MKR valuation - questions

Hi all,

Following the work done by @Aes and @SebVentures here, I’m trying to build my own model for valuing MKR tokens and will share it here once done.

I’m using @SebVentures Dune Analytics dashboard for historical data and doing a projection from there on. I had a few questions to build out my model:

P&L:

  1. What are lending expenses? How are they paid (using DAI from Surplus Buffer? From Operating Reserves? If using MKR, then from where?)
  2. Similarly, how are Workforce expenses paid?

Balance Sheet:
3. What are trading assets on the balance sheet? Are these the assets held due to trades through the PSM? What factors would determine the growth rate of these assets?
4. What are Operating Reserves for? What determines the operating reserves kept? In what form are they kept on the balance sheet (in DAI, MKR?)

Thank you!
Paritosh

Here’s the link to my draft model for reference if it helps:

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hey, I wrote a valuation piece on Maker for Messari back in July. You might find it helpful in making your own model. Here’s the link: Messari - Bitcoin & crypto price, news, charts, and research. Cheers

Thank you @FXLord. Would you be able to share the Google Sheet/Excel file of your model?

Sure, send me a private message and I’ll forward it by email.

Thanks for those questions @paritosh

  1. Lending expenses is the DSR (DAI saving rate) we offer to DAI holders if they stake. It’s 1bps for now so quite small. It comes from the Surplus Buffer.
  2. Workforce is paid from the Surplus Buffers.
  3. Trading assets are indeed the PSM (and some stablecoins vaults as they will be migrated to PSM at some point). We offered a bid/ask spread hence generating trading revenues. This is no longer the case. Trading Assets are more to be seen as a Liquidity Buffer? The size depends on the imbalance between DAI demand and DAI Supply, you can read more here.
  4. Operating Reserves are multisig controlled by MakerDAO but managed by CUs. CUs budget are moved from the Surplus Buffer to those multisig and under the management of the signers. they can return the excess cash if needed. It’s in DAI.
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Thank you @SebVentures. A couple more questions I missed asking:

  1. I think the current reserves at ~$60mm are low (~1.4% of assets) to manage market dislocation events like we saw last year. I’m assuming that the reserves will have to increase progressively to ~3.5% of assets over the next 5 years and that any gap would be filled by issuing additional MKR tokens. Do you think these are fair assumptions?

  2. Is my understanding correct that currently MKR holders don’t have direct claim to the DAI held in reserves (apart from benefiting from MKR being burnt when reserves are in excess) and one bet is that they’ll have direct claims in the future to the reserves (proxy for equity)?

Thank you!

Hey @paritosh. Thank you for contributing with another valuation model. I’m wondering if you could elaborate on why you assume issuing MKR from March 2022 onwards?

Hi @JustinCase, thanks for reviewing.

My assumption (based on the previous conversations I also saw on the forum) is that the stability reserve will have to increase in line with the total assets to protect the peg (including due to regulator mandates as DAI grows). I’ve assumed total equity (including stability and other reserves) grows steadily to 3.5% of assets by Dec-2026. To fund this, we’ll have to issue MKR in return for DAI.

Please let me know if my assumptions don’t make sense.

They do have a claim to the Surplus Buffer, MKR holder can set the limit to 0 and burn it all (or do some expenses). They can decide the level of Surplus Buffer they want to protect the solvency of the system. Even with only 1%, it can be argued that Maker is on the safe side of DeFi stablecoins. Frax is negative ~15%, Terra is circular. Fei and Angle are positive but with a strong currency mismatch (Fei is mostly ETH on the assets and on its liability, Angle is as asset and € as liability).

It is my view that we should build the Surplus Buffer strongly, especially as it is difficult to catch up if we endure strong growth and low return over assets. I would doubt that the MKR community would issue MKR for that. The Surplus Buffer is there for tail risks and currently, we have plenty of tail risks that wouldn’t be avoided even with a large Surplus Buffer.

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Thanks for your thoughts @SebVentures!

Hi @paritosh, if you need support getting more data let me know. Happy to help from the @data-insights-cu!

Thanks @tadeo!