Maker News
MKR Token Soars Amