MakerDAO Elephant Turnaround: Detailed Explanation of Spark, subDAO, and Maker's "Endgame"

Written by: Reflexivity Research

Compiled by: Frank, Foresight News

Maker has over $8 billion in TVL, making it one of the largest successful narratives in crypto history and a long-standing advocate for DeFi since its inception. Despite numerous successes, Maker and MakerDAO have been seeking continuous evolution, with the "Maker Endgame" proposal being one of the boldest moves taken by a DeFi protocol in crypto history.

Before we delve into Maker subDAOs, the Endgame proposal, Maker's RWA layout, and the complexities of Spark, it is necessary to go back in time to understand the origins of Maker and how it has reached this point in such a short time.

Early Days of Maker

Back in 2017, we found ourselves in an era where DeFi was just another buzzword propagated through cryptocurrency, a new space for sending digital currencies, on-chain transactions, and participating in decentralized variants of traditional financial systems. Maker began in 2014, with its founder Rune Christensen envisioning a blockchain-based idea to support traditional financial systems on a large scale.

A permissionless, decentralized financial system for everyone.

At the core of MakerDAO is the combination of a decentralized autonomous organization (DAO) with a credit protocol and the decentralized stablecoin DAI.

The main function of Maker is to manage the DAI stablecoin, which is a stablecoin pegged to the dollar, similar to Tether's USDT or Circle's USDC, but with differences. The peg of DAI is maintained through a dynamic system of collateralized debt positions (CDPs), stability fees, and decentralized governance, which together ensure the stability and reliability of DAI as a stablecoin.

The foundation of the MakerDAO system is the CDP, a smart contract mechanism where users can lock collateral assets (such as Ethereum) to generate DAI. This process is crucial as it brings DAI into circulation while maintaining its supply. The amount of DAI a user can generate is determined by the collateral-to-debt ratio, ensuring that the system always holds more collateral value than the DAI it issues. This mechanism secures the value of DAI, especially in times of market volatility. While stablecoins like USDC and USDT are backed by reserves at a 1:1 ratio, DAI's mechanism offers greater flexibility and has become one of the cornerstones of DeFi.

MakerDAO adopts a dual-token model: DAI and the Maker token MKR. MKR holders are an integral part of the governance of the MakerDAO system, possessing voting rights on key decisions such as stability fees (interest rates charged on DAI generated from CDPs) and other 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 undergone various changes since its inception. Through immutable smart contracts and a balance of decentralized governance, MakerDAO has demonstrated the potential that financial systems can unleash in the near future.

Overview of DAI

DAI stands out in the stablecoin world for its unique stability and decentralization. As mentioned earlier, DAI presents a distinctly different model compared to other stablecoins, especially those backed by fiat currency. USDC and USDT maintain their peg to the dollar by holding an equivalent amount of fiat reserves. This approach provides a direct stability mechanism but relies on centralization and traditional financial systems. Maker set out to address the question: what are the benefits of a decentralized financial system dominated by centralized participants?

These stablecoins are typically issued and regulated by centralized entities that hold fiat reserves and can exert significant control over the issuance and redemption of tokens. While this may not be a barrier for many, as it does not introduce additional risks from external influences on their value stability (the greatest value stablecoins can provide is stability), it does present a choice for those who prefer decentralization.

On the other hand, DAI is completely decentralized and operates without the need for centralized institutions.

Its stability is not achieved through holding fiat reserves but through the over-collateralization of various cryptocurrencies. The MakerDAO ecosystem and its governance model allow for community-driven decision-making, making the system more resilient and capable of responding to market fluctuations. If users and governance participants wish to obtain more forms of collateral or different weights of DAI collateral, this governance mechanism allows for a fair and just modification process.

Of course, this level of decentralization may inadvertently lead to complexities in understanding and interacting with the system, potentially making it difficult for those unfamiliar with cryptocurrencies to access it.

Compared to other decentralized stablecoins, DAI distinguishes itself with its mature ecosystem and Maker's strong track record, as well as being one of the most focused and active governance forums in all of DeFi.

