MakerDAO project revenues fell dramatically in the third quarter of 2022 through a drop in debt demand and several liquidations.
Token Maker - a new quality in the cryptocurrency world?
MakerDAO is a lending platform created in 2017 on the Ethereum blockchain. At its foundation lie stablecoins, called DAI, linked to the US dollar. The protocol created by the founders allows for a 170% collateralised loan, meaning that to obtain, for example, 100 ETH, someone would need to deposit an equivalent amount of 170 ETH.
The additional collateral was intended as a response to the high volatility of token prices. The intention was to protect investors from a crash, with cryptocurrencies such as Ethereum serving as reserves for some DAI and other stablecoins. Due to its high security and important position in the crypto world, the token has been hailed by internet users and even some media outlets as the 'central bank of cryptocurrencies'.
Why would someone deposit more than they could borrow? The main reason could be that by borrowing DAI, an investor would be able to access stablecoin in US dollars without having to sell their ETH. This could be very useful, as many lending platforms and so-called 'yield farms' offer higher interest rates for stablecoin denominated in hard currency than for potentially volatile ETH.
MakerDao's deteriorating performance
According to data from the report "The State of Maker Q3 2022" The DAO (decentralised autonomous organisation) reported a revenue decline of more than $4 million in the third quarter, translating into a decline of as much as 86% quarter-on quarter and 74% year-on-year.
According to Senior Analyst Messari, falling demand for loans and the collapse of some projects where they were being deposited may have led to disappointing performance. It also seems that the bad sentiment related to the bankruptcy of the leading tokens and funds in the market resulted in a decrease in user confidence and lower activity, which could be seen from the reduced demand for MakerDAO services.
Despite a 16 % reduction in project costs during the quarter, on a year-over-year basis, they are up by a whopping 132%. This may be due to the losses incurred by borrowing during the downturns, where a 170 % deposit may not have been sufficient with such large ETH price reductions.
With ETH falling 73% from its peak, for a long-term loan, the deposit would have shrunk to less than 40%. Even if Maker was making more short-term loans, it could have exposed itself to gigantic losses in the event of default.
MakerDAO price, daily candles
Source: Conotoxia MT5
Token Maker represents DAO shares and tends to be related to the overall behaviour and prospects of the project. Despite its gains, in the last weeks, its activity may face several obstacles. Among others, could be : retaining existing clients (heavily dependent on the overall health of the crypto debt market), reducing costs and surviving a period of reduced demand.
Rafal Tworkowski, Junior Financial Markets Analyst, Conotoxia Ltd. (Cinkciarz.pl investment service)
The above trading publication does not constitute an investment recommendation or information recommending or suggesting an investment strategy within the meaning of Regulation (EU) No 596/2014 of 16 April 2014. It has been prepared for information purposes and should not form the basis for investment decisions. Neither the author of the study nor Conotoxia Ltd. accepts any responsibility for investment decisions made on the basis of the information contained in this publication. Reproduction or reproduction of this study without the written consent of Conotoxia Ltd. is prohibited.
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