The Sky Is Falling: Mr. Market Hates MakerDAO’s Re-Brand

Summary MakerDAO has re-branded Maker to ‘Sky Protocol’ and issued a new governance token SKY-USD as well as a new stablecoin USDS-USD. Market reaction to the change has been mixed to negative, with some raising concern about the freeze functionality with USDS. Sentiment aside, the DAI stablecoin is still one of the most widely utilized stablecoin in the industry and MKR trades at an attractive multiple. Calling the last seven months “brutal” for holders of the MakerDAO ( MKR-USD ) governance token would likely be an understatement. Since April, MKR has collapsed nearly 80% with very few green candles along the way. MKR Daily Chart (TrendSpider) It’s been ugly. Despite the hideousness of the MKR chart, the coin itself still represents supposed governance over the MakerDAO protocol. A system that is ranked 15th in fees, 4th in TVL, and is the issuer of two of the top six stablecoins in the market by circulating supply. In past articles for Seeking Alpha, I’ve called MKR a ‘ sell ‘ and a ‘ hold ‘. In this update, I’ll detail why I now believe MKR is an interesting speculative ‘buy.’ Why The Freefall? During the summer, MakerDAO was re-branded to Sky Protocol and two new tokens were introduced. The Sky ( SKY-USD ) token was launched as a governance counterpart to MKR and is redeemable on a 24,000 to 1 ratio; 1 MKR token being equal to 24,000 SKY tokens. The re-brand also brings about a new stablecoin counterpart to DAI ( DAI-USD ) via the Sky Dollar (USDS-USD). Like DAI, Sky Dollar has a soft-peg to USD and derives value backing from a basket of assets that include crypto, real world assets (or RWA), and other stablecoins. Importantly, nothing changes with DAI or MKR as a result of this update and conversion to the new tokens is not mandatory. The reception to USDS within the cryptocurrency community has been mixed to negative, from my vantage. One of the primary concerns from community members has been the inclusion of ‘freeze functionality’ in the code for USDS. This is a drastic change from DAI. The only stablecoins in the market with a larger circulating supply than DAI are Tether ( USDT-USD ) and USD Coin ( USDC-USD ); each of which have the same freeze functionality as USDS. The purpose for such a mechanism is for compliance with regulators when funds are marked as being used for illicit activities. Thus, this appears to be an attempt to make Maker/Sky better positioned for broad adoption. There are some who welcome this, but the more hardcore DeFi participants are less convinced. Given the reception to the new direction, MakerDAO is now reportedly contemplating dropping the Sky Protocol brand all together and will put it to a community governance vote in early-November. Options to be considered include continuing forward with Sky, dropping Sky and reinstating MKR as the sole governance token, or bringing back the “Maker” brand in another capacity. Frankly, it’s all a bit chaotic in my personal opinion and shows how community governance in the public blockchain space can be messy. However, I also think the market has taken SKY – and by extension MKR – too far down. Thus, a potential opportunity for contrarian buyers. Circulating Supply and Usage Since the launch of Sky Dollar, USDS has become the sixth largest stablecoin in the market by circulating supply at just over $1 billion. Rank Stablecoin Ticker Supply 1 Tether USDT $120,298 2 USD Coin USDC $34,379 3 Dai DAI $4,914 4 Ethena USDe USDe $2,623 5 First Digital USD FDUSD $2,306 6 Sky Dollar USDS $1,013 7 USDD USDD $760.6 8 PayPal USD PYUSD $629.6 9 BlackRock USD BUIDL $529.7 10 TrueUSD TUSD $484.4 Source: DeFiLlama, dollars in millions Interestingly, 729 million of those 1 billion USDS coins are DAI tokens that have been ‘upgraded’ to the new stablecoin through convertibility. Of the combined supply between USDS and DAI, the circulating stablecoins are over-collateralized, with $9.7 billion in total collateral against less than $6 billion in currency supply. Monthly network fee growth has declined in recent months, but is still well ahead of levels from the previous bull cycle: Fees vs Stablecoin Transfer Volume (Token Terminal) The chart above shows $16.6 million in Sky/Maker fees for the month of September. This is admittedly about 50% off the 2024 high from April but still well ahead of the $10.3 million in fees during September 2023. There are ebbs and flows with every blockchain-based product, but I think we’re seeing stablecoins starting to carve out a more significant role in the cryptocurrency ecosystem. Consider the $962 billion in transferred value in the chart above. Despite the proliferation of new stablecoins from centralized issuers like BlackRock ( BLK ) or PayPal ( PYPL ), DAI has been used more in 2024 than any other year since it was launched, and this is not something that is widespread in the stablecoin market. Transfer Data And Annualized Revenue As mentioned above, August produced $962 billion in transferred value for the DAI stablecoin. The chart below shows on-chain volume for DAI in a stacked chart with the other popular stables like Tether and USDC. It can be hard to see the legend if you don’t click to enlarge, but DAI is the yellow bars below: Monthly Stablecoin Transfer Volume (IntoTheBlock) In March, DAI made up 25% of the stablecoin volume. In every single month since April, DAI has been the most used stablecoin in the EVM space. It was 65% of the market in August and 52% in September. It isn’t just the number 1 stable in this regard, but it is accounting for more transfer volume than all of the other coins combined. How does this benefit MKR holders? Annualized Revenue (Sky.money) MKR holders get a take rate on platform fees. Keep in mind that even though it’s not a fiat-backed stable, DAI is collateralized by t-bills and real world assets. At $304.3 million, the annualized revenue trend has normalized since the big spike in the DAI Savings Rate (or DSR) earlier this year. But despite the DSR coming back down to January/February levels, the annualized revenue has grown . So if we construct a price to sales multiple that adds both the $92.5 million market cap of SKY tokens with the $990 million market cap of MKR tokens, we get a price to sales multiple of about 3.5. Essentially, MKR is trading at a cheaper P/S valuation than BlackRock – which has issued a far less successful stablecoin in its own right. Closing Summary There are a number of different reasons why digital asset investors may want to allocate a position to any coin or token. In the instance of MKR, the coin has been clearly suffering from bad PR. Things get interesting as potential contrarian plays when sentiment gets worse than the fundamental setup. I think we now have that with MKR. The price of the MKR token has been getting hit in line with the SKY token due to the convertibility between the two. The market doesn’t seem to like SKY. But I believe that provides an opportunity for patient investors. The risk to this theory is that the MakerDAO ecosystem is in disarray and the market is pricing in future failure of either governance or the protocol itself. I don’t think that’s the most likely outcome. So I think MKR is a solid bet after such a large selloff in such a short amount of time.

Source: Seeking Alpha