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With over $8 billion in TVL and standing out as one of the largest success stories in crypto history, Maker has been the face of DeFi since its inception, remaining dominant and adaptive to this day. Despite its numerous successes, Maker and its infamous MakerDAO has been looking for more, with the Maker Endgame proposal being one of the largest moves taken by a DeFi protocol in the sector’s short history.

Before we get into the complexities of Maker subDAOs, the Endgame proposal, Maker’s RWA push and Spark, we have to go back in time and learn a bit more about Maker’s beginnings and how it’s come so far in such a short time.

Maker’s Early Days

Going back to 2017, we find ourselves in an era where DeFi was little more than just another buzzword making its rounds through crypto, a new place to send digital money, transact on-chain and participate in decentralized variants of the traditional financial system. Maker began as a concept in 2014, with its creator Rune Christensen dreaming up the idea of blockchains enabling traditional financial systems at scale.

Permissionless, decentralized finance for all.

At its core, MakerDAO combines a decentralized autonomous organization (DAO) with a credit protocol and decentralized stablecoin, DAI.

Maker’s primary function is to manage the DAI stablecoin, a stablecoin whose value is pegged to the US dollar, similar to Tether’s USDT or Circle’s USDC, with its share of differences. DAI’s peg is maintained through a dynamic system of collateralized debt positions (CDPs), stability fees, and decentralized governance, which collectively ensure DAI's stability and reliability as a stablecoin.

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The foundation of MakerDAO's system is the CDP, a smart contract mechanism where users can lock in collateral assets, like Ethereum, to generate DAI. This process is critical as it introduces DAI into circulation and maintains its supply simultaneously. The amount of DAI a user can generate is determined by the collateral-to-debt ratio, ensuring that the system always holds more collateral in value than the DAI it issues. This mechanism protects DAI's value, especially in volatile market conditions. Where stablecoins like USDC and USDT are backed 1:1 by reserves, DAI’s mechanism provides greater flexibility and stands out as one of the pillars of Decentralized Finance.

MakerDAO utilizes a dual-token model, utilizing DAI, naturally, and the Maker (MKR) token. MKR holders are integral to the governance of the MakerDAO system, possessing voting rights on critical decisions like stability fees (interest rates charged on DAI generated from CDPs) and additional risk parameters.

The decentralized governance model allows for collective decision-making and risk management, contributing to the system's resilience and adaptability as DeFi has gone through various changes since its inception. Through the balance of immutable smart contracts and decentralized governance, MakerDAO stands as a testament to the potential of the financial system of the near future.

DAI Overview

DAI stands out in the world of stablecoins due to its unique approach to maintaining stability and decentralization. As we mentioned earlier, compared to other stablecoins, particularly those that are fiat-collateralized, DAI presents a fundamentally different model. USDC and USDT maintain their peg to the US Dollar by holding an equivalent amount of fiat currency in reserve. This approach offers a straightforward mechanism for stability, but it introduces elements of centralization and reliance on traditional financial systems. Maker set out to fix this, as what good is a decentralized financial system dominated by centralized actors?

These stablecoins are often issued and regulated by centralized entities, which hold the fiat reserves and can exercise significant control over the issuance and redemption of the tokens. While this isn’t a turn-off for many - the greatest value a stablecoin can provide is stability - it does lead to issues for those that prefer decentralization, without any risk of outside influence over their currency.

On the other opposite end of the spectrum, DAI is completely decentralized and operates without the need for a central authority.

Its stability is not achieved by holding fiat currency in reserve, but rather through over-collateralization with various cryptocurrencies. The MakerDAO ecosystem and its governance model allow for community-driven decisions, making the system adaptable and resilient to market fluctuations. If users and governance participants wish for more forms of collateral or different weightings of DAI collateral, governance allows for a fair and just process. This level of decentralization can inadvertently lead to more complexity in understanding and interacting with the system, potentially making it less accessible to those who aren’t as familiar with crypto.

When compared to other decentralized stablecoins, DAI's distinction lies in its mature ecosystem and proven track record of Maker, along with the help of one of the most dedicated and active governance forums across all of DeFi.