Other decentralized stablecoins, such as Synthetix's sUSD, employ different mechanisms to maintain their peg. For example, sUSD is backed by the Synthetix network token SNX and other assets within the Synthetix ecosystem, which operates independently of Maker and DAI. This system has its own advantages and challenges, particularly in terms of scalability and resilience in extreme market conditions.

A more cautionary tale of decentralized stablecoins comes from Terra's UST, whose decoupling led to the collapse of Terra, evaporating billions of dollars. Building decentralized stablecoins is one of the most challenging tasks in the cryptocurrency space, and DAI's resilience is a true success narrative, underscoring the importance of cautious use of decentralized systems.

DAI maintains its peg to the dollar through a dynamic collateralized debt position (CDP) system, now also referred to as the vault 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 the minted DAI, thereby maintaining a safe level of over-collateralization. If the value of the collateral falls below a certain threshold, the CDP will automatically liquidate to ensure the system remains solvent.

In addition to collateral, the MakerDAO system also employs mechanisms such as stability fees (similar to interest rates) and the DAI Savings Rate (DSR) to maintain DAI's peg. Stability fees are paid by users generating DAI, and the rates can be adjusted through governance decisions made by MKR token holders to respond to market conditions. On the other hand, the DSR provides incentives for holding DAI, as users can lock their DAI in smart contracts to earn additional DAI, thereby reducing its circulating supply and helping to stabilize its value.

While DAI may lack the simplicity of fiat-backed stablecoins or some new mechanisms of decentralized stablecoins, it combines decentralization, community-driven governance, and proven stability mechanisms, making it a significant player in the stablecoin space. Its approach strikes a balance between the ideals of decentralization and the practical needs of stablecoins, making it a cornerstone of the DeFi ecosystem.

Latest Developments

MakerDAO and its stablecoin DAI have become an indispensable part of the broader DeFi ecosystem, playing a pivotal role in its growth and development. The success and influence of MakerDAO can be attributed to several key factors and strategic decisions that have enabled it to thrive in the rapidly evolving DeFi landscape.

Providing stability in turbulent markets: Amid the inherent volatility of the crypto world, DAI offers a much-needed element of stability, serving as a reliable medium of exchange and store of value pegged to the dollar, which is crucial for various DeFi applications. This stability is particularly valuable for users looking to hedge against the volatility of other cryptocurrencies, engage in liquidity mining, or participate in decentralized lending platforms;

Foundation for other DeFi protocols: DAI has become a foundational asset for numerous DeFi protocols, with its integration across various platforms reflecting its versatility and utility. For instance, DAI is widely used in popular DeFi applications such as lending on Compound and Aave, for liquidity provision on decentralized exchanges like Uniswap, and in liquidity mining protocols where users can earn rewards from their DAI holdings. This widespread adoption highlights its importance as a cornerstone in the DeFi ecosystem;

Decentralized governance and community participation: A key factor in MakerDAO's success is its decentralized governance model supported by MKR tokens. MKR holders have voting rights, allowing them to participate in critical decisions regarding system parameters such as stability fees, debt ceilings, and the addition of new types of collateral. This community-driven approach fosters a sense of ownership and aligns the interests of stakeholders, contributing to the protocol's adaptability and resilience;

Innovation and adaptability: MakerDAO has consistently demonstrated innovation and adapted to the changing demands of the DeFi market. For example, the introduction of multi-collateral DAI (upgrading from single-collateral DAI) allows for various cryptocurrencies to be used as collateral, not just Ethereum. The diversification of collateral types enhances the system's robustness and increases its appeal to a broader user base;

Proven resilience: The MakerDAO system has shown resilience under various market conditions, including downturns and periods of high volatility. This resilience has bolstered trust in the system, attracting more users and integrations. For example, during the crypto market crash in March 2020, despite facing challenges due to extreme market conditions, the system ultimately held strong and made necessary adjustments through its governance processes to strengthen the protocol;

Let’s look at some specific examples of MakerDAO's impact:

Decentralized lending: Platforms like Compound and Aave have integrated DAI, allowing users to borrow this stablecoin, showcasing its utility in the decentralized lending market.

Liquidity mining: DAI has been a popular choice for liquidity mining strategies, providing users with stable returns on their investments across various DeFi protocols.

Payment and remittance services: The stability of DAI makes it an excellent choice for digital payments and remittances, reducing the volatility risk for users looking to transfer value across borders.

