MKR Update #1: Second Wind
Dip buying into expectation of new highs in MKR profits and DAI supply.
Summary:
MKR is up 20% (+46% at its peak) since our first report on 17 Jul vs Alts -7% / BTC -5% / ETH -6%. Given MKR’s recent retracement, we thought it’d be timely to put out an update note reiterating our bullish view on MKR as a high conviction core position.
This is the second time MKR has experienced a >20% retracement since its breakout in July, the first coinciding with the peak of a16z’s selling. We are of the view that MKR will soon test the $1,500 - $1,600 range as MKR profits and DAI supply both hit a new high, driven by 1) the reduction of EDSR yield to 5%, 2) the expansion of the BlockTower Andromeda vault, 3) higher DAI supply and 4) higher borrow fees as SPK reward incentives induce more DAI borrowing. We believe the current retracement is on the back of i) recent erosion of MKR’s profits by the 8% EDSR (which we view as temporary) and ii) profit taking in light of the recent altcoin correction (which we expect dip buyers to step in due to MKR’s still strong value accrual and narrative).
Catalyst #1: Reduction of EDSR from 8% to 5%
The recent expansion of EDSR to 8% has resulted in the compression of MKR profits. This concerned investors as buyback from the Smart Burn Engine could, as a result, be dampened. However, this will soon reverse with the recent governance proposal to reduce EDSR to 5%. This is currently polling and likely to go to an executive vote on 18 Aug, Fri and implementation 21/22 Aug, Mon/Tue.
Catalyst #2: BlockTower Andromeda TVL Expansion
It is worth noting that there is still plenty of headroom in the BlockTower Andromeda vault. The BlockTower Andromeda vault currently has a debt ceiling of $1.28bn with only 652mn utilization. In other words, there can be 600mn more DAI earning a 4.5% fee ($27mn) for the protocol yet to come. Additionally, by design, when USDC in the PSM(USDC) + USDC in the GUNI-LPs is > 500m, then 100mn will be transferred out from the PSM to Coinbase Custody. But Coinbase Custody is already at its limit so the remaining will go to Monetalis Clydesdale or BlockTower Andromeda, earning up to 4.5%. See screenshots from Discord below.
Catalyst #3: Higher Borrow Fees from SPK Farming
Rune has recently floated the idea of rewarding users that borrow via Spark with SPK tokens. The reward incentive “should just represent low single digit % yield per year”, while this may seem underwhelming, we are of the view this will subsidize borrow rate on Spark/MKR and allow MKR to take share from other borrow/lend platforms such as COMP and AAVE. This will drive an increase in DAI creation via DAI borrow and consequently fees from DAI borrow.
Catalyst #4: Higher DAI Supply
We are of the view that the market will soon view DAI supply as a simple proxy of MKR’s revenue generating ability, similar to how banks income grow as deposit grows. DAI supply growth will be a simple representation of either DAI creation via borrow or deposits into the DSR, both of which revenue accretive to MKR in the long run. We believe we are in the early innings of that trend as depicted in the chart below.
Conclusion
We see the four above-mentioned catalysts are high visible and near-term hence presenting a dislocation between recent price action and where price would soon be. As always, we happy to engage all who are keen in discussing our views. Feel free to reach us at our public TG - https://t.me/OuroborosNarratives.