Bull Case for MKR/SKY - Q2 Update
If you want a video explainer of my MKR thesis, check it out here.
In my MKR/SKY report a few months ago, I argued that the resumption of buybacks would lead to outperform the majority of crypto assets on a risk-adjusted basis. Since the buybacks were announced on February 20:
MKRBTC is up 46%, MKRETH is up 70%, and MKR is one of the few crypto coins actually up year-to-date (YTD): +24%
In this update, I will discuss why I expect this to continue for 3 reasons:
Introduction of SKY Staking
Forced SKY Token Migration (>10% supply to be burnt)
SPK Farming
Introduction of SKY Staking
Currently, MKR/SKY is a token that directs all protocol profits into buying back the token. At the current pace of buybacks, the protocol buys back $15M per month ($500k/day), or almost 1% of circulating supply per month (largest out of any crypto project).
On April 30, Rune made a forum post to activate SKY staking, where 50% of the profits will be directed to SKY stakers, paid in USDS. So $250k will be spent on buybacks and $250k will be distributed to stakers, per day.
Assuming 33% of supply is staked, SKY stakers can expect a 7-8% staking yield.
Forced Token Migration
In the same update, there will be a forced migration from MKR to SKY:
Since MKR is one of the oldest ERC20s (live since 2017), there is bound to be many tokens that are lost forever. This can be due to loss of private keys, wallets, or death of the holder.
By looking at onchain data, I was able to find the amount of “dormant MKR tokens” that will inevitably be burnt from supply, displayed below.
I then made reasonable assumptions such as, “If there are 23,349 MKR tokens that have not moved in 4-5 years, I can assume that ~90% of those are lost forever, AKA burnt.” With these assumptions I forecast roughly 100,000 MKR will be burnt as a result of this migration (~11.4% of circ supply). I think this is a conservative estimate by looking at other case studies of lost tokens such as Aragon DAO.
In 2023, the Aragon DAO token ($ANT) traded below the value of the treasury. “Treasury Raiders,” or RFVooors, bought the token below NAV and demanded redemption of the treasury for profit. This raid was successful, and there was a process to migrate the ANT token to a new token to redeem the treasury value. In this instance, ~27% of tokens were not migrated. We can imply that these tokens were lost forever.
I expect anywhere between 10-20% of MKR to be burnt in the coming months/years, which I expect to be supportive of token price. The forced migration may also allow more CEXes to list SKY, which could be an added benefit.
SPK Token Launch
Spark is a lending market + onchain asset manager that made $40M in revenues in Q1 despite minimal incentives. They are able to borrow stablecoins for SKY at a subsidized rate in order to allocate capital onchain.
SPK will be a "fair launch/farm" token that you can only farm by staking USDS or SKY (read economics here). 50% of SPK incentives will be distributed in the first two years. If we assume an FDV of $500M, that is $250M of value that will go to SKY/USDS stakers which will provide staking yield for the native token as well as subsidize USDS growth which fuels even more buybacks in the future.
There are other subDAOs/Stars launching on the horizon (Solana Star, RWA Star, etc), which will only fuel more buybacks in the future
Stablecoin Bill
The Stablecoin Bill (GENIUS ACT) is expected to be signed by Trump in July/August. Though this bill mostly targets centralized issuers (and thus having very little effect on decentralized issuers), it is a narrative that will likely add tailwinds for MKR/SKY. According to industry experts this is expected to be signed by Trump in July/August.
Conclusion
Stablecoins good. One of the most profitable projects in crypto. Good coin.
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