MakerDAO 2018 Revenue Analysis
How much was made, how it got redistributed
Decentralized Autonomous Organizations don’t publish financial statements or quarterly reports. Why would they? The data is already out there, available for everyone to review and audit if necessary. But very few people will go through the trouble of parsing and reviewing gigabytes of data, so there is still a need for some sort of reporting. In this blog post, we are attempting to publish a basic 2018 revenue statement for MakerDAO.
MakerDAO launched the groundbreaking Single Collateral DAI (SCD) over 14 months ago. During that time, it accrued revenues (stability fees and liquidation penalties), paid expenses (discounts on liquidated collateral), wrote off losses (bad debts from liquidations and market movements) and distributed its surplus by burning MKR and PETH tokens.
MakerDAO’s SCD is working in a very unique way, completely ignoring the structure of a normal corporation and accounting standards, so it is very hard to find the right way to categorize the transactions of the MakerDAO smart contracts. While the categorization is certainly open to discussion, the exercise can still be very useful in understanding SCD’s inner workings and MakerDAO’s value proposition.
The list of all transactions calling the various SCD and MakerDAO contracts was generated using a custom data scraper to parse the Ethereum blockchain. The wipe and bite transactions were of particular interest. The data was then augmented with ETH and MKR prices as recorded by the MakerDAO Oracle, allowing a conversion of all amounts to DAI at the time of the transaction. The use of DAI as a unit of account removes the volatility of ETH and MKR and simplifies analysis. (1 DAI = 1 USD)
The extracted data and the calculations used for generating this report are available for review.
Stability fees are the interest that CDP holders have to pay on their DAI debt. At the beginning of 2018, the fee was 0.5% and was increased to 2.5% on August 30th, before being reduced back to 0.5% on December 21st. We are categorizing these revenues as Accrued Stability Fees and Collected Stability Fees.
Accrued Stability Fee: Interest accumulated by CDPs during the period. Accrued fees are collected from CDP holders only on CDP wipes and shut.
Collected Stability Fee: Interest paid by CDP holders when they are reimbursing their debt, at the time of a wipe or a shut.
As we can see on above graphic, interest rate adjustments had an important impact on MakerDAOs stability fees revenue.
It is important to distinguish the accrued and the collected fees because only a portion of the stability fees were realized in 2018. Also, a little-known characteristic of SCD is that accrued fees are forgone by MakerDAO when a CDP is liquidated. This is resulting in a write-off of some of the Accrued Stability Fees (it is expected that the upcoming Multi-Collateral DAI will be eliminating these write-offs).
Stability Fee Write-off: Accrued stability fees that cannot be collected from the CDP holders due to a liquidation (bite).
An overlooked major stream of income for MakerDAO is the liquidation penalty that must be paid by underwater CDP holders. This rate is currently 13%, unchanged since launch. The liquidation fee’s purpose is to discourage liquidation while covering the costs of inefficiencies in the liquidation process.
The bear market of 2018 presented challenges to CDP holders, and these difficulties were transformed into a major source of revenue for MakerDAO.
Liquidation penalty: Amount of DAI that is added to CDP balance during liquidation (bite). The penalty replaces any accrued stability fee.
Due to the limitations of SCD, a large proportion of the collected fees are lost in market price changes and incentives for keepers. To understand this, let’s go over the liquidation steps:
- A CDP is liquidated by a “bite”, immediately erasing its DAI debt in exchange for just enough PETH collateral to cover the debt plus liquidation fee.
- The collected collateral is moved to the “tap” contract.
- The “tap” contract offers to keepers the PETH collateral at a 3% discount relative to current ether price as an incentive. If the ether price continues to drop and no keeper buys the collateral quickly enough, MakerDAO has to write off the depreciation.
- Keepers buy the PETH and return DAI to the tap contract (“bust”).
- The DAI required to cover the CDP debt is immediately burned. Any surplus DAI is kept for redistribution (more on that later).
This year, MakerDAO gave 1.58M DAI in discounts to keepers for their services and lost 251k DAI due to collateral depreciation. Overall, these operations generated a 4.25M DAI surplus.
Distributions of Revenues and Surplus
MakerDAO, the DAO, does not have expenses at this stage. All development, research, marketing, and legal expenses are paid by the Maker Foundation. As the MakerDAO isn’t keeping reserves, all revenue and surplus are immediately redistributed.
- Collected Stability Fees: These fees are paid in MKR or DAI. When the fees are paid in DAI, MKR is bought on the market and burned. The burn reduces the MKR supply and benefits all MKR holders.
In 2018, 462.81 MKR worth 183k DAI was burned.
- Liquidation Penalties: The surplus from the liquidation process is redistributed to PETH holders by buying PETH with the DAI surplus and burning it. To incentivize the sale of DAI for PETH, another 3% rebate is given to keepers.
After the 128k DAI rebate, 21,591.48 PETH worth 4,13M DAI were burned.
Who benefited the most?
In the end, who is benefiting from these revenues, rebates, and surpluses? The answer may surprise many.
A disproportionate slice of the revenues is captured by keepers and PETH holders to the detriment of MKR holders. In Single Collateral DAI, only the collected stability fees are used to burn MKR, while liquidation penalties go to PETH holders only. Additionally, liquidation inefficiencies require a large discount to keepers to ensure that liquidations are done swiftly.
Multi-collateral DAI will eliminate PETH so MKR holders will benefit from liquidations but will be on the hook if liquidations are running a deficit. Also, the liquidation fee is expected to be much lower and a new auction process should also be reducing the discounts made to keepers.
MakerDAO is part of the very select group of DAOs able to generate and redistribute revenue. MakerDAO is once again setting the bar very high for other Dapps and DAOs.
We’ve seen that SCD is very inefficient at liquidating CDPs and is doing a very poor job of distributing revenues and surpluses to MKR holders. SCD was meant to be temporary, and as such, many shortcuts were made to deliver a stable currency while putting early backers’ interest second. This is another example of MakerDAO’s community patience and exemplary focus on delivering a revolutionary product.