In summary, MakerDAO's success in the DeFi space can be attributed to its innovative approach to maintaining a stable cryptocurrency, its integration with numerous 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.

Spark, subDAO, and Maker's Endgame

Now that we have introduced the basics of Maker and its current positioning in DeFi, we can explore some interesting aspects of the Maker ecosystem, particularly Spark, subDAOs, and Maker's Endgame.

Overview of Spark

Since its inception, Spark has accumulated over $1 billion in TVL. The protocol aims to facilitate the development of the Maker ecosystem while allowing for more innovation outside the traditional Maker governance structure.

Spark focuses on enhancing the DAI ecosystem within the MakerDAO community, with the following detailed overview:

1. SparkLend: A DAI-Centric Money Market Protocol

SparkLend is designed as a decentralized, non-custodial liquidity protocol where users participate as lenders, borrowers, or liquidators, directly integrating liquidity from Maker and DeFi protocols to ensure optimal liquidity management;

Lenders on SparkLend provide liquidity to the market and earn interest on their crypto assets, while borrowers can obtain loans in an over-collateralized manner, including options for single borrow transactions (flash loans) that do not require over-collateralization.

2. sDAI and SparkConduits

sDAI (Savings DAI) is introduced as a yield-bearing stablecoin, representing DAI in the DAI Savings Rate (DSR) module, which redistributes the income of the Maker protocol to DAI holders;

SparkConduits are another key feature, part of the Maker allocation system, facilitating direct liquidity management from Maker to various protocols;

3. Efficiency and Risk Management of SparkLend

SparkLend introduces modes such as Efficiency Mode (eMode) and Isolation Mode to optimize asset yield generation and borrowing capacity. eMode allows borrowers to maximize their borrowing capacity using related assets, enabling high-leverage trading and efficient liquidity mining;

Isolation Mode is designed to list new assets in a controlled environment. Borrowers can only use isolated assets as collateral and are limited to borrowing certain stablecoins, as stipulated by Maker Governance;

Introducing isolated borrowing for assets with potentially manipulable oracles limits borrowing to a single asset to reduce risk;

4. Advanced Risk Parameters and Governance Features

SparkLend implements advanced risk parameters set by Maker Governance, such as supply and borrowing caps, to regulate asset borrowing and supply, thereby reducing bankruptcy risk;

The protocol allows for fine control over borrowing capacity, which can be flexibly reduced to as low as 0% without affecting existing borrowers;

Risk managers can be granted the authority to dynamically update risk parameters, ensuring the system responds to market changes;

5. Decentralization and Accessibility

SparkLend adopts a decentralized governance model, with roles such as ASSETLISTINGADMIN_ROLE for managing asset listings;

The Spark interface is hosted on IPFS, ensuring decentralized access, allowing users to connect to the Spark interface through various IPFS gateways, ensuring reliability and security;

Savings DAI (sDAI) allows users to deposit DAI and earn yields from the Maker protocol, further enhancing the liquidity and utility of DAI within the ecosystem;

The Spark Protocol represents a significant step forward in the DeFi space, aiming to optimize capital efficiency, strengthen risk management, and promote a more decentralized governance structure within the MakerDAO ecosystem. By providing innovative lending mechanisms and closely integrating with MakerDAO, Spark is poised to make a substantial contribution to the development and growth of the DAI ecosystem.

The Endgame

The "Endgame" proposal of MakerDAO is an ambitious and comprehensive roadmap aimed at enhancing the efficiency, resilience, and participation of the MakerDAO ecosystem. The proposal outlines a multi-phase transformation process designed to significantly increase the supply of DAI and cultivate a robust organization capable of scaling effectively. Here is an overview of how it works and its potential impacts:

Phase 1: Beta Release

The initial phase of Maker's Endgame revolves around rebranding and unifying the MakerDAO ecosystem, involving the introduction of a new brand and website that aligns with the vision of the Endgame, which includes AI-assisted governance and enhanced security for stablecoins.

Of course, key elements like DAI and MKR remain unchanged, but users will have the option to upgrade to a newer, slightly modified version—NewStable (a new ERC20 wrapper for DAI) and NewGovToken (a renamed version of MKR). These are placeholder names specified in Maker governance proposals, which will undergo significant adjustments in a timely manner.

