MakerDAO Fundamentals Could Boost Maker (MKR) After DeFi Correction

It’s been a tough past few weeks for all leading decentralized finance coins. While Maker (MKR) — the native token of the MakerDAO protocol — has been an outperformer, the coin is down 35% from its recent highs, set just a few weeks ago. This means that the Ethereum-based coin is underperforming Ethereum, which has dropped around 28%, and Bitcoin, which is down only around 14%.

There may be a reason why MKR is one of the best-performing altcoins of the past few weeks though, even though it’s down 35% from its recent highs.

MakerDAO Fundamentals Set to Boost Maker (MKR)

MakerDAO has strong fundamentals set to drive the cryptocurrency even higher.

Ryan Watkins, a crypto-asset analyst for Messari, recently reported that MakerDAO is now generating $27 million worth of annualized revenue for MKR token holders. MakerDAO recently increased the interest rates on its decentralized loans (called the stability fee), thereby allowing value to accrue in the MKR token for the first time in many months.

Regularly, MakerDAO buys back Maker tokens with protocol revenue, which is again generated through the protocol interest rate.

With this recent monetary policy shift, MKR now trades at a 19 times forward earnings multiple, Watkins explained. Commenting on this, he said:

“I’m personally skeptical token buybacks and burns are the best way to distribute value to token holders, and believe Maker is challenged longer-term. But no doubt Maker is demonstrating its ability to capture value from Dai growth.”

This ratio is much higher than was before due to an increase in the stability fee, coupled with a strong uptick in outstanding debt.

Chris Burniske, a partner at Placeholder Capital, is one such bull on Maker amid current trends in the decentralized finance space. He recently said:

“People mostly sleeping on $MKR while utility goes through the roof, and conversations abound around its value capture model.”

How far MKR rallies, though, remains to be seen.

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MakerDAO Fundamentals Could Boost Maker (MKR) After DeFi Correction

Ethereum DeFi’s poster child, MakerDAO, is up 120% in the past month: why this is important

Aside from Bitcoin gaining a perfect storm of macro factors, one of the biggest narratives in the crypto market over the past few months has been decentralized finance (DeFi). The DeFi industry has seen vast amounts of investment while the number of users in blockchain-based finance products has shot up rapidly.

Coins representing the industry have respectively exploded higher in value, strongly outperforming Bitcoin, Ethereum, and even Cardano (in some cases).

Ethereum-based DeFi coins explode in value

In the past 30 days, the second native asset of the MakerDAO ecosystem, Maker (MKR) has exploded higher by 120 percent, according to data from CoinMarketCap. Over that same time frame, Bitcoin gained 13 percent while Ethereum saw a 30 percent increase in value.

MKR’s outperformance comes on the back of three fundamental trends:

  • A listing on Coinbase’s professional platform, which is one of the first times the asset can be traded by a retail audience in the U.S.
  • An increase in MakerDAO demand spurred by the addition of alternative assets to the collateral pool.
  • An increase in usage of DeFi applications, which all involve MakerDAO’s DAI token.

Other coins representing DeFi have also outperformed. Ethereum investor “Arthur_0x” noted that certain altcoins in this industry — such as Kyber Network’s KNC, Loopring’s LRC, Aave’s LEND, Bancor’s BNT, Gnosis’ GNO, and Airswap’s AST — have strongly outperformed Bitcoin since the start of the year.

According to Kelvin “Spartan Black” Koh, partner at The Spartan Group and formerly of Goldman Sachs, the strength in MKR (and presumably other DeFi tokens) affirms “strong interest and momentum” in the DeFi space.

DeFi is tapering out… for now

While DeFi has seen growth — both in terms of its native assets and user base — over recent months, some fear that it is a trend whose growth is tapering out for the time being.

Multicoin Capital managing partner Kyle Samani released an extensive blog post on Jun. 4 outlining why Ethereum’s budding finance space is “facing some real challenges,” and thus, is staring down a “plateau” in growth for the time being.

Samani explained that there exist clear “latency” issues with Ethereum which are preventing the mainstream adoption of DeFi products:

“You just can’t build global scale trading systems for lots of users on POW chains. It just doesn’t work. High latency –> all kinds of negative second order effects. So I think for now we are near a plateau for DeFi – measured in ETH terms (not USD) – until the core latency problems are solved.”

Ethereum’s 13-14 second block time seems to be his main gripe: high-frequency trading, where every millisecond may amount to more or less profit, and other financial functions are made difficult when you don’t have the speed of the internet on your side.

Samani also identified a lack of fiat on-ramps, a lack of trading functionality in decentralized applications, and a lack of abilities to obtain leverage in the DeFi space as issues for this budding part of the Ethereum economy.

Multicoin Capital has investments in the DeFi space, making these comments more constructive criticism rather than an attack on this segment of the Ethereum market.

