MKR P/E Calcualtion

Update:

Jan 20, 2022

So, here’s an update on MKR’s current PE ratio and a demonstration of how to calculate this yourself.

Data from daistats.com.

Live calculation at makerburn.com

Tokenomics of MKR

So, let’s talk about the tokenomics of MKR. It’s one of the oldest Defi projects with one of the simplest tokenomics structures out there. There’s no dividend yet. There’s no liquidity mining program. There’s no fancy incentive program promoting the use of DAI at all actually. All there is, is a pile of DAI that is generating fees which creates buy pressure on the MKR token. Gain adoption, price go up. So how’s that adoption going?

Dai: Start of 2020

1 M

Well, at the start of 2020 there was about 40M DAI.

DAI: Start of 2021

0 B

At the start of 2021 there was 1.2B DAI. That was impressive.

DAI: Start of 2021

1.2 B

At the start of 2022 there was 9B DAI. Solid.

Dai

9 B

Right now, on Jan 20th, we’re at ~9.75B DAI. Despite the recent bear, DAI is showing steady growth.

Stablecoins are here to stay

Given the growth trend it's reasonable to expect DAI to hit 20B this year. In general stablecoins are here to stay, and we’re likely get to $1TB worth of them in 2022. My fear for MKR isn't that stablecoins won't continue to grow. Instead I fear the stablecoin market will be divided many different ways between USDC, USDT, DAI, RAI, LUSD, MIM, FRAX, sUSD, alUSD, UST, USDs, etc. This will soft cap the speculative valuation of MKR once the stablecoin market reaches saturation.

For reference, there's about 100T USD. The forex market is about $100B. After that it starts to reach the valuation of precious metals like gold at $8T. Getting to even $20T will require miraculous adoption of CBDC's. I expect to see the government actively resisting this adoption past $10T for the better part of this decade.

How do we calculate MKR buy pressure?

So how do we calculate the buy pressure on MKR due to this adoption? How does the buyback of MKR work? Basically they have a bunch of collateral pools each of which continuously contributes some DAI to the surplus buffer. Every so often DAI in the surplus buffer above the buffer ceiling is used to buy MKR on auction.

Each pool has an amount of DAI minted from it and a stability fee that is a percent borrowers owe on their DAI loan. If we sum all that up we get a system profit of about $4.22 a second, $112M a year. You can find current data on the collateral pools at daistats and some great analytics at makerburn.

Peg Stability Module (PSM)

Intro

At the top of the daistats collateral page is a pool called PSM-USDC-A. It currently is responsible for over 3.8 B of the DAI in circulation. That’s almost 25% of all DAI.

I implied before that more DAI basically meant more profit but that’s not true for DAI minted from the PSM. There is no revenue for this DAI.

That’s unfortunate because the MKR holders are still responsible for maintaining the peg on this DAI and therefore are absorbing financial risk that they aren’t getting paid for.

Why was the PSM Created?

So how did this happen? Short story, during the Covid meltdown in March 2020 the DAI peg broke. DAI was selling for $1.10 as people were rushing to buy back DAI to repay their loans rather than get liquidated.

There is a structural issue with DAI in that maintaining the peg requires arbitragers willing to sell DAI when the peg breaks to the upside. Maker’s interest rate manipulation works over longer time periods but not during periods of high volatility. The problem is when the peg breaks to the upside it has always been because the market is crashing. So when ETH is going down 30% in a day, not enough people are willing to retain their exposure to ETH, let alone leverage it, and deposit it to vaults and mint DAI to maintain the peg. Instead, everyone is moving in the same direction at the same time.

The PSM solves this by allowing people to arbitrage DAI directly using USDC. And it works!

PSM Risk

The PSM should only be used to absorb short term deviations. Longer term, the system is supposed to adjust the supply and demand of DAI using rate adjustments. However, the situation with the PSM has been going on for almost 2 years now and even though it has gone from 50% to 25% backing, it still represents an existential risk at these levels.

In the worst case Circle blacklists the PSM contract due to US government interference. In this case there is more outstanding insolvent DAI than you could possibly cover by minting and selling MKR.

PSM DAI = 3.8 Billion
MKR market cap = 1.7 Billion

That’s not an auction that’s going to go well. Whoever bails out the system at that time would basically own it and the DAO would be functionally dead.

Alternatively they would have to emergency shutdown DAI. The DAO would still be functionally dead. This is the risk MKR holders are taking and why it is their responsibility to manage this system well. In my view they should be working to gradually get the DAI minted from the PSM down to below 10% of supply and distributed amongst more stablecoins such as sUSD and alUSD.

The DAOs plan

The MakerDAO is seeking to diversify the assets backing DAI. In the best case their Real World Asset (RWA) program takes off and the outstanding DAI grows substantially until the DAI in the PSM is substantially smaller than the MKR market cap. The short-term plan is simply to take the USDC in the PSM and put it into diversified assets such as US treasuries that are extremely low risk and generate yield. You can see an attempt at this here.

TLDR:

DCA, READY TO BUY

Adoption

Adoption is definitely going up and to the right.

I'll be a buyer again, if...

PE 10, market bottoming, or I see serious traction on their Real World Asset (RWA) division.