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Pro DeFi Stablecoins

Maker's Money Market

Ally Zach

Feb 22, 2023 ∙  11 min read

Top of Mind
DAI, MakerDAO's core product, is a stablecoin minted as debt. The success of DAI as a
product depends on its widespread acceptance across various markets, such as decentralized
exchanges (DEXs) like Uniswap and money markets like Aave. However, Maker has little control
over the downstream protocols that determine its native stablecoin’s success, making it subject
to external incentives and strategies.

What if Maker was to release its own downstream market protocol? They would have complete
jurisdiction over the protocol design, more effectively incentivize and control DAI’s usage, and
offer new products, extending their reach throughout the DeFi ecosystem. This is precisely the
motivation behind the pending launch of Maker's Spark lending protocol developed by
Phoenix Labs.

Spark Protocol

Spark Lend, a lending platform forked from Aave V3, is the first product in a broader strategy
to build vertically integrated markets for DAI.

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Spark Lend Platform User Interface, Source: MakerDAO Forums

Similar to other money markets, Spark Lend lets users deposit assets as collateral and borrow
assets as debt from other users. However, Spark Lend’s tight association with Maker enables a
few unique characteristics.

Initial Launch Parameters

The most impactful characteristic is the ability to set the borrow rate of DAI on the protocol
below other money markets. Initially, the plan is to set the rate at the Dai Savings Rate (DSR) of
1%. This will be the cheapest credit rate in DeFi, made possible by Maker fronting the initial
200 million DAI debt ceiling for the vault and completely removing the need for third-party
liquidity providers.

Historically, MakerDAO balanced vault stability fees and the DSR to manipulate the supply and
demand for DAI to maintain its peg. With this new market extension, MakerDAO will be able to
directly monitor and regulate the supply of DAI in the Spark Lend market. This enables the
DAO to guarantee the variable borrowing rate trends toward a specific level and yields an
additional tool to manage DAI fluctuations.

The core component that sets this new DAI-supporting lending engine apart from other
platforms is the combination of Maker’s Dai Direct Deposit Module (D3M) and PSM. D3M is a
unique vault that allows Maker to directly interact with any secondary market by actively
controlling the DAI supply according to current demand. Users will benefit from a more fixed,

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and reliable DAI borrowing rate, which typically is subject to high fluctuations. The D3M has
recently been incorporated into both AAVE and Compound, yielding more lucrative borrow
rates for DAI across the greater lending market.

Spark Lend will only support five types of high-liquidity collateral on launch: DAI, ETH, Lido’s
stETH, wBTC, and Savings DAI. Savings DAI (sDAI) is DAI locked in the DSR contract,
essentially acting like a savings account by offering a stable, low-risk yield. As previously
mentioned, Spark Lend also incorporates the PSM, enabling users to directly swap USDC for
DAI at 1:1 within the interface.

Future Plans

Later this year, Phoenix Labs will integrate fixed-rate borrowing, cross-chain support on
Ethereum L2s and sidechains, redundant oracles for resilient price monitoring, and launch their
own liquid staking derivative, EtherDAI. The Spark Lend protocol is opening the doors to
decentralized lending particularly for retail investors. Beyond increasing the borrowing demand
for DAI with low-interest rates, Maker is taking a grand step forward by installing the AAVE-
based UX to make it much easier for users to access its native stablecoin.

Lending Market Implications

One of the prime features of the pending Spark Lend platform is cheap credit or the ability to
borrow DAI at the DSR variable rate of 1%. Given the current bear market conditions, borrow
rates have been relatively low, yet haven’t quite met the new DSR rate. Looking at the average
borrow rate across AAVE and Compound on Ethereum over the past year, the borrowing APY
has averaged 1.8% with a typical standard deviation of 0.8%. Regarding DAI alone, the average
borrowing rate on Compound and AAVE for the past year was approximately 1.7%, with
slightly less variability at 0.6%.

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Overall, 92% of the time, the average borrowing rate for DAI was greater than the proposed
DSR rate of 1%. Spark Lend is giving Maker the opportunity to make a groundbreaking
entrance into the lending market by offering the cheapest credit in DeFi. Furthermore, with the
inclusion of the D3M, the APY variability should be greatly minimized. As a result, in a perfect
market, Spark Lend's lower borrowing rates should steal loan share from other protocols and
tokens (USDC) forcing both the rates and revenues down for competitors.

