO mode at scale.
Over 2022 MakerDAO already experienced turbulence related to its Governance, that has been claimed to turn to a political game and centralisation in hands of couple of people (more details here https://www.wired.co.uk/article/makerdao-rune-christensen-decentralize).
Interesting how move current MakerDAO performance would be reflected in MKR valuation as looking at TradeFi crypto-friendly banks like Silvergate Capital Corporation (SI) or Signature Bank (SBNY), that have more assets and are consistently profitable still showing P/E around ~7, while MKR looks at P/E in high 10th (LTM).
As an example Silvergate, that has bought out Diem (Facebook's stablecoin venture), as the end of Q3-22 had $15.5b in assets and $130m in net income for 9 months at market cap of $868m, while Maker DAO $73.b in assets, $55.4m in net income for the same period at market cap of $640m.
**This is not an investment or financial advise.**
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Oleksandr Ulytskyi | Senior Token Economist
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