MAKERDAO

DIGITAL ASSET REPORT:

MKR Review and Investment Grade

Crypto Briefing Research Department

March 30, 2020
Grade-B

Quick Facts

TickerMKR
Current Price$298.72
Market Capitalization$300,505,724
Buy Up To Price:$590
Private Sale
Private Allocation$27,000,000
Total Supply1,002,622 MKR
Top 10 Addresses Combined Stake61.86%
ATH Price$1,773.92 (Jan 18, 2018)
30-Day Average Price$396
24H Volume$4,047,106
30-Day Average Volume$6,012,948

Contents

Fundamental Factors

Market Opportunity 85;
Ecosystem Development 75;
Token Economics 75;
Token Performance 60;
Core Team 75;
Underlying Technology 75;
Roadmap 70;

Combined Score: 7.4

Introduction

Over the last two years, Decentralized Finance (DeFi) has become a dominant narrative within the Ethereum ecosystem. The total value locked in DeFi protocols has grown from $0 in August 2017 to more than $600M today. 

Since its inception, the DeFi space has been dominated by the MakerDAO platform. In fact, this was the first decentralized application that has experienced significant adoption.

MakerDAO is a stable coin project that backs the value of the Dai stable coin through a dynamic system of Collateralized Debt Positions (CDPs or Vaults). Dai is designed to maintain a 1:1 soft-peg with the U.S. Dollar and its value is backed by collateral: Ethereum, Basic Attention Token, and USDC stablecoin locked on its smart contracts. 

Dai stablecoins are widely used within the DeFi ecosystem. Moreover, out of around $600M locked in DeFi protocols, 54% is locked on Maker’s smart contracts, making the project a systemically critical player in the current DeFi ecosystem.

Since its launch, the project has been through ups and downs. Recently, it faced major problems with its liquidation system, which resulted in mass liquidations resulting in a deficit of more than $4M for the platform. 

Despite all of the negative community backlash connected to this event, the project received a great deal of support from DeFi ecosystem players. The DeFi community realized that Maker is already too big to fail and, in some ways, the whole industry is dependent upon its success or failure. Therefore, the current hurdles are unlikely to affect the long term sustainability of Maker’s platform. 

As an early leader, MakerDAO will likely continue to dominate this dynamically evolving space. The hurdles will only help the project mature and become more resilient. It’s expected that Maker will be able to adapt to handle large volumes as DeFi adoption grows.

How Does MakerDAO Work?

Maker’s system lets you create new Dai stablecoins by locking up your collateral in the platform’s smart contract. These contracts were developed by Maker back in 2014 and are called Collateralized Debt Positions, or CDPs. 

In order to open a CDP and mint Dai, users have to lock at least 150% more collateral on a Maker smart contract. This is the minimum collateralization ratio for all Maker users. 

If the collateralization ratio falls under 150%, the collateral becomes available for liquidation and will be sold on the open market at a discount, which will result in some losses for the issuer of this CDP. 

Therefore, users usually maintain a much higher collateralization ratio. In fact, the current average collateralization ratio in the system is around 296%. This means that there is almost three times more collateral of the total Dai issued in the system. 

Cryptocurrencies remain a very volatile asset class. Therefore, a high collateralization ratio is an absolute must in order to maintain the stability of this system.

What Are the Use-Cases?

Maker Dao provides a number of use-cases for its users: 

  1. Stable currency Dai. Dai has gained substantial adoption and is used in most DeFi dApps as a decentralized substitute for United States Dollar. The current average trading volume for Dai is over $10M and is currently the largest and most capitalized decentralized stable currency in the crypto space.
  2. Leverage. When users want to increase their leverage, they can always lock their ETH or BAT and receive Dai tokens. Using Dai tokens can enable purchase of any other asset on the market, which creates a leveraged long position. 
  3. Trading. Maker has created its own application Oasis.app that lets users trade, borrow, or earn savings on Dai. 

How Is the Protocol Governed?

Prior to March 25, 2020, the Maker Foundation has governed the smart contract that underpins MakerDAO. However, just recently the Foundation announced that it has transferred full control of the contract to the Maker governance community. 

