Project Update: New DeFi Lending Solution Spark Protocol for DAI Users

Source: Go2Mars Research

On May 9, 2023, the decentralized stablecoin protocol MakerDao announced the official launch of Spark Protocol, the front end for executing various operations with DAI. Its first product is Spark Lend (Aave v3 fork), which currently supports collateral types including ETH, stETH, DAI, and sDAI. The protocol achieves a fixed interest rate of 1.11% by integrating Maker DAO's D3M module. The aim of the protocol is to provide functionalities for DAI users that were not previously offered by Maker, thereby expanding the applicability of DAI and increasing its market share in the stablecoin sector.

So, what does the launch of Spark Protocol mean for the overall ecosystem of MakerDAO? How does it leverage its unique utility? What implications does this have for the development and innovation of other ecosystems?

Ecological Background of Spark Protocol: MakerDAO and DAI

Maker DAO is a decentralized platform operating on the Ethereum blockchain, providing users with the opportunity to generate the dollar-pegged stablecoin DAI. Users can use their digital assets (such as ETH) as collateral to generate DAI according to their needs.

Additionally, Maker DAO issues a governance token called MKR, which is used to pay interest, fees, and participate in voting on system parameters. The goal of Maker DAO is to establish a fair, transparent, and intermediary-free financial system.

DAI is a stablecoin whose value is stable relative to the US dollar. Stablecoins are digital currencies pegged to "stable" reserve assets (such as the US dollar or gold), designed to reduce the price volatility of unpegged cryptocurrencies like Bitcoin.

Maker DAO is the creator of DAI, utilizing the decentralized nature of the Ethereum blockchain to allow users to use their digital assets as collateral to borrow DAI. DAI is supported by publicly transparent crypto collateral, and all collateral information can be viewed on the Ethereum blockchain. Furthermore, the management of DAI is conducted by a community of MKR token holders, who vote to determine the system's parameter settings.

As of now, Maker DAO has become the second-largest locked protocol in the decentralized finance (DeFi) ecosystem, with a locked value of $7.1 billion. Its issued stablecoin DAI ranks first in circulation among all decentralized stablecoins.

EndGame

MakerDAO's "EndGame" is a long-term restructuring proposal aimed at decentralizing and diversifying the Maker ecosystem. It involves introducing new functionalities and products to enhance the capabilities and adoption of DAI, including clearly defined rules (to be implemented immediately after passing Maker's constitutional MIP proposals), governance participation incentives (to be implemented later in 2023), and transferring operational complexity from MakerDAO to SubDAOs (to be implemented in 2024).

Spark Protocol is one of the many innovations that the Endgame era will bring to the MakerDAO ecosystem.

First Trial of Spark Protocol: Spark Lend

Mechanism Overview

The first version of Spark Protocol launched is Spark Lend. As a decentralized non-custodial liquidity market protocol, Spark Lend allows users to participate as suppliers or borrowers. Suppliers provide liquidity to the market to earn passive income, while borrowers can take loans either through over-collateralization (permanent) or under-collateralization (single-block liquidity).

Spark Lend is linked to Maker's D3M (Direct Deposit Dai Module), which supports interaction between the Maker ecosystem and third-party lending pools. The connection between the Spark protocol and Maker's D3M aims to link Maker's liquidity with a complete DeFi solution, allowing users to borrow DAI at more competitive rates by utilizing MakerDAO's credit line, with an initial annual interest rate of only 1.11%.

The D3M (Directly Deposit Dai) module is a tool that allows MakerDAO to create DAI and deposit it into other lending protocols on the Ethereum blockchain (such as Aave and Compound). With this tool, MakerDAO can influence DAI interest rates in these protocols and provide more liquidity and stability for DAI users.

As a Maker Vault, D3M uses deposit tokens from lending protocols (such as aDAI or cDAI) as collateral. The amount of DAI created and deposited by D3M depends on the target borrowing interest rate set by Maker governance.

Regarding the connection between Spark Protocol and Maker's D3M, a post from MakerDAO states: "This direct wholesale credit line in DAI injects fresh DAI liquidity and automatically balances it into Spark Lend, enabling its users to access the best rates in the market."

sDAI

Spark Protocol's Spark Lend product also introduces a tokenized version of the DAI stablecoin, deposited in the form of DAI Savings Rate (DSR). The tokenized version is called sDAI. However, the current yield is very low, with DAI deposits only yielding 1.1%. It also utilizes a pegged stability module to help connect liquidity infrastructure and provide instant exchanges between DAI, sDAI, and USDC.

DSR (Dai Savings Rate) allows DAI holders to earn interest on their DAI deposits. DSR is a special module in the MakerDAO smart contract system that continuously pays the Dai Saving Rate on deposits at each block. DSR is set by Maker governance, which can adjust the DSR to balance the supply and demand of DAI, affecting its stability. DSR is an attractive option for DAI users looking to earn passive income through stablecoins.

Although the current yield may be low, decentralized finance users have been cautious about protocols offering high-risk, high, and often unsustainable yields. Therefore, Maker focuses on providing stability, liquidity, and significantly reduced risk.

After the launch of Spark Lend, Phoenix Labs aims to continue delivering new products and features. The 2023 roadmap includes Spark fixed rates, elastic oracles, cross-chain support, Maker transfer support, and the introduction of EtherDAI.

Phoenix Labs

Phoenix Labs, as the development team of Spark Protocol, aims to introduce new decentralized products into the Maker ecosystem. Our mission is to help MakerDAO grow and innovate in the decentralized space, and everything Phoenix Labs builds will center around DAI.

MakerDAO will own every product created by Phoenix Labs; thus, they will inherit the governance system that Maker has already perfected. On the other hand, Maker Governance will manage all smart contracts through voting to adjust system parameters and add new collateral.

Summary

MakerDAO is expanding its user base and product line by launching Spark Protocol, moving towards its vision of becoming a fully decentralized platform. The introduction of Spark Protocol not only enhances MakerDAO's DAI lending capabilities but also further increases its appeal to users.

Additionally, through the "EndGame" plan, Maker DAO breaks its business into multiple SubDAOs based on different matters to enhance the protocol's flexibility. The emergence of Spark Protocol perfectly demonstrates the potential for innovation and value creation of Creator SubDAOs on top of the Maker protocol. These SubDAOs can innovate within the protocol framework, providing users with more services and value.

These innovations and new services enhance the use cases of DAI, further solidifying its leadership position in the decentralized stablecoin space. These initiatives indicate that MakerDAO is not only expanding its business scope but also enhancing the value of its products through innovation to meet the needs of more users and maintain its competitiveness in the market.

References:

[1] Maker DAO: MIP116: D3M to Spark Lend

[2] Maker DAO: Announcing Phoenix Labs and Spark Protocol

[3] Spark Document Hub