Viewpoint: Why I believe that MakerDAO's MKR will outperform most assets?

Author: Taiki Maeda

Compiled by: Shenchao TechFlow

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

MKR increased by 46% compared to BTC,

MKR rose 70% compared to ETH,

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

In this update, I will discuss why I believe this trend will continue from three aspects:

Launch the SKY staking mechanism

Mandatory SKY token migration (>10% of the supply will be destroyed)

SPK token mining plan

Introduction to the SKY Staking Mechanism

Currently, MKR/SKY is a token that uses all protocol revenue for token buybacks. At the current buyback rate, the protocol buys back approximately 15 million dollars per month (500,000 dollars daily), which is about 1% of the circulating supply bought back monthly (the highest proportion among all crypto projects).

On April 30th, Rune announced a proposal in the forum to launch the SKY staking mechanism. According to the proposal, 50% of the protocol's revenue will be distributed to SKY stakers, paid in USDS. This means that approximately $250,000 will be used for buybacks daily, and $250,000 will be distributed to stakers.

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

Forced migration of SKY tokens

In the same update, it was also mentioned that a mandatory migration from MKR to SKY will take place:

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

I base my reasonable assumptions on the following: "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, which means they will be destroyed." Based on these assumptions, I estimate that about 100,000 MKR will be destroyed due to migration (approximately 11.4% of the circulating supply). By referencing other cases of lost tokens (such as Aragon DAO), I believe this is a conservative estimate.

Taking the Aragon DAO token ($ANT) in 2023 as an example, its trading price was below the treasury value at that time. "Treasury raiders" or RFVooors bought tokens at a price lower than the net asset value (NAV) and demanded the redemption of the treasury for profit. This action was successful, and the process of migrating ANT tokens to a new token to redeem the treasury value was then initiated. During this process, approximately 27% of the tokens were not migrated, and it can be inferred that these tokens have been permanently lost.

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

SPK token launch

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

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

In addition, there are other sub DAOs or "star" projects set to launch (such as Solana Star, RWA Star, etc.), and the launch of these new projects will 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 mainly targets centralized stablecoin issuers (thus having little impact on decentralized issuers), this policy narrative could bring positive market momentum for MKR/SKY. Industry experts predict that the bill is likely to pass in July or August.

Summary

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