Other lending protocol rates are entirely driven off supply and demand where the higher the
borrow demand relative to the supply liquidity, the higher the interest rate paid to suppliers.
Hence, to continuously offer competitive rates as demand rises, competitors would have to
constantly attract more capital willing to accept a 1% return rate – a near-impossible ask in a
bull market.

On the other hand, Maker is the sole LP for Spark Lend’s DAI and completely removed their
dependence on third-party liquidity providers. They have the unique opportunity to guide the
market-wide borrowing rate, flood the market with their own native stablecoin, and reap the
benefits of increased DAI exposure in DeFi and retaining market fees for profit. The only real
obstacle for Maker is a combination of the PSM and their earning potential from the 1% borrow
rate. That is, Maker has to be able to afford to pay the interest rate within their savings module
and maintain DAI’s peg, both of which are directly related to the amount of DAI that is minted
in the new vault.

However, all eyes will be on AAVE as they are set to launch their own native stablecoin, GHO,
in the near future. Similar to Spark Lend, the supply of GHO will be contributed from the Aave
DAO itself, removing the third-party LP reliance and retaining the revenue for themselves.
There is a strong possibility that Aave follows suit in flooding the decentralized lending market
with cheap credit, which in combination with Maker, could help revive the DeFi ecosystem.

Future Platform Features

Down the road, the Spark Lend platform will also offer fixed-rate loans through a partnership
with Element Finance, Sense Finance, or Deco. While the mechanics vary slightly between each

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of these platforms, they will essentially all operate according to the following diagram where PT
represents a principal token – an asset such as BTC, ETH, or DAI that is locked for a fixed-term
and redeemable for its full value at the end-of-term.

Users will be able to borrow PT-DAIs from the platform and sell them at a discount for DAI,
locking in a fixed rate for the term length. For example, a user can borrow 100 PT-DAI, sell
them under a one-year term for 98 DAI, and lock in a 2% fixed APY up-front.

The DSR and corresponding DAI borrow rates will be actively monitored and regulated by
MakerDAO, but the fixed interest rates will be established by the open market. The
aforementioned fixed-rate protocols enable speculative trading to establish rates. For example,
Element’s Hyperdrive AMM enables speculators to long or short the fixed rate that the pool
offers. Because traders set the fixed-interest rates within the lending market, it mitigates the
need for Maker to tinker with the supply of DAI to manipulate the borrowing rate. Furthermore,
as the sole DAI LP of Spark Lend, Maker, and Spark Protocol will collect the fees associated
with the trading activity.

Fixed-rate credit is one of the previously unsolved mysteries in DeFi. If an investor wanted to
take out a loan, they generally have no clue what the variable rate might be in both the near
and long term. Even for platforms offering “stable” rates, the interest rate is typically high and
is subject to change after a short period of time.

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Beyond fixed rates, the Phoenix Labs team is also adding redundant oracles to provide resilient
price feeds and including Maker’s own synthetic liquid staking derivative called EtherDAI. In the
future, everything associated with Spark Protocol will be potentially merged into a Maker
SubDAO when it becomes available.

Impacts on MakerDAO

All of the components of Spark Protocol are prebuilt from other platforms or require minor
modifications to realize the platform’s end state. As such, the proposed timeline to launch is
very short pending community approval: Spark Lend in April, remaining features throughout
the year. Until the fixed rate feature is incorporated into the platform, Maker’s revenue will
primarily be driven from their variable rate loan options.

Preliminary Spark Lend Roadmap, Source: MakerDAO Forums

At full deployment, Maker is poised to make the following off this endeavor from interest and
trading fees, dependent on market conditions:

• Bear Case:

◦ Expected Revenue: $3 Million

◦ Market Conditions: Utilization rates and TVL low

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• Bull Case:

◦ Expected Revenue: $77 Million

◦ Market Conditions: Utilization rates and TVL high, at previous bull cycle levels

• Base Case:

◦ Expected Revenue: $12 Million

◦ Market Conditions: Utilization rates and TVL mid-levels, 50% of current secondary
markets

By entering the lending game as the sole liquidity provider, Maker is diversifying their revenue
streams to include trading fees and supply yield. The projected revenue from Spark Protocol is
heavily dependent on a departure from the current bear cycle. Still, even the expected base
case of $12 Million will increase the DAO’s current total revenue by 40%. The majority of
Maker’s revenue currently comes from its real-world asset vaults.