Bitcoin could get a boost with altcoins booming

Although DeFi coins are getting a massive boost, some of those gains could soon be siphoned into Bitcoin as investors begin to realize that they need to preserve the gains they made.

Koh explained in response to Su Zhu’s comment on CME options that the growth in DeFi coins over the past few weeks while Bitcoin has been stuck in a range is a clear sign that “risk appetite is returning” in the crypto market:

“We have seen a major re-rating in many of the smaller altcoins (esp DeFi ones) in the past 4-5 weeks while BTC has been range-bound.”

To him, this means that altcoins will soon reach a point where their valuations are “frothy,” forcing capital to flow back into Bitcoin, boosting prices.

This is somewhat similar to what happened near the end of 2017, when certain altcoins saw exponential explosions in value, which then forced smart investors and whales to sell their altcoins for Bitcoin, boosting BTC.

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MakerDAO founder: Ethereum is a vacuum that will suck in almost “all value” in crypto

This week, millions of dollars worth of Wrapped Bitcoin — the leading representation of BTC on the Ethereum blockchain — were deposited into decentralized stablecoin protocol MakerDAO to generate $4 million worth of the DAI stablecoin.

According to MakerDAO founder Rune Christensen, this sole transaction is extremely bullish for Ethereum’s long-term value proposition, not just the protocol he helped to create.

The importance of the 4 million DAI mint

The MakerDAO founder — one of the forefathers of the decentralized finance movement — argued that the mint of four million DAI shows the massive total addressable market that DeFi — and Ethereum by extension — has.

“4 million Dai was just minted with WBTC in a single transaction. This really showcases the latent demand for non-ETH assets, and it’s the beginning of a broader trend of DeFi acting as an economic vacuum that will eventually attract almost all value to the Ethereum blockchain,” Christensen wrote in a comment that went crypto-viral among ETH supporters.

This is a similar assertion to one made by Andrew Keys, managing partner of Digital Asset Risk Management Advisors.

Keys wrote in a ConsenSys blog post published at the start of this year that Ethereum has a “market opportunity estimated at well over $80 trillion” because the blockchain basically has “infinite use cases.” The investor, formerly an executive at ConsenSys, added:

“We will be able to trustlesstly and digitally represent fiat, gold, software licenses, equity, debt, derivatives, loyalty points, reputation ratings, and much much more that we can’t even conceive of yet.”

Dependent on ETH 2.0

Although Christensen is convinced Ethereum will capture billions (maybe trillions) of dollars worth of economic value over time, as it stands, the blockchain will have trouble doing that.

As noted by the analyst “Ceteris Paribus” on May 15, the cost to send Ethereum has effectively quadrupled since the end of April, rising to 41 Gwei as of the time of his post from the 10 Gwei baseline where the metric normally sits. This equates to around $0.20 to send ETH from address to address. (According to ETHGasStation, fees remain around the levels indicated in Paribus’ post.)

While the fees are still not ludicrous per se, they highlight that even at pre-bull run transaction levels, Ethereum is running into potential scalability problems.

What we tend to forget is that the ability to send and receive value is not exactly the primary function of ETH. Instead, the primary function of the cryptocurrency is to interact with smart contracts, meaning high fees can make certain decentralized applications basically unusable, say, if you’re spending $1.00 on a $5.00 function.

Hence why the ETH 2.0 upgrade is so important.

For those unaware, Ethereum 2.0 is basically an overhaul of the blockchain that will implement technologies like Proof of Stake, sharding, and more to exponentially increase the speed, transaction throughput, and decentralization of the network.

While the jury is still out on how exactly this upgrade will help Ethereum’s usability, it’s slated to remove at least two of the many crucial barriers preventing mainstream adoption: high fees and low transaction throughput.

It’s begun

Ethereum may have a large reliance on the success of 2.0, though that’s not to say that the blockchain has not captured vast amounts of value as it stands.

Already, the blockchain hosts over $7 billion worth of stablecoins, namely USDT. Furthermore, Reddit has begun to work with Ethereum technology while Visa has purportedly hinted at using the blockchain to digitize certain fiat currencies.

That’s the thing, compared to other smart contract-focused blockchains, ETH is winning hands down.

As reported by CryptoSlate, Placeholder Capital partner Chris Burniske noted that Ethereum is “orders of magnitudes ahead of any of its competitors in terms of people willing to pay for its utility.”

He illustrated this point with the chart below from Dec. 2019, which shows the aggregate mining fees paid by Ethereum against Tezos, Waves, and Lisk.

Mining Fees Paid (Ethereum vs. Tezos, Waves & Lisk Combined)
Mining Fees Paid Ethereum vs. Tezos, Waves & Lisk Combined (via Chris Burniske)

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