Other decentralized stablecoins like Synthetix's sUSD, employ different mechanisms for maintaining their peg. For instance, sUSD is backed by the Synthetix Network Token (SNX) and other assets within the Synthetix ecosystem, a separate system from Maker and DAI. These approaches offer their own sets of advantages and challenges, particularly in terms of scalability and resilience to extreme market conditions. One of the more cautionary tales of decentralized stablecoins comes from Terra’s UST, which experienced a depeg event and led to the downfall of Terra and billions of dollars. Building a decentralized stablecoin is one of the most difficult challenges in crypto, and DAI’s resilience is a true success story and shows how essential it is to exercise decentralized systems with caution.

DAI's over-collateralization approach has proven to be robust, especially during periods of high volatility in the crypto markets. The system has weathered significant market downturns, maintaining its peg more consistently than some algorithmic stablecoins and gaining increased respect in the process. This robustness comes at the cost of capital efficiency; the over-collateralization requirement means that more capital is locked up in the system than the actual value of DAI in circulation.

DAI, the centerpiece of the MakerDAO ecosystem, is a decentralized, unbiased, collateral-backed cryptocurrency soft-pegged to the US Dollar. Unlike traditional stablecoins, which are often backed and stabilized by fiat currencies held in reserve, DAI maintains its value through a sophisticated system of smart contracts and collateral assets on the Ethereum blockchain. This approach offers a high degree of transparency and trustlessness, as the entire system is open to public audit and does not rely on any centralized authority to maintain its value. The creation of DAI was driven by the need for a stable and decentralized digital currency in the cryptocurrency market. The inherent volatility of cryptocurrencies like Bitcoin and Ethereum poses significant risks for both traders and decentralized applications.

A stablecoin like DAI provides a solution to this problem by offering the benefits of digital currency (like fast, global transactions and privacy) without the high volatility. This stability is crucial for various use-cases, including lending, remittances, and as a stable medium of exchange for day-to-day transactions. DAI maintains its peg to the US Dollar through a dynamic system of Collateralized Debt Positions (CDPs), now also referred to as Vaults in the Maker Protocol. Users lock collateral assets (such as ETH or other supported cryptocurrencies) into these smart contracts to mint DAI. The system ensures that the value of the collateral always exceeds the value of DAI minted, thereby maintaining a safe overcollateralization level. If the value of the collateral falls below a certain threshold, the CDP is automatically liquidated to ensure the system remains solvent.

In addition to collateralization, the MakerDAO system also uses mechanisms such as Stability Fees (akin to interest rates) and the DAI Savings Rate (DSR) to maintain DAI's peg. Stability Fees are paid by users who generate DAI, and the rate can be adjusted through governance decisions by MKR token holders to respond to market conditions. The DSR, on the other hand, offers an incentive for holding DAI, as users can lock their DAI into a smart contract to earn additional DAI, thus reducing its circulating supply and helping stabilize its value. The creation of DAI represents a significant step forward in the evolution of cryptocurrency. It provides a decentralized, stable asset that can be used for savings, payments, and as a standard of value in the DeFi ecosystem. This stability and decentralization make DAI a critical component in the broader movement towards a more open and accessible financial system.

While DAI might not have the simplicity of fiat-collateralized stablecoins or the cutting-edge mechanisms of some newer decentralized stablecoins, its blend of decentralization, community-driven governance, and proven stability mechanisms make it a significant player in the stablecoin arena. Its approach offers a compelling balance between the ideals of decentralization and the practical need for a stable digital currency, making it a cornerstone of the DeFi ecosystem.

Current Developments

MakerDAO and its stablecoin DAI have become integral components of the broader decentralized finance (DeFi) ecosystem, playing a pivotal role in its growth and development. MakerDAO's success and influence can be attributed to several key factors and strategic decisions that have enabled it to thrive within the rapidly evolving DeFi landscape.

