MakerDAO Budget Simulator as of 7/21/21 - Revenue & Cash Flow Forecast

With the recent decrease in rates and continued onboarding of new Core Units, the RWF team thought it would be prudent to review and update the budget simulator that @SebVentures built. Please find the updated simulator here. All existing and prospective Core Units are listed with an associated status, as well as corresponding MKR budgets if applicable. All CU expenses are included in the forecast and P&L calculations.

While we are forecasting to finish 2021 at nearly 10x 2020 FY revenue, the rolling 12 month forecast is less favorable. Assuming no change in our assets generating stability fees, we are forecasting $48M in revenue broken down by the following income streams.

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Forecast Assumptions:
Interest (Stability Fees): maintain stable at current levels

Liquidation Fees: Feb - July 2021 average excluding May. In May we saw significant decreases in DAI generated from risk assets with ETH-A vaults alone decreasing nearly $1.2B from peak, corresponding with $4M in liquidation fees. With lower leverage in the system, we expect lower liquidation fees in the near term

Trading Fees: July 2021 average - lower PSM outflow fees will generate less trading revenue going forward

Opportunities to drive incremental revenue not included in forecast:

  • Over $3.1B USDC in the PSM that could be invested to earn interest
  • Scaling Real World Assets (NS-DROP $5M DC → $20M, SolarX $21M, 6S $15M, Treasuries), etc.
  • Investing in DAI Derivatives (i.e. D3M)
  • Leveraged G-UNI Vault
  • Flash Mint Module
  • Institutional vaults, SushiLPs, CropJoin

With the SB buffer approaching $50M, we still have a cushion in the event that downward pressure on rates continue and cash flow turns negative, assuming Liquidations continue in an orderly fashion and we do not incur any bad debt. However, this is quite far below the CET1 (3% - 4.5%) and liquidity ratios recommended by risk and we should avoid drawing down the SB while we remain below these levels (approximately $56M and $160M at a 3% CET1 and liquidity ratio respectively).

As a reminder, non-cash expenses reflect the MKR compensation; green highlighted plans have been approved, yellow has had the DAI budget approved, and orange has had neither approved. While these expenses impact Net Income, there is no impact on cash flow. While cash flow is positive, the SB will continue to increase and MKR will continue to be burned at the current approved 75% SB / 25% burn ratio. The model assumes a safe scenario where no MKR is burnt until the SB is above risk targets.

As with all models we share, please feel free to download and include your own inputs and assumptions. If you have any questions, please let me know.

24 Likes

@Aes Great post, thanks for putting it together.

The two comments on both liquidation and surplus buffer summarise my worry with current state of our network.

The revenue generated from liquidations are great as collateral auctions are more efficient. But it can be shortsighted. Unless we manage to create incentives for further leveraging by tweaking the risk parameters (SF, LR), the system increasingly moves towards greater share of psm or non-revenue generating assets in the near term. Our expenses are only increasing.

In theory, RWA collaterals could fill in that revenue gap, but then…

For RWA to be able to scale safely into dozens or hundreds of millions, we need a greater provision buffer. In my credit risk opinion, it wouldn’t be wise otherwise. To manage credit risk with a small SB, we may need to put further credit enhancements in RWA collaterals (higher overcollateralisation or equity ratio for e.g.). That’s tricky as it may increase cost of capital for originators, pushing them away, if tradFi is cheaper. We may need to come up with some tactical solutions to increase revenue until we get the SB buffered up or take further credit risks on RWAs. I would rather recommend the former, or at least a combination of both strategies.

5 Likes

Thank you for this!

Everyone should click through, even if you don’t want to play around. I think people need to understand the seriousness of how — while we have time to correct it — we need to get revenue up significantly to avoid a net loss in the coming year.

And as pointed out above, we need larger cash reserves.

3 Likes

It is a net loss if you deduce the MKR outflow from the cash revenue. Net cash is expected to be positive. This is a completely OK startup situation. Even bleeding some cash would be OK. Plans to increase revenue should be long term oriented and promise huge payoffs. It would be counterproductive to focus on getting a positive number in that excel sheet this year.

4 Likes

I think my reply would be that we are not a startup. That doesn’t mean we can’t have exponential growth, but we need a plan to get revenues up and diversify our business lines that support DAI.

And being cash flow positive is good, but in this case it’s because we are taking on paid-in capital in the form of forgone wages. That’s not fundamentally different (from a profit/loss perspective) from just selling MKR for DAI and using that DAI to pay people.

This isn’t an “alarm bells” kind of situation. But we need to be pointed in the right direction, because any changes will take time. Our margin of safety is shrinking, so we need to find a way to reverse that. And that won’t happen by whistling past the graveyard. Better to think about this today than in a year or two when perhaps even our cash flow is negative.

3 Likes

I think we’re mostly in agreement. I meant startup as in delaying profit in favor of growth in an extreme manner, not as in bleeding millions while still looking for a business model. That would be a different situation.

we need a plan to get revenues up and diversify our business lines that support DAI.

This isn’t an “alarm bells” kind of situation.

Fully agree, I just want to avoid a sense of urgency – having a net loss in the coming year is not ideal but is OK if that’s because the focus is on bigger things to come. Better that than shifting energy to quick wins with only the next 12 months in mind.

4 Likes

What provision buffer do you think we should target to accomplish this? Though it has been frustrating to see crypto prices fall, I’m grateful that it has provided an opportunity for the CET1 ratio to catch up to the rapid growth in collateral this year (CET1 ratio has grown from 0.5% at the start of the year to 2.6% as of June end).

It’s great to see our CET1 ratio growing, very positive. (Though I have my reservations on the RWA part of the formula we use).

To scale RWA safely with the SB, without having to increase our credit enhancement requirements, I think there are a couple of things we need to do:

  1. Setup a clear separation between its use for opEx vs provisions. Have a reasonable 50% ratio at least for provision
  2. Define individual and collection provision ratios for individual collateral types and collectively for whole pool of collaterals, respectively. Track that as a KPI
  3. Set up a maximum exposure level for any individual collateral as a ratio to the SB part allocated to provision only (point 1)
  4. Increase the SB provision part to that cap (point 3).

This would be just the start. I think all of this as KPIs, should we wish to use as both a communication tool to the DAO and one component of our risk appetite.

2 Likes

I had just been thinking about this. Agreed!

50% ratio for/of what?

I agree that we should have a separate treasury for OpEx compared to the SB, but I think the first order of business would be to have risk set defined CET1 and liquidity ratios and have our SB automatically adjusted based on them rather than having a signal request every time we raise and fill the SB.

Points 2-4 all make sense to me - are these things you’re working on? :slight_smile:

50% of SB set aside for provision on credit losses.

Agreed. The automatic adjustment of SB will probably require some development like the IAM.

Yes, embedding this into another piece of work.

2 Likes