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

Compiled by: Shenchao TechFlow

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

• MKR rose by 46% compared to BTC,
• MKR increased by 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:

1. Launch the SKY staking mechanism
2. Mandatory SKY token migration (more than 10% of the supply will be burned)
3. 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 about 15 million USD per month (500,000 USD per day), which is approximately 1% of the circulating supply bought back each month (the highest among all crypto projects).

On April 30th, Rune posted a proposal on 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 allocated 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 bound to be some permanently lost tokens. This may be due to reasons such as lost private keys, lost wallets, or the death of holders. Through on-chain data analysis, I have discovered some "sleeping MKR tokens," which will inevitably be removed 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, meaning they will be destroyed." Based on these assumptions, I expect 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.

Take, for example, the Aragon DAO token ($ANT) in 2023, when it was trading below the vault value. "Vault looters" or RFVooors buy tokens for less than their net asset value (NAV) and demand to redeem the vault for a profit. The operation was successful, and the process of migrating ANT tokens to new tokens was initiated to redeem the vault value. Approximately 27% of the tokens were not migrated during this process, 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 support the token price. Furthermore, 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 the lending market with on-chain asset management, achieving revenue of $40 million 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, and users can only mine it by staking USDS or SKY (the specific economic model can be referenced in the related documents). In the first two years of the token issuance, 50% of $SPK will be allocated as incentives. If we assume a fully diluted valuation (FDV) of $500 million, $250 million of that 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 subDAOs or "star" projects set to launch (such as Solana Star, RWA Star, etc.), and the introduction 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.