1. Providing Stability in a Volatile Market: In the inherently volatile world of cryptocurrencies, DAI offers a much-needed element of stability. As a stablecoin pegged to the US Dollar, DAI provides a reliable medium of exchange and store of value, essential for various DeFi applications. This stability is especially valuable for users looking to hedge against the volatility of other cryptocurrencies, engage in yield farming, or participate in decentralized lending platforms.
2. Foundation for Other DeFi Protocols: DAI has become a foundational asset for numerous DeFi protocols. Its integration across various platforms exemplifies its versatility and utility. For instance, DAI is widely used in popular DeFi applications such as Compound and Aave for lending and borrowing, in decentralized exchanges like Uniswap for liquidity provision, and in yield farming protocols, where users can earn returns on their DAI holdings. This widespread adoption underscores its importance as a building block in the DeFi ecosystem.
3. Decentralized Governance and Community Involvement: A key factor in MakerDAO's success is its decentralized governance model, powered by the MKR token. MKR holders have voting rights, allowing them to participate in crucial decisions regarding the system's parameters, such as stability fees, debt ceilings, and the addition of new collateral types. This community-driven approach fosters a sense of ownership and aligns the interests of stakeholders, contributing to the protocol's adaptability and resilience.
4. Innovation and Adaptability: MakerDAO has shown a consistent ability to innovate and adapt to the changing needs of the DeFi market. For example, the introduction of Multi-Collateral DAI (upgrading from Single-Collateral DAI) allowed for the inclusion of various cryptocurrencies as collateral, not just Ethereum. This diversification of collateral types enhances the robustness of the system and increases its appeal to a broader user base.
5. Proven Resilience: MakerDAO's system has demonstrated resilience during various market conditions, including significant downturns and periods of high volatility. This resilience has bolstered trust in the system, attracting more users and integrations. For instance, during the crypto market crash in March 2020, although MakerDAO faced challenges due to extreme market conditions, the system ultimately held up, and the necessary adjustments were made through its governance processes to strengthen the protocol.

Let’s move towards some concrete examples of MakerDAO's Impact:

Decentralized Lending: Platforms like Compound and Aave have integrated DAI, allowing users to lend and borrow this stablecoin, demonstrating its utility in decentralized lending markets.

Yield Farming and Liquidity Mining: DAI has been a popular choice for yield farming strategies, providing users with a stable return on their investments in various DeFi protocols.

Payment and Remittance Services: DAI's stability makes it an excellent choice for digital payments and remittances, reducing the risk of volatility for users who wish to transfer value across borders.

In conclusion, MakerDAO's success in the DeFi space can be attributed to its innovative approach to maintaining a stable cryptocurrency, its integration with a multitude of DeFi applications, and its robust and decentralized governance model. These factors have not only contributed to its own success but have also played a significant role in shaping the broader DeFi ecosystem.

Looking at Spark, subDAOs and Maker’s Endgame

Now that we’ve covered the basics of Maker and how it’s positioned in DeFi currently, we can explore some of the interesting happenings in the Maker ecosystem, specifically Spark, subDAOs and Maker’s Endgame.

Overview of Spark

Spark has been able to accumulate over $1 billion in TVL since its inception. The protocol was designed to facilitate the growth of the Maker ecosystem, while allowing for more creativity and innovation outside of the traditional Maker governance structure.

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There are very few protocols who have cultivated a structure like Maker, and even fewer who have the resources and community to scale as Maker has done. Spark’s done well to focus on enhancing and empowering the DAI ecosystem within the MakerDAO community. Here's a detailed overview: ‍

1. SparkLend: A DAI-Centric Money Market Protocol

- SparkLend is designed as a decentralized, non-custodial liquidity protocol where users can engage as suppliers, borrowers, or liquidators. It integrates liquidity directly from Maker, along with the best DeFi protocols, ensuring optimal liquidity management.

- Suppliers in SparkLend provide liquidity to the market and earn interest on their crypto assets. In contrast, borrowers can take loans in an overcollateralized manner, including the option for one-block borrow transactions (flash loans) which don't require overcollateralization.

2. Introduction of sDAI and SparkConduits

- sDAI (Savings DAI) is introduced as a yield-bearing stablecoin. It represents DAI within the DAI Savings Rate (DSR) module, which redistributes revenue from the Maker protocol back to DAI holders.

- SparkConduits, another key feature, facilitate direct liquidity flow from Maker to various protocols as a part of the Maker Allocation System.

