Opinion: Why MakerDAO's MKR will outperform most assets?

Author: Taiki Maeda Compiler: TechFlow

In the MKR/SKY report a few months ago, I proposed that the restart of the buyback would enable it to outperform most crypto assets on a risk-adjusted basis. Since the buyback was announced on February 20:

• MKR is up 46% against BTC,

• MKR is up 70% against ETH,

• MKR has become one of the few cryptocurrencies with a year-to-date (YTD) price increase: +24%.

In this update, I will discuss three aspects of why I think this trend will continue:

1. Introduction of SKY staking

2. Forced SKY token migration (>10% of supply will be destroyed)

3. Mining plan for SPK tokens

Introduction of SKY staking

Currently, MKR/SKY is a token that uses all protocol revenue to buy back tokens. At the current buyback rate, the protocol buys back about $15 million per month ($500,000 per day), which is equivalent to buying back about 1% of the circulating supply per month (the highest proportion of all crypto projects).

On April 30, Rune published a proposal on the forum to launch the SKY pledge mechanism. According to the proposal, 50% of the protocol revenue will be distributed to SKY pledgers, paid in USDS. That is to say, about $250,000 per day is used for repurchase and $250,000 is distributed to pledgers.

Assuming 33% of SKY supply is staked, stakers can expect to earn a staking yield of 7-8%.

Forced SKY Token Migration

In the same update, it was also mentioned that a forced migration from MKR to SKY would be carried out:

Since MKR is one of the earliest ERC20 tokens (launched since 2017), there must be some tokens that are permanently lost. This may be due to reasons such as lost private keys, lost wallets, or the death of holders. Through on-chain data analysis, I found some "sleeping MKR tokens" that will inevitably be destroyed from the supply.

I based my analysis on reasonable assumptions, such as: "If there are 23,349 MKR tokens that have not been transferred in the past 4-5 years, I can assume that about 90% of them have been permanently lost, that is, they will be destroyed." Based on these assumptions, I expect that about 100,000 MKR will be destroyed due to migration (about 11.4% of the circulating supply). By referring to other cases of lost tokens (such as Aragon DAO), I think this is a conservative estimate.

Take the Aragon DAO token ($ANT) in 2023, when it was trading below the treasury value. "Treasury looters," or RFVooors, purchased tokens at a discount to the net asset value (NAV) and demanded that the treasury be redeemed for a profit. The operation was successful, and a migration process for ANT tokens to new tokens was subsequently initiated to redeem the treasury value. During this process, approximately 27% of the tokens were not migrated, and it can be inferred that these tokens were permanently lost.

Therefore, I expect 10-20% of MKR to be destroyed in the coming months or years, which will support the token price. In addition, this forced migration may prompt more centralized exchanges (CEX) to list SKY, which will bring additional benefits.

SPK Token Launch

Spark is a project that combines a lending market with on-chain asset management. With almost no incentives, it achieved $40 million in revenue in the first quarter of 2023. They are able to borrow stablecoins for SKY at a subsidized rate, thereby allocating capital on-chain.

SPK will be a "fair launch/mining" token that users can only mine by staking USDS or SKY (the specific economic model can be found in the relevant documents). In the first two years of token issuance, 50% of the $SPK incentives will be allocated. If the fully diluted valuation (FDV) is assumed to be $500 million, $250 million of the value will be allocated to SKY/USDS stakers. This not only provides staking returns for the native token, but will also promote the growth of USDS, which will further drive more buybacks in the future.

In addition, there are other subDAOs or "star" projects coming online (such as Solana Star, RWA Star, etc.), and the launch of these new projects will also further support the buyback plan.

Stablecoin Bill

The "Stablecoin Bill" (GENIUS ACT) is expected to be signed by Trump in July or August. Although the bill is mainly aimed at centralized stablecoin issuers (and therefore has little impact on decentralized issuers), this policy narrative may bring positive market momentum to MKR/SKY. According to industry experts, the bill is expected to be passed in July or August.

Summary

Stablecoins are the future and are one of the most profitable projects in the crypto space.