Summary After a 100% rally from the low earlier this summer, I've clearly been wrong about MKR since my late June sell call. The growth in supply of DAI and the attractive yield from Maker's DSR program has been a big driver of capital gains in MKR. Given governance centralization is still a major concern and the new direction of MakerDAO, I think it's wise to wait rather than chase. But this has certainly been a humbling few months and I'm upgrading MKR from sell to hold. This may come as a surprise to some of my followers - maybe not a surprise at all to others - but I occasionally get things wrong. From a crypto asset standpoint, the best example of such an instance might be my late-June article covering the governance token of the DAI (DAI-USD) stablecoin ecosystem MakerDAO (MKR-USD). I called MKR a sell at $700 per coin on June 23rd. Two weeks later, it hit $1,000. As of article submission, it's right around $1,300. And the comments section isn't letting me off the hook: You seem to be utterly wrong Gee, thanks. I'm not wrong, the market is wrong! I'm definitely joking on that last part. But in the interest of reassessment, I think it's worth revisiting MakerDAO today to see if we can get a sense for why MKR is doing the exact opposite of what I expected just three months ago. DAI Supply Growth The most straightforward explanation for why MKR has performed so well over the last few months is the growth in the supply of DAI stablecoins: DAI Supply (MakerBurn) Having gone from a two-year low of 4.44 billion DAI in early August, the supply of the market's third largest stablecoin by market capitalization has grown by 24% in a little over 6 weeks. This is particularly impressive because the general trend in the broader stablecoin market over that same time frame has been a continuation of declines in the total market cap of all stables. DAI Deployment (Dune Analytics/steakhouse) What has almost certainly aided the increase in DAI supply is the 5% return from the DAI Savings Rate program, or DSR. That rate was briefly 8% earlier this summer. In late June, there were about 190 million DAI stablecoins in the DSR. That represented roughly 3% of the DAI supply at the time. Now, DAI in DSR has exploded to over 1.5 billion DAI. Which is just under 29% of DAI supply. Assets by Category (Dune Analytics/steakhouse) Importantly, the collateral backing this DAI supply has become increasingly more reliant on real world assets - specifically US treasuries through various vaults, including reputable firms like BlockTower. The reliance on competing stablecoins is down from 66% earlier this year to just 19% today. That's a good thing, as it minimizes exposure to other assets that could theoretically lose pegs. Fees, Earnings, and Buybacks The recent surge in protocol fees is admittedly impressive. There were just $2.9 million in Maker fees back in May. That figure spiked to over $17.3 million in August: Maker fees (Token Terminal) The increase in fees earned by the Maker is a large driver of these MKR returns. Again, the reason is due to favorable tokenomics as MKR holders take those protocol fees. Annualized Earnings v Profit (MakerBurn) It's a little difficult to tell from the chart above, but the annualized profit estimate from the Maker protocol flipped from negative to positive right around the time FTX collapsed in November 2022. It should be noted though that even as annualized fee income keeps moving higher, the profit estimate still remains below Maker's 2023 high of $89.5 million back in July. MKR Outstanding (Dune Analytics/steakhouse) Another factor that has helped propel MKR higher even as earnings have come down since July is the MKR buyback program. We can see MKR outstanding decline from 913k MKR tokens in July to a little over 903k MKR tokens currently. If MKR remains deflationary and annualized fees continue moving higher, MKR is likely well positioned to continue returning value to token holders. Of course, this isn't still without risk. Risks I still have the same concerns regarding the centralization of MakerDAO governance that I had 3 months ago. 16 wallet addresses currently hold more than half of the MKR in circulation. At 15% of holdings, the retail cohort of MKR supply hasn't budged in over two years: Holder breakout (IntoTheBlock) On the flip side, one of the more notable holders of MKR tokens sold 500 coins in early September , claiming that "MakerDAO is torpedoing itself in weird directions" Ethereum (ETH-USD) co-founder Vitalik Buterin sold MKR. On one hand, this could possibly be viewed as a bit of a sour grapes decision. Buterin appears to want to focus more on protocols that utilize Ethereum as collateral rather than US debt. Maker creator Rune Christensen has thrown out the possibility of forking Solana (SOL-USD) as the basis for Maker's "NewChain." This would be part of the Endgame strategy for Maker that I detailed in my last MKR article. There is still quite a bit up in the air regarding that plan, and I think it would be wise to wait and see how that plays out before chasing MKR after a nearly 100% gain in a matter of just a couple of months. Summary The cold, hard truth is I've been dead wrong on MKR this summer. I've been wrong on my Seeking Alpha calls before, and I'll certainly be wrong again in the future - hopefully, not too often. I'll reiterate what I said about DAI in my last MKR article; as a concept, I completely understand the desire for a stablecoin that is decentralized and not reliant on fiat as collateral. However, I'd argue the more DAI becomes reliant on US treasuries for collateral backing, the less different it ultimately is from the fiat-backed stables that it competes with. While that might not be an issue for MKR holders who simply want to collect protocol revenue, it is something crypto purists may want to consider. I'm still not willing to call MKR a buy due to some of the issues I laid out in the risks section. But I will eat some humble pie on my previous call and upgrade MKR from "sell" to "hold" today.