3. Efficiency and Risk Management in SparkLend

- SparkLend introduces modes like Efficiency Mode (eMode) and Isolation Mode for optimizing asset yield generation and borrowing power. eMode allows borrowers to maximize borrowing power using correlated assets, enabling high-leverage trading and efficient yield farming.

- Isolation Mode is designed for listing new assets in a controlled environment. Borrowers can only use an isolated asset as collateral and are limited to borrowing certain stablecoins, as dictated by Maker Governance.

- Siloed borrowing is introduced for assets with potentially manipulatable oracles, limiting the borrowing to a single asset to mitigate risk.

4. Advanced Risk Parameters and Governance Features

- SparkLend implements advanced risk parameters like Supply and Borrow Caps, set by Maker Governance, to modulate asset borrowing and supply, thus reducing insolvency risks.

- The protocol allows granular control over borrowing power, with the flexibility to reduce it to as low as 0% without impacting existing borrowers.

- Risk Admins can be granted permission to update risk parameters dynamically, ensuring a responsive system to market changes.

5. Decentralization and Accessibility

- SparkLend incorporates a decentralized governance model, with roles like ASSET_LISTING_ADMIN_ROLE to manage asset listings.

- The Spark interface is hosted on IPFS, ensuring decentralized access. Users can connect to the Spark interface through various IPFS gateways, ensuring reliability and security.

- Savings DAI (sDAI) allows users to deposit DAI and receive yield from the Maker protocol, further enhancing the liquidity and utility of DAI within the ecosystem.

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Spark Protocol represents a significant step forward in the DeFi space. It aims to optimize capital efficiency, enhance risk management, and promote a more decentralized governance structure within the MakerDAO ecosystem. By offering innovative borrowing and lending mechanisms, and integrating closely with MakerDAO, Spark stands poised to significantly contribute to the evolution and growth of the DAI ecosystem.

The Endgame

The "Endgame" proposal for MakerDAO is an ambitious and comprehensive roadmap designed to enhance the efficiency, resilience, and participation within the MakerDAO ecosystem. This proposal outlines a multi-phase transformation process, aiming to significantly grow the DAI supply and foster a robust organization capable of scaling effectively. Here's an overview of how it works and its potential impact:

Phase 1: Beta Launch

The initial phase of Maker’s Endgame centers around rebranding and unifying the MakerDAO ecosystem. This involves introducing a new brand and website that aligns with the Endgame vision of AI-assisted governance and enhanced stablecoin security.

Key elements like DAI and MKR remain unchanged, of course, but users will have the option to upgrade to newer, slightly modified versions - NewStable (a new ERC20 wrapper for DAI) and NewGovToken (a redenominated version of MKR). These are of course placeholder names specified in Maker governance proposals, which will see significant adjustment in time.

NewStable introduces some new features like native farming of NewGovToken and additional subDAO tokens, and an allocation system to seed liquidity on major exchanges as necessary. The NewStable Accessibility Reward system will incentivize platforms that integrate NewStable, to further Maker’s reach across decentralized finance. NewGovToken offers features like the Smart Burn Engine and access to Governance AI Tools, enhancing governance processes.

Phase 2: SubDAO Launch

This phase introduces the first six Maker SubDAOs, which function as decentralized, specialized divisions within MakerDAO. These SubDAOs are responsible for user acquisition, decentralized frontends, and governance.

SubDAOs are divided into FacilitatorDAOs (focusing on governance processes) and AllocatorDAOs (specializing in allocating NewStable collateral and managing operational efficiency).

The launch of SubDAOs aims to streamline MakerDAO's governance, reducing operational complexity and focusing on mitigating risks. More information regarding subDAOs will be covered in the next section.

Phase 3: Governance AI Tools Launch

The introduction of Governance AI Tools and the Atlas, a comprehensive governance rulebook designed specifically for Maker, aims to further democratize participation in governance and expand access for those with financial limitations. These tools enable all stakeholders to engage effectively in governance decisions. The Immutable Documents within Atlas ensure the permanence of core principles, safeguarding the ecosystem from centralization or misalignment.

