Research Summary
The report discusses the inclusion of the Maker token in the KVQ index. It explains the value of the Maker token, derived from the combination of interest income in the protocol and the automatic use of this interest income to buy and burn the Maker token. The report also provides a simplified valuation of the Maker token using a discounted cash flow analysis of the Maker protocol’s net profits.
Key Takeaways
Understanding the Maker Token
- Maker Token’s Value: The Maker token, the governance token of the MakerDAO, derives its value from the combination of interest income in the protocol and the automatic use of this interest income to buy and burn the Maker token.
- MakerDAO’s Income and Expenses: The MakerDAO’s primary source of income is interest rate income on DAI issuance. Its main expenses are interest rates on DAI deposits and developer and community costs. The net difference between income and expenses is added to MakerDAO’s surplus buffer, which is used to buy and burn Maker tokens when it exceeds $50 million.
Valuation of the Maker Token
- Discounted Cash Flow Analysis: The Maker token can be valued using a discounted cash flow analysis of the Maker protocol’s net profits. This analysis is sensitive to the discount rate, which is not evidently clear for the Maker token.
- Price-Earnings Ratio: The current price-earnings ratio of the Maker token indicates that the protocol would have to operate ‘as is’ for almost 14 years for “dividends” to surpass the current token price. This is considered a reasonable price-earnings ratio.
Maker Protocol’s Performance
- Impact of Interest Rates: Higher interest rates are beneficial for the MakerDAO’s income. The MakerDAO’s income has fallen less than most other protocols even though the DAI issuance has halved since the peak in early 2022.
- Income Stability: The Maker protocol’s income is likely to fall less in tougher markets than most other protocols, suggesting a lower floor income while still being able to extract extra profits in booming markets.
Inclusion of Maker Token in the KVQ Index
- Reason for Inclusion: The Maker token is included in the KVQ index due to the good possibility of the Maker token maintaining or increasing its price in the future, and a small but existing probability that the protocol will fail.
- Potential Risks: The Maker protocol can fail or be outcompeted, which could decimate the value of the Maker token. However, the Maker protocol’s longevity makes a compelling argument for Maker’s continued success.
Actionable Insights
- Investigate the Potential of the Maker Token: Given the Maker token’s value derived from the Maker protocol’s interest income and the automatic use of this income to buy and burn the Maker token, it may be worth investigating the potential of the Maker token.
- Consider the Impact of Interest Rates: Higher interest rates can positively impact the MakerDAO’s income. Therefore, changes in interest rates should be closely monitored.
- Assess the Stability of the Maker Protocol’s Income: The Maker protocol’s income is likely to be more stable in tougher markets than most other protocols, suggesting a lower floor income while still being able to extract extra profits in booming markets. This stability should be taken into account when assessing the potential of the Maker token.
