05 Nov 2023

Why we included the Maker token

For the November re-balancing of the KVQ index, we have included Maker as one of nine cryptocurrencies from the top 30. Read why in this article.
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What is the Maker token?
Maker is the governance token of the MakerDAO. The Maker DAO again controls the Maker Protocol. Governance rights in and of themselves are difficult to value, but the Maker token derives undisputable value from the combination of interest income in the protocol and the automatic use of this interest income to buy and burn the Maker token.The Maker DAO has one main source of income, interest rate income on DAI issuance. Furthermore, the Maker DAO has two main sources of expenses, interest rates on DAI deposits, and developer and other community costs. The net difference between income and expenses is added to Maker DAO’s surplus buffer. When the surplus buffer exceeds $50 million, the overshooting surplus buffer is used to buy and burn Maker tokens. This means that, over time, the net profit of the protocol will be used to buy and burn Maker tokens.
Assessing the Maker token’s price
Simplifying a bit, the Maker token can be valued using a discounted cash flow (DCF) analysis of the Maker protocol’s net profits. DCF analysis is highly sensitive to the discount rate, and it’s in no way evident what is the appropriate discount rate for the Maker token. Still, by evaluating current price-earnings ratios and evaluating the sustainability of the current profits, we can gauge whether the Maker DAO token is severely overvalued – which would have to be the case for the Maker token to not be included in the KVQ index.
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For stocks, a price-earnings ratio between 20 and 25 would generally be considered good, and for growth companies, this metric tends to be much higher. The current price-earnings ratio of the Maker token indicates that the protocol would have to operate ‘as is’ for almost 14 years for “dividends” to surpass the current token price. To us, this seems like a reasonable price-earnings ratio.Higher interest rates are, everything else equal, good for the Maker DAO’s income. Hence, the Maker DAO’s income has fallen way less than most other protocols even though the DAI issuance has halved since the peak in early 2022. Still, the protocol’s profits were higher during peak mania as lower interest rates were counteracted by higher issuance and deposit interest rates were set lower compared to lending rates. The most interesting observation is, however, that the Maker protocol’s income is likely to fall less in tougher markets than most other protocols. Hence, the protocol, and by extension the Maker token, likely has a lower floor income, while still being able to extract extra profits in times when markets are booming.
Conclusion – The Maker token is added to the index
All in all, we believe there is a good possibility of the Maker token keeping or increasing its price in the future, and a small but existing probability that the protocol will fail. Combined, this makes us conclude that there is only a small chance of the Maker token losing most of its value before it has accrued significant dividends. Therefore, the token is included in the KVQ index.The Maker protocol can fail or be outcompeted, and thereby decimate the value of the Maker token. As most things in crypto, the Maker protocol is a code that can be easily copied. The most obvious ‘attack vector’ would be for others to copy the protocol and offer lower interest rates. This is easier said than done, and the Maker protocol’s longevity makes a compelling argument for Maker’s continued success. Still, pointing to yesterday’s success is not a sufficiently good argument in crypto, as has been evidenced multiple times.Collateralized stablecoins are suspect to death spirals if not governed properly. Trust in the governors or governing protocol of a collateralized stablecoin is, therefore, of great importance for people’s willingness to use the stablecoin. This trust factor is not just mechanical but also reputational. The Maker DAO is continuously adjusting the parameters of its protocol to govern the DAI stablecoin and the Maker DAO’s income in the best possible way. While it certainly can be outcompeted, it would, at the very least to hard for competitors to build the same trust as DeFi users have in DAI.To conclude, the Maker protocol is making money today, and the possibility of copying and users switching has been there the entire time. The case is, for instance, very different from UNI, where the protocol is not making any income today, and the switch to being able to do so seems highly unlikely. If DeFi and crypto keep growing at the same rate as the last five years and Maker keeps its dominating market share, the Maker token’s price will increase multiple times over. That said, the collateralized stablecoin market is not necessarily a one-protocol-takes-all-all game. Things tend to develop in a happy medium, so we should expect competing protocols to steal market shares over time.
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