Phase 4: Governance Participation Incentive Launch

The Sagittarius Lockstake Engine (SLE) incentivizes NewGovToken holders to engage in governance by locking their tokens and delegating voting power.SLE participants receive rewards in NewStable or SubDAO tokens, fostering active involvement in governance.

Phase 5: NewChain Launch and Final Endgame State

The final phase involves the launch of NewChain, a blockchain dedicated to supporting the backend logic of SubDAO tokenomics and governance security.NewChain allows for the use of hard forks as a governance mechanism to recover from catastrophic disputes, ensuring the resilience of the ecosystem.

Influence and Implementation:

The Endgame proposal is influential as it seeks to significantly scale the MakerDAO ecosystem while maintaining decentralization and resilience. Maker’s phased approach allows for gradual implementation and adjustment, ensuring stability and community buy-in at each step.

By introducing AI tools and advanced tokenomics, Endgame positions MakerDAO at the forefront of DeFi innovation, potentially setting new standards for DAO governance and operation.

The focus on decentralized governance, public good, and scalability could make MakerDAO a leading example in the DeFi space, influencing how other projects approach governance and growth.

In summary, the Endgame proposal is a visionary plan to evolve MakerDAO into a more efficient, resilient, and scalable ecosystem. Its successful implementation could have a lasting impact on the broader DeFi landscape, setting new benchmarks for decentralized governance and innovation.

SubDAO Explainer

SubDAOs in the MakerDAO ecosystem represent a novel and decentralized approach to governance and innovation within the broader Maker protocol. These semi-independent entities, while linked to Maker Governance, have their own unique characteristics and roles. Here’s an overview:

1. General Characteristics of SubDAOs:

SubDAOs are specialized DAOs that operate semi-independently but are still connected to Maker Governance. Each SubDAO has its unique governance token, governance processes, and workforce, reflecting its self-determined values and aspirations.While they function largely independently, SubDAOs are designed to reduce complexity and risk for Maker Core by sandboxing their operations. Their governance processes are built upon the MakerCore governance infrastructure, and MKR holders retain control over many of the SubDAOs' assets.

2. Types of SubDAOs:

SubDAOs are categorized into three types: FacilitatorDAOs, AllocatorDAOs, and MiniDAOs, each with distinct functions.

FacilitatorDAOs:

These entities manage internal mechanisms of MakerDAO, AllocatorDAOs, and MiniDAOs.Their responsibilities include interpreting and facilitating specific governance-related processes.FacilitatorDAOs can engage Facilitators, who have direct access to governance processes and smart contracts relevant to their responsibilities.They operate based on Scope Artifacts and are rewarded through a tokenomics system based on their responsibilities and performance.

AllocatorDAOs:

AllocatorDAOs are responsible for generating Dai directly from MakerDAO and allocating it across the DeFi ecosystem. They provide public entry points to the Maker ecosystem and have the capability to spin off MiniDAOs. Their allocation of Dai is guided by broad objectives defined by the Stability Scope and restricted by Maker Governance. AllocatorDAOs have specific capitalization requirements and face penalties if these are not met.

MiniDAOs:

MiniDAOs are experimental entities spun off by AllocatorDAOs. They focus on exploring innovative concepts and products to further the growth of the Maker Protocol.Due to their experimental nature, MiniDAOs may be short-lived, especially if they fail to achieve product-market fit. They represent the most diverse and dynamic aspect of the SubDAO structure, allowing for rapid testing and iteration of new ideas.

4. Impact and Significance:

The introduction of SubDAOs within the MakerDAO ecosystem signifies a shift towards more decentralized and experimental forms of governance and innovation.

By dividing responsibilities among specialized entities, SubDAOs aim to streamline governance processes, reduce cognitive load, and foster more rapid growth and experimentation.

The structure allows for a balance between maintaining the stability and security of the core MakerDAO system while enabling flexibility and adaptability through the SubDAOs.

This model could potentially set a precedent in the DeFi space for how large, complex protocols can manage growth, innovation, and risk in a decentralized and scalable manner.

SubDAOs represent an innovative step in decentralized governance within the MakerDAO ecosystem, offering a structured yet flexible approach to managing various aspects of the protocol’s operations and growth strategies. This model showcases how large-scale DAOs can effectively decentralize and distribute responsibilities while maintaining a cohesive overarching governance structure.

