A Tale of Two Makers: Innovative product, inefficient value capture

With the help of explicit earnings data within the Maker system — visible via smart contracts on the Ethereum blockchain — we calculated relative valuation metrics for Maker such as Price to Burn (Interest Earnings) and Earnings Yield (Burn Yield). Our findings show that while Maker has achieved a fairly stable peg with its stablecoin DAI (daily price standard deviation of $.015 since Jan 2018), the system hasn't been able to capture and distribute interest payments (revenue) to its MKR stakeholders adequate to its current total market value. 

MKR Token Holders have taken the back seat to PETH holders

Using Stability Fees, or the interest rate paid upon closing a CDP, we can calculate the total amount of interest paid by CDP holders to date. Considering the current single collateral DAI system, the only revenue that currently gets distributed to MKR token holders is via the closure of a CDP, which translates to a realized payment of interest on the respective outstanding balance at the variable rate set by MKR token holders (currently 11.5%). Interest payments can be paid in DAI or MKR, both of which will lead to a subsequent burn (removal) of the dollar value of MKR from the total outstanding supply.

In 1Q19, the equivalent of ~$100,000 worth of DAI was paid in interest to the system.

Sources: Marc-André Dumas, The Block, Messari, Etherscan
Note: Values assume DAI = $1; when fees are paid in DAI, MKR is bought on the market and burned

While this value is meaningfully higher than the 1Q-3Q18 total interest payments, it pales in comparison to the value of liquidation penalties (13% of outstanding CDP value) which gets distributed to PETH holders, less the rebate to keepers and devaluation of collateral, within the Maker system. In 1Q19 PETH holders saw close to $2 million worth of DAI distributions due to net liquidations, compered to ~$100K worth of interest payments received (and MKR burned). This implies that to date MKR holders have captured under 4% of total revenue disbursements to PETH's 96%.

Sources: Marc-André Dumas, The Block, Messari, Etherscan
Note: MKR is calculated by the total amount of interest distributed (assuming DAI = $1), PETH is calculated by total DAI disbursement, net collateral devaluation expense and Keeper rebates

Considering the current total market value of all MKR tokens is above $700 million, a relative Price to Burn (burn being interest received) multiple shows that MKR investors are currently paying an exorbitant premium in relation to its total market value - with the total MKR market value being over 3000x the prior twelve months sum of interest payments distributed to MKR holders (via a token burn). To get a better sense of how inefficient the prior 12-months worth of value capture has been for MKR token holders, the inverse of the Price to Burn, or Earnings Yield (Total Revenue Distributed to MKR / Total MKR Market Value), is under 5bps. Meaning, for every dollar invested in MKR, token holders "earned" (via burn) under 5bps worth of yield. Given the 3-month U.S. treasury is currently around 2.4%, MKR's trailing earnings yield has under-performed the risk-free rate by roughly 200bps.

Sources: Marc-André Dumas, The Block, Messari, Etherscan
Note: Price to burn = Total MKR Value / Total MKR Revenue Received (Past 12-months)

Sources: Marc-André Dumas, The Block, Messari, Etherscan
Note: Earnings Yield = Total MKR Revenue Received (Past 12-months) / Total MKR Value 

Furthermore, while multi-collateral DAI plans to distribute liquidation penalties (which currently go to PETH holders) to MKR holders in the future, even if you include the prior 12-months worth of MKR and PETH revenue distributions, both the Price to Burn and Earnings yield remain high: at ~120x and under 1.00%, respectively.

Sources: Marc-André Dumas, The Block, Messari

Sources: Marc-André Dumas, The Block, Messari, Etherscan

While not true "comparables," looking at other publicly traded secured lending companies highlights the gap between Maker's relative valuation vs. other lending companies. Even if you assume all CDPs outstanding (~$90m) pay off their positions at 11.5% interest, for a total of ~$10.4m in revenue disbursements, the Price to Burn multiple would still be over 65x and earnings yield would be ~1.5%.

 

Sources: Marc-André Dumas, The Block, Messari, Lending Club (LC), Regional Management (RM), Elevate Credit (ELVT), Binance, Etherscan
Note: Regional Management (Ticker: RM) has +95% of revenue come from secured lending, One Main (Ticker: OMF): predominate secured lender, Elevate Credit (Ticker: ELVT) provides lending to Underbanked), Binance takes current total value of BNB / past 4 quarters USD value of BNB burn

 

Sources: Marc-André Dumas, The Block, Messari, Lending Club (LC), Regional Management (RM), Elevate Credit (ELVT), Binance, Etherscan

 

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