Maker is using an on-chain voting mechanism to vote on important governance decisions for the protocol. In order to participate in voting, users have to own Maker’s governance token—MKR. Voting is determined by the amount of MKR voting. 

According to the project’s documentation: 

“The primary responsibility of MKR holders is to ensure the stability of the Dai peg and the overall health of the Maker Protocol. It’s also in MKR holders’ interest to focus on improving and growing the Maker Protocol by building out the governance processes and infrastructure that enable the effective management of the system.”

In the event of an unpredictable disaster, known as a Black Swan, “If the system debt exceeds the surplus, the MKR token supply may increase through a Debt Auction to recapitalize the system."

For taking these responsibilities, MKR token holders benefit from the fees charged by the system.

  1. Stability fee - currently around 7.5%. It is designed to address the inherent risk in generating Dai against collateral in Makers CDPs.
  2. Liquidation Penalty fee - in the event of CDP liquidation (when the collateralization ratio decreased below 150%), CDP owners are penalized and have to pay a liquidation fee, which is currently 13%. Out of this 13%, 10% goes to Maker and 3% to the liquidator.

All the fees are paid in Dai. However, the fees are not transferred directly to MKR holders but instead are transferred to the Maker Buffer.

The Maker Buffer serves as a hedge against a potential increase in the MKR supply due to previously mentioned Black Swan events. If the proceeds from all of the fees charged by Maker exceed the Maker Buffer limit, the surplus is sold through a Surplus Auction. 

Bidders compete by bidding decreasing amounts of MKR to receive a fixed amount of Dai. Once the auction ends, all the MKR collected is autonomously destroyed by the system, which reduces the overall total supply of MKR. 

This reduction in supply should positively affect the MKR price and therefore benefit the current token holders in the long run.

MakerDAO Ecosystem

MakerDao is currently the number one DeFi platform with over 2.1M ETH locked on its smart contracts. This is equivalent to around $325M, or ~1.9% of total Ethereum supply.

The Dai minted by Maker’s users is also widely used within the crypto community. Its popularity and value is based on the fact that this is the first decentralized stable coin in the space, and it satisfies the industry’s ethos of decentralization.

According to Coingecko.com, it is traded on over 15 exchanges, including Coinbase Pro, Kraken, and Bitfinex, with a total 24h volume of over $10M and a total market cap of around $80M.

Moreover, the coin is used on some of the most popular DeFi dApps, such as Uniswap, Compound, dYdx, and others. In terms of DeFi applications, Dai is especially important since they aim to fully decentralize their operations. 

Dai can also be lent and borrowed across several P2P lending platforms. It is accepted by all major players, both centralized and decentralized. 

Compared to other blockchain applications (not only DeFi), Maker is enjoying a first-mover advantage and is showing great signs of real adoption, something that most other blockchain dApps lack.

The project is also actively working on growing its ecosystem. In December 2019, the Maker Foundation announced that two venture capital funds, Dragonfly Capital Partners and Paradigm, have acquired $27.5M worth of MKR, approximately 5.5% of the total MKR supply.

These funds will be used to support Maker's effort to expand by bringing DeFi to China and other Asian markets. In fact, the Asian market is currently dominated by the centralized stablecoin USDT issued by Tether. However, venture firms still see great potential for Dai on the Asian market 

According to Dragonfly Capital managing partner Alexander Pack, “Fund’s thesis on space is that a lot of the really cool core technologies are being built in the west, and a lot of adoption in Asia, and we try to bridge that. Maker is perfect for that."

Maker has also recently partnered with Simplex, a European Union-licensed financial institution with over 100 partners that support many fiat and crypto currencies. This will help the project grow its on-ramp distribution network and will simplify the onboarding of new users that are less familiar with the DeFi space. 

Given that the project continues to work on the expansion of its ecosystem, and as the overall DeFi market continues to grow, Maker will likely be dominating the space and will further increase adoption.

Maker’s Recent Crisis and Potential Implications

Earlier this month, MakerDao faced arguably the single worst day in its history. The full story about what has gone wrong is explained here

In short, the current financial crisis has negatively affected the crypto market. Due to this, the value of Ethereum has dropped over 50%, triggering a cascade of liquidations alongside significant network congestion. 