In Maker’s Endgame Plan, they have stated that over the short term, they are hoping to
maximize their exposure to RWAs in an effort to increase their ETH revenue as much as
possible. Long term, they are going to greatly reduce this exposure and focus on physically

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resilient RWA that's not seizable by a legal entity.

Maker’s long-term focus has always been strengthening the resilience of DAI and its censorship
resistance. Regulation has come for DeFi throughout the last year in the form of the Tornado
Cash sanctions, SEC shutting down Kraken’s staking services, and recent claims against the
BUSD stablecoin. RWAs are often deemed the low-hanging fruit when it comes to government
seizure. With the addition of Spark Protocol, ideally, the new money market will comprise 28%
of the total revenue and reduce the revenue share from RWAs to 37%, potentially alleviating
some of Maker’s dependence on its leading revenue source.

Key Events
Platypus Stablecoin Exploit

• Avalanche-based AMM, Platypus, lost $8.5 million to an attacker who used flash loans to
exploit a smart contract vulnerability.

• The Platypus team recovered about $2.4 million and will reimburse liquidity providers who
lost funds in this attack.

Flashbots proposes MEV-Share

• MEV-Share will be a new matchmaking protocol that distributes MEV profits more
broadly.

• Users will be able to receive MEV profits on the transactions they directly create.

Florida-based Bank proposes new real-world asset vault on Maker

• Cogent Bank, a Florida-based commercial bank, proposed the addition of a new $100
million RWA vault with a similar structure to the pre-existing Huntingdon Valley Bank
arrangement.

• If approved, this will be the second institutional bank partnership for MakerDAO and
potentially opens the doors for more institutions to follow suit.

Renegade raises $3.4 million for Dark Pools protocol

• Renegade raised $3.4 million led by Dragonfly Capital, to build a completely anonymous

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DEX, Dark Pools Protocol.

• By enabling complete user privacy on this L2 native platform, the DEX will mitigate front-
running strategies.

Sushi acquires Cosmos-based Vortex Protocol

• SushiSwap acquires Vortex Protocol to offer derivatives trading within their DEX platform.

• The acquisition also means that SushiSwap will be one of the first Ethereum-native
applications to make the move to the Cosmos ecosystem.

Uniswap votes to launch on BNB chain

• Uniswap V3 will be deployed on Binance’s BNB chain using Wormhole’s cross-chain

bridge despite a16z voting against the proposal.

• To prevent other parties from forking Uniswap cross-chain, Uniswap plans to deploy on
Moonbeam, Boba Network, and StarkNet in the coming months.

• The proposal passing despite a hefty vote against it from a leading VC also highlights the
benefits of decentralized governance.

MarginFi launches on Solana

• MarginFi, a new lending platform, launched on Solana offering several pools with no fixed
term or rates.

• A new lending platform could help boost Solana’s DeFi ecosystem, which has generally
lagged behind competitors.

Aori launches new Options protocol

• Typically, traders are limited to trading options on centralized exchanges or OTC brokers,
taking on an additional counterparty risk.

• Through the use of full collateralization and an order book-based trading protocol, Aori is
creating a capital-efficient options protocol for ERC-20 tokens.

Top Movers

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Liquid staking protocols, Lido, and Rocketpool saw the most significant upward price
movement over the past two weeks as Ethereum’s Shanghai upgrade nears. Gains Network
also saw significant gains following Binance listing its native GNS token.

Following their Polygon Quickswap integration in early February, Gamma strategies has
significantly increased fee-based revenue (+372%). Of their four deployments, nearly 88% of
the $25 million TVL has accumulated on Polygon.

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Ally Zach

24 Reports 0xallyzach

Ally is a Research Analyst on the Enterprise team at Messari. Prior to joining the team, Ally worked as a
Structural Engineer at Magnusson Klemencic Associates. Ally graduated from the University of Illinois in 2018
with a master’s degree in Civil and Structural Engineering.

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