[Discussion] MakerDAO Key Performance Indicators (KPIs) & Capital Allocation

I’d like to start a discussion around KPIs for MakerDAO with the community. Unlike the traditional financial and equity markets, there is little or no consensus around how cryptocurrencies are valued today. Stocks and bonds are typically valued using a discounted cash flow model - the present value of all future cash flows generated by a company discounted back to the present.

Cryptocurrencies have a variety of different use cases and some present challenges to using a traditional valuation framework. There are some cryptos used primarily as a medium of exchange or store of value where a DCF is not applicable - some analysts have proposed valuing these based on the quantity theory of money. ‘Utility’ cryptocurrencies may be the most complex type of crypto to value - value is largely dependent on the demand for services transacted on the platform and the supply of tokens (which can be impacted by staking and other incentives to lock/remove a portion of the supply from the markets).

Unlike the aforementioned types of cryptocurrencies, the framework for valuing DeFi tokens lends itself to traditional valuation methodologies. Many of these tokens take some sort of fee that grows as Total Value Locked (TVL) increases or as transactions increase which makes a DCF a logical choice when attempting to value the token. IMO, MKR falls into this category.

There are many factors which contribute to the success of an enterprise, some more easily quantifiable than others. In order for MakerDAO to succeed long term, we must deeply analyze and understand what drives MKR’s value so we can efficiently allocate capital and resources to maximize it’s value. In order to do this, I’d like the community’s input on what KPIs they are looking at and which they feel are most important to MKR’s long term success. Here are a few I’m sure most have thought of to start the discussion (in no particular order):

  1. Total Risk Assets Outstanding
  2. Interest Income Correlation
  3. Net Interest Income
  4. Total DAI Outstanding
  5. DAI Market Share
  6. DAI on-chain volume
  7. Gross Interest Income
  8. Vaults Opened

Once we have a reasonable consensus on our most important KPIs, we can evaluate potential opportunities and investments more effectively and prioritize. Important factors to consider for prospective investments include: TAM (Total Addressable Market), cost to implement, ROI (long-term), margins (how lucrative could this investment be, strategic advantages (i.e. will offering a complementary product improve our lending demand), and risks. For starters, I think focusing on three to five primary KPIs feels optimal. Looking forward to hearing your thoughts!

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I feel like the indicators I am most interested in (in no particular order) tend to be annualized profit, annualized DAI growth rate, market share by transaction value of USD-pegged stablecoins.

Out balance sheet is fairly simple. As is our cash flow. I’m not sure a lot of qualitative indicators lend themselves to precise measurements, but our financials are not especially complicated. So more focus on the qualitative measures is warranted, but with a realization they’re squishier and shouldn’t be relied upon in isolation.

But growth of DAI supply + profits are the guiding star for me.

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Some projects have a primary stablecoin integration.
How many of those projects choose Dai vs. some other stablecoin is, in my view, an important metric.

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Here what I would consider the most important KPIs:

SF revenue growth rate
Gross profit margin of SF
Net profit margin of SF
Earnings Per Token
Total profit Added on a monthly basis
Monthly Budget divergence for CUs

And last but not least, the CHURN RATE :slight_smile:

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This is a good one that I feel we don’t have a lot of visibility on at the moment.

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Another metric I’d like to suggest, and one that I tracked when I was running the BD team, is “Dai ubiquity.” It’s a subset of market share, but is based upon integrations and not simple volumes. Basically it’s tallying how many places Dai is available to the end user and comparing it to other stablecoins. The metric is important because of how quickly a startup can grow to command big market share in this space. The best example I can think of is Compound - Dai was the first stablecoin on the platform because our team put in the legwork and valued the integration even though they were just getting up and running, this paid off hundreds of times over when crypto money markets took off and USDC was not the default option.

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From our experience with some rwa projects, this is definitely an important metric. Being top of mind in preparation for a market take off (in our case fixed-income) puts us in the right spot.