Next Steps for Maker and RWAs

With all of that out of the way, we can look to Maker’s RWA ventures and discuss the potential of this promising new sector. Real-World Assets (RWAs) in the cryptocurrency sector, particularly in relation to MakerDAO, pose a significant and evolving aspect of decentralized finance (DeFi). RWAs are tangible assets like real estate, corporate debt, or other income-generating assets that are integrated into the blockchain ecosystem, typically through tokenization.

In the context of MakerDAO, these RWAs provide an avenue for diversifying collateral beyond traditional cryptocurrencies, thereby reducing the overall risk and volatility associated with crypto-collateralized loans. By incorporating RWAs, MakerDAO enhances the stability and attractiveness of its platform, offering more traditional asset exposure to DeFi participants.

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As of December 2023, MakerDAO's RWA portfolio has undergone notable developments, reflecting both the dynamic nature of the DeFi space and the specific challenges and opportunities inherent in integrating RWAs into a decentralized protocol.

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Portfolio Changes and Stability Fee Contribution:

- MakerDAO's RWA exposure, excluding the Peg Stability Modules (PSMs), decreased by approximately $222 million. This reduction was primarily due to drawdowns from Clydesdale, Andromeda, and Coinbase Custody to support USDC-PSM liquidity.

- Despite this decrease, RWAs continued to contribute significantly to Maker’s Stability Fees, accounting for roughly 48% of all Stability Fees generated by the protocol in December 2023. This contribution highlights the growing importance of RWAs within Maker's ecosystem, and continued reliance on RWAs as a consistent and extremely strong source of revenue for Maker.

Specific Updates:

- Fortunafi's Challenges: The Fortunafi centrifuge pool encountered a smallerror, resulting in Drop tokens being redeemed at an artificially low price. While Centrifuge has largely fixed the situation, the incident highlights the complexities involved in managing RWAs and the issues that can arise when dealing with large, decentralized systems.

- Harbor Trade Default: Harbor Trade's default situation is still ongoing, with the workout process to recover value from defaulted assets continuing as of the last report issuance in December 2023. The default, which began in April 2023, is being addressed through both legal and negotiation strategies, with further information progressing.

- ConsolFreight Paydowns: ConsolFreight received multiple paydowns, making up 21% of restructured assets. This development signals positive progress in recovering the value of troubled loans, a prescient issue across both traditional and decentralized finance.

Vault-Specific Developments:

- Monetalis Clydesdale (RWA-007): The latest report from Monetalis indicates adjustments in the estimated fees for Clydesdale.

- BlockTower Andromeda (RWA-015): Andromeda reduced its treasury bill holdings and is returning stability fees back to the DAO.

- Huntingdon Valley Bank (RWA-009): Notice has been given to terminate future loan purchases, with a transition to a new exchange agent.

- BlockTower Credit (RWA-012 & RWA-013): BlockTower increased its vault position and is satisfying all covenants with ongoing monitoring.

- 6s Capital Partners (RWA-001): No new loan activity was reported, and the current loan balance remains at $12.8 million.

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In summary, the December 2023 update on MakerDAO's RWA portfolio illustrates the ongoing efforts to integrate real-world assets into the DeFi ecosystem. These efforts are not without challenges, as evidenced by incidents like Fortunafi's pricing error and the Harbor Trade default. However, the substantial contribution of RWAs to Maker’s Stability Fees and the proactive management of these assets reflect the potential of RWAs to provide a stable and diversified source of collateral for DeFi platforms like MakerDAO.We hope this report provided sufficient and relevant information towards MakerDAO, DAI and the numerous expansions occurring across the Maker ecosystem.

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Disclaimer: This research report is exactly that — a research report. It is not intended to serve as financial advice, nor should you blindly assume that any of the information is accurate without confirming through your own research. Bitcoin, cryptocurrencies, and other digital assets are incredibly risky and nothing in this report should be considered an endorsement to buy or sell any asset. Never invest more than you are willing to lose and understand the risk that you are taking. Do your own research. All information in this report is for educational purposes only and should not be the basis for any investment decisions that you make.