NewStable introduces several new features, such as native farming for NewGovToken and other subDAO tokens, as well as a liquidity allocation system for deploying liquidity on major exchanges as needed. The accessibility rewards system for NewStable will incentivize platforms that integrate NewStable, further expanding Maker's influence in the DeFi space. NewGovToken offers features like a smart burn engine and access to governance AI tools, enhancing the governance process.

Phase 2: Launch of subDAOs

This phase introduces the first six Maker subDAOs, which act as decentralized specialized departments within MakerDAO. These subDAOs are responsible for user acquisition, decentralized front-end, and governance.

SubDAOs are divided into FacilitatorDAO (focused on governance processes) and AllocatorDAO (dedicated to allocating NewStable collateral and managing operational efficiency).

The launch of subDAOs aims to streamline MakerDAO's governance, reduce operational complexity, and focus on risk reduction. More information about subDAOs will be provided in the next section.

Phase 3: Release of Governance AI Tools

The launch of governance AI tools and Atlas is designed as a comprehensive governance rulebook tailored for Maker, aimed at further democratizing governance participation and expanding access for those with economic limitations. These tools enable all stakeholders to effectively engage in governance decisions. The immutable documents in Atlas ensure the permanence of core principles, protecting the ecosystem from centralization or misalignment.

Phase 4: Launch of Governance Participation Incentives

The Sagittarius Lockstake Engine (SLE) incentivizes NewGovToken holders to participate in governance by locking tokens and delegating voting rights. SLE participants will receive rewards in NewStable or subDAO tokens, promoting active governance participation.

Phase 5: Launch of NewChain and Endgame State

The final phase involves the launch of NewChain, a blockchain dedicated to supporting subDAO token economics and governance security. NewChain allows for hard forks as a governance mechanism to recover from catastrophic disputes, ensuring the resilience of the ecosystem.

Impact and Implementation:

The Endgame proposal is impactful as it aims to significantly expand the MakerDAO ecosystem while maintaining decentralization and resilience. Maker's phased approach allows for gradual implementation and adjustments, ensuring stability and community support at each step.

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

The focus on decentralized governance, public interest, and scalability may make MakerDAO a leading exemplar in the DeFi space, influencing how other projects handle governance and growth.

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

subDAO

The subDAOs within the MakerDAO ecosystem represent a novel and decentralized approach to governance and innovation within the broader Maker protocol. These semi-independent entities, while associated with Maker governance, have their own unique characteristics and roles. An overview is as follows:

1. General Characteristics of subDAOs

SubDAOs are specialized DAOs that operate semi-independently but remain connected to Maker Governance. Each subDAO has its own unique governance token and governance processes, reflecting its autonomous values and aspirations. While they largely operate independently, subDAOs aim to reduce the complexity and risk of Maker Core through sandbox operations. Their governance processes are built on the MakerCore governance infrastructure, with MKR holders retaining control over many subDAO assets.

2. Types of subDAOs

SubDAOs are divided into three types: FacilitatorDAO, AllocatorDAO, and MiniDAO, each with different functions.

FacilitatorDAO

These entities manage the internal mechanisms of MakerDAO, AllocatorDAO, and MiniDAO, with responsibilities including interpreting and facilitating specific governance-related processes. FacilitatorDAOs can hire Facilitators, who have direct access to governance processes and smart contracts related to their duties. They operate based on scope artifacts and earn rewards through token economics systems based on their responsibilities and performance.

AllocatorDAO

AllocatorDAOs are responsible for directly generating DAI from MakerDAO and distributing it throughout the DeFi ecosystem. They provide public entry points for the Maker ecosystem and have the ability to spin off MiniDAOs. Their allocation of DAI is guided by broad objectives defined within a stable range and is subject to Maker governance constraints. AllocatorDAOs have specific capitalization requirements, and failure to meet these requirements may result in penalties.

MiniDAO

MiniDAOs are experimental entities spun off from AllocatorDAOs. Due to their experimental nature, MiniDAOs may be temporary, especially if they fail to achieve product-market fit, focusing on exploring innovative concepts and products to further advance the Maker protocol. They represent the most diverse and dynamic aspects of the subDAO structure, allowing for rapid testing and iteration of new ideas.