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All suggested seem to have an eye toward growth, or growth minded profitability measures. There should be an eye for risk, leverage ratios, VAR etc. After all…we are a “credit” extension and are bound to the whims of black swan events and the collateral that backs the protocol.

This is a long way of saying…a significant draw down scenario analysis wouldn’t hurt to keep the risks to MKR in the public eye so that DAO cannot be surprised if entropy decides to throw a random wrench of chaos at us.

At the end of the day, we want 5-7 key metrics to form a trend analysis over time to compare and contrast decisions made and how they accrued/depreciated value. It would be nice to know (if possible) if we are pushing the edge enough/not enough and quantify the risk in either direction.

I’m rambling now…but besides KPIs, do the many avenues of growth get consolidated into a basic three statement forecast (IS, BS, CF)?

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I agree! I also think the correlation between Total DAI Outstanding and ETH price is an important KPI and hopefully this will decrease as more RWA collateral is onboarded.

You can find the IS and BS here. We will update them monthly.

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This one interests me the most. I’d love to see how much Dai is circulating, parked in a contract, earning yield, or borrowed in aggregate.

BTW these KPI’s to start are quite thorough. :raised_hands:

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I should have noted…a forecast, instead of historical.

Interesting. You think we should start forecasting future earnings? That would be sweet. Imagine:

“Our FY 2021 capex forecast is now 18.9M DAI, and the consensus EPToken forecast has increased over the past week from 1.76 to 1.91 DAI” -SEB V.

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This is very interesting - is there any way to quantify DAI outstanding through integrations? Is there a list of integrations we’ve done anywhere?

Great point! @SebVentures is tracking the leverage and CET1 ratio (compares a bank’s capital against its risk-weighted assets to determine its ability to withstand financial distress) in his monthly financial presentation which you can find here: Financial Report - 2021-04

With the growth we’ve experienced in the past year it can be easy to overlook risk metrics but we should always have our eye on potential downside and key risks. @Primoz would love to get your take on this subject as well.

@ElProgreso not sure if your question was directed to Seb or myself but I think at some point in the near future we could certainly do that - sometime after the first ‘wave’ of CUs when we have greater visibility into our expenses. This ties into the above since we are paying CUs out of the SB. Pretty sure MakerDAO would be the first in the crypto space to provide guidance which would likely generate a lot of interest from traditional financial market investors and publicity.

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I think that this is an excellent thread and covers a lot of the financial metrics that will be immediately useful to participants. However there are some non financial metrics that would be of interest also. I’m thinking specifically of things like levels of decentralisation which could be measured by unique token holders. Other metrics, like market share, have been referenced already by others.

There’s currently 80,360 holders

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Not exactly, partners don’t often want to share their addresses (Web3 apps being the obvious exception). We have a system of weighting deals by users and estimating. @Nadia has the full list of Integrations.

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It would be an interesting exercise. I only bring up risk management as a continuous evaluation because rapid growth brings rapid risk. Wading through the defi-world with a quickly scalable platform that brings network effect like volume without a forecast is possible, but how can we evaluate our credit risk, VAR, desired stability buffer for a rainy day on a continuous basis as we add numerous collaterals, both RWA and not, without a forecast?

Audited Historical Financials are confirmatory; forecasts are a tool to give the DAO better decision making, as are KPIs, so the original inquiry made me wonder…is this possible? Do we have any visibility to the upside/downside or are we as a DAO just hoping to grow, grow, grow, and that the engineered systems will be able to last another bear market/black swan without wiping out our revenues/MKR value…

To sum this up: A forecast: 3 months, 6 months, 12 months could help us answer the questions…

Do we need to keep revenues today because there is a ceiling for DaI? (TAM, Market share losing concerns, Regulation, Financial Controls/Leverage Ratios)
Do we have an understanding of what next year looks like Revenues/Expenses to allow for core units to expand and MKR value to accrue?
What reporting can we form to analyze extreme to the downside/extreme to the upside to give us a basis to make decisions for ST value accrual to MKR holders, LT safety and security of the DAO?

Just food for thought

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