In-depth Analysis of MakerDAO's Newly Established Phoenix Labs and Spark Protocol

Written by: Jiang Haibo, PANews

As Aave's stablecoin GHO and Curve's stablecoin crvUSD are about to launch, MakerDAO is preparing to expand its lending business through Phoenix Labs and Spark Protocol, and enter the liquid staking market.

On February 9, the establishment of Phoenix Labs and the development of Spark Protocol were announced on the MakerDAO forum, focusing on the decentralized lending market. How do Phoenix Labs and Spark Protocol work, and how do they help MakerDAO? Currently, the Spark Protocol official website does not have detailed information, and the following content is based on an understanding of the MakerDAO forum and tweets from the founders of Spark Protocol.

What are Phoenix Labs and Spark Protocol?

After MakerDAO's founder proposed the Endgame plan last June, MakerDAO needed to continue expanding while maintaining maximum flexibility, so some core unit team members of MakerDAO created Phoenix Labs. Phoenix Labs is a research and development company aimed at introducing new decentralized products into the Maker ecosystem. The products developed by Phoenix Labs will be owned by MakerDAO, inheriting Maker's governance system and managed through Maker Governance voting for smart contracts.

Spark Protocol is the first solution from Phoenix Labs, enabling fixed and variable rate lending of crypto assets, supporting EtherDAI, and implementing elastic oracles to enhance MakerDAO's functionality. After the establishment of MakerDAO's Creator SubDAO model, Spark Protocol will transition into the Creator SubDAO.

Related article: The Crisis and Opportunity of MakerDAO: Losses, Regulatory Risks, and the Redemption of MetaDAO

Spark Lend: A Lending Market Forked from Aave V3

The first product of Spark Protocol is the lending market Spark Lend with a frontend. According to the official roadmap, the basic functions of Spark Protocol, including product launch, will be completed by April this year. This year will also see the addition of fixed-rate lending, elastic oracles, cross-chain support, and the onboarding of EtherDAI.

Spark Lend is built on Aave V3, and Spark Protocol will allocate 10% of the profits earned from the DAI market to Aave after DAI loans reach $100 million over the next two years. Currently, Spark Protocol has also initiated a proposal on the Aave forum.

Spark Lend supports Maker's D3M and PSM, allowing projects to have cheap liquidity, while others can borrow DAI at the DAI Savings Rate (DSR). The DSR allows users to deposit DAI and earn interest on their deposits, currently at an annualized rate of 1%. USDC holders can also directly convert USDC to DAI through PSM on the Spark Protocol official webpage and earn interest through DSR.

Spark Lend will focus on high liquidity collateral types and will support lending in the following five markets at launch: DAI, ETH, Lido wstETH, WBTC, and DAI locked in DSR. Among them, ETH and wstETH will support Aave V3's E-Mode, allowing users to borrow 98% of ETH by collateralizing wstETH, supporting higher leverage.

In the second half of this year, Spark Protocol plans to collaborate with Deco, Sense Finance, Element Finance, and others to support fixed-rate lending.

Guiding the Use of EtherDAI

In the Endgame plan, Maker decided to create a liquid staking derivative (LSD) for ETH called EtherDAI. With the Shanghai upgrade approaching, staked ETH will be withdrawable, which is considered a good opportunity to enter the LSD track. One of the main purposes of Spark Protocol is also to guide the use of EtherDAI.

According to Spark Protocol's liquid staking plan, EtherDAI will be similar to Frax Finance's liquid staking plan, featuring a 1:1 pegged EtherDAI and a yield-bearing version called sEtherDAI. Since only a portion of the staked tokens share all staking rewards, the yield of sEtherDAI may be as high as that of sfrxETH, surpassing other LSDs.

Additionally, EtherDAI will also have a PSM. In Maker, PSM allows tokens like USDC and GUSD to be exchanged 1:1 with DAI. Here, the PSM will allow ETH or other ETH liquid staking derivatives to be conveniently exchanged for EtherDAI.

To support the rapid launch of EtherDAI, Maker can also provide liquidity mining subsidies in MKR or DAI for EtherDAI.

Issuing New Tokens

In previous discussions about Endgame, Maker decided to split its core units into multiple MetaDAOs due to high employee costs and the urgent need for expansion. Each MetaDAO needs to be self-sufficient and will issue its own tokens. Although Spark Protocol did not introduce token-related aspects in the MakerDAO forum, it may have its own token.

The founder of Phoenix Labs mentioned on Twitter that there will be multiple competitive SubDAOs, with the relevant tokens associated with the cash flow of SubDAO products. The revenue generated by Spark Protocol will flow to these token holders. All tokens will be distributed through liquidity mining, with no pre-allocation.

Compared to before, after the establishment of SubDAOs like Spark Protocol, Maker's cost expenditures will be reduced, and each SubDAO will still work around the Maker ecosystem.

After various SubDAOs issue their own tokens, existing assets in MakerDAO such as MKR and DAI may also become tools for mining, which could be a reason for the recent rise in MKR. Tokens issued by SubDAOs may have rights to their own project revenue distribution.

Summary

Core unit members of MakerDAO established Phoenix Labs and developed Spark Protocol, which will initially have a lending market forked from Aave V3, allowing for low-cost liquidity through support for D3M and PSM. Another important purpose is to guide the use of Maker's liquid staking derivative EtherDAI.

After the establishment of SubDAOs like Spark Protocol, it may significantly alleviate MakerDAO's cost pressure. SubDAOs will issue their own tokens, which will be fairly distributed through liquidity mining, and MKR and DAI may become tools for mining.