3. Impact and Significance

The introduction of subDAOs in the MakerDAO ecosystem marks a shift towards more decentralized and experimental forms of governance and innovation.

By delineating responsibilities among specialized entities, subDAOs aim to simplify governance processes, reduce cognitive load, and facilitate faster growth and experimentation.

This structure allows for a balance between maintaining the stability and security of the core MakerDAO system and achieving flexibility and adaptability through subDAOs.

This model could set a precedent in the DeFi space, demonstrating 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, providing a structured yet flexible approach to managing various aspects of protocol operations and growth strategies. This model showcases how large-scale DAOs can effectively decentralize and distribute authority and responsibility while maintaining a cohesive overall governance structure.

Next Steps for Maker and RWA

With all this, we can look at Maker's RWA initiatives and discuss the potential of this promising new sector. Real-world assets (RWAs) in the cryptocurrency space, particularly those associated with MakerDAO, constitute an important and evolving aspect of DeFi. RWAs are tangible assets, such as real estate, corporate debt, or other income-generating assets, typically integrated into blockchain ecosystems through tokenization.

In the context of MakerDAO, these RWAs provide a pathway for diversifying collateral beyond traditional cryptocurrencies, thereby reducing the overall risk and volatility associated with crypto-backed loans. By integrating RWAs, MakerDAO enhances the stability and attractiveness of its platform, offering DeFi participants greater exposure to traditional assets.

As of December 2023, MakerDAO's RWA portfolio has undergone significant development, reflecting the dynamic nature of the DeFi space and the specific challenges and opportunities inherent in integrating RWAs into decentralized protocols.

Portfolio changes and stability fee contributions:

MakerDAO's RWA risk exposure (excluding the peg stability module PSM) has decreased by approximately $222 million. This reduction is primarily due to withdrawals from Clydesdale, Andromeda, and Coinbase Custody to support USDC-PSM liquidity;

Despite the decline, RWAs continue to make significant contributions to Maker's stability fees, accounting for about 48% of all stability fees generated by the protocol in December 2023. This contribution highlights the growing importance of RWAs in the Maker ecosystem and the continued reliance on RWAs as a sustained and extremely strong source of revenue for Maker;

Specific updates:

Challenges with Fortunafi: The Fortunafi Centrifuge liquidity pool encountered a minor error that led to Drop tokens being redeemed at artificially low prices. While Centrifuge has largely resolved this situation, the incident underscores the complexities involved in managing RWAs and the potential issues that can arise when dealing with large decentralized systems;

Harbor Trade Default: As of the publication of the previous report in December 2023, the default situation with Harbor Trade continues, and the recovery process for value from defaulted assets is ongoing. This default began in April 2023 and is currently being addressed through legal and negotiation strategies, with more information progressing;

ConsolFreight Paydowns: ConsolFreight has received multiple payments, accounting for 21% of restructured assets. This development marks positive progress in recovering the value of troubled loans, a foresighted issue in both traditional and decentralized finance.

Vault-specific developments:

Monetalis Clydesdale (RWA-007): Monetalis's latest report indicates that the estimated costs for Clydesdale have been adjusted;

BlockTower Andromeda (RWA-015): Andromeda has reduced its holdings of government bonds and returned stability fees to the DAO;

Huntington Valley Bank (RWA-009): A notice has been issued to terminate future loan purchases and transition to a new trading agent;

BlockTower Credit (RWA-012 & RWA-013): BlockTower has increased its vault positions and is meeting all covenants through ongoing monitoring;

6s Capital Partners (RWA-001): No new loan activity has been reported, with the current loan balance remaining at $12.8 million;

In summary, the updates on MakerDAO's RWA portfolio as of December 2023 illustrate the ongoing efforts to integrate real-world assets into the DeFi ecosystem. These efforts are not without challenges, as evidenced by events like Fortunafi's pricing error and the Harbor Trade default. However, the significant contribution of RWAs to Maker's Stability Fees and the proactive management of these assets reflect the potential of RWAs to provide stable and diversified sources of collateral for DeFi platforms like MakerDAO.