Maker’s liquidation system was unable to handle this level of congestion and the event resulted in a failure of the liquidation process. Most of the liquidators were not able to submit their bids, while a few bidders were able to win ETH collateral with $0 bids, thus walking away with free ETH.

This has left Maker with over $4M worth of undercollateralized Dai. To quickly solve this dilemma, the team called an emergency meeting and implemented several important changes to the protocol in order to improve liquidity. 

To fix the liquidation mechanism, the auction closing time was increased from 10 minutes to 6 hours. Also, the auction size in ETH was increased from 50 ETH to 500 ETH in order to reduce the number of transactions and consolidate bidders.

To cover the $4.5M debt, the Foundation conducted a series of Debt Auctions where more MKR was minted to fill the hole.

What’s interesting is that the whole DeFi community was ready to support this auction. Paradigm fund pledged a bid of $5MM. Moreover, the “Backstop Syndicate” quickly formed to become a MKR buyer of last resort, pricing their backstopped bids at $100/MKR. 

In fact, due to the wide support from the DeFi community, the project was easily able to cover the hole on its balance sheet.

This situation clearly shows that the entire DeFi space is still in its early stages of development. Hacks and other technical failures are growing pains and harsh lessons that the industry has to endure in order to mature. 

Contrary to what one might expect, we feel this incident has actually helped strengthen Maker, as these battle scars from real world stress testing has allowed it to address weakness in its system. 

It is important to remember that regardless of the high valuation and market cap, most cryptocurrencies on the market today are still, by nature, early-stage startups. So while we must assess system failures seriously, what is even more important is how these startups respond and emerge from such events.  

Still, in the short term, current issues will likely have a negative effect on investor sentiment towards the project. How these CDP holders that have lost their collateral will be compensated is still in discussion and it is likely that Maker will not be able to make everyone happy. 

However, current issues will unlikely have a negative effect on the long term sustainability of the project. Maker is literally half of the DeFi market right now, and all the DeFi stakeholders are interested and somewhat dependent upon its success. Maker’s failure will ultimately have a major ripple effect on all of the other players in the DeFi ecosystem. As such, we believe it will continue to receive significant support from the community.

Conclusion

Over the course of several years, Maker was able to grow the adoption of its protocol and build the whole ecosystem around its stable coin. The project is enjoying first-mover advantage and is currently the leader in the growing DeFi space. 

Despite all the recent hurdles, having a professional team and effective governance has allowed the project to solve its technical issues.

Although the MKR price took a hit, the recent problems with the protocol has only made the project stronger. 

The project continues to be fundamentally strong and under current conditions looks like a good value play. Therefore, it receives a grade of B.

How to buy MKR

Choose your preferred exchange. MKR can be purchased from several cryptocurrency exchanges, the full list of exchanges can be seen ​here​.

Step 1. Head over to your preferred exchange.

If you want to purchase MKR, one of the options is to use KuCoin.

Step 2. Create an account on the exchange of your choice if you don’t already have one.

Step 3. Top-up your exchange balance with some of your BTC or ETH

On KuCoin, MKR can be purchased with Bitcoin and Ethereum so make sure to first send over some BTC or ETH to your exchange wallet. (Don’t forget to double-check that the address you are sending your coins to is correct!)

*Optional​: If you don’t own BTC or ETH, the easiest way to buy them is through ​Coinbase​ or Binance US

Step 4. Choose your trading pair

Head over to the exchange and choose BTC to purchase MKR with.

Step 5. Purchase MKR with a market or a limit order.

If you want to buy just a small amount instantly, it is easiest to use a Market Order.

Input the amount of MKR you want to purchase and press Buy.

If you need to purchase a large amount of MKR, it is best to use a Limit Order to get the best possible price.

Input the amount of MKR you would like to purchase, and the price at which the order should be filled at and press Buy. (It might take some time for the whole order to be filled if you are purchasing a large amount).

Step 6. Store your MKR on one of the supported wallets for increased security.

To store MKR, you can use Trezor​, or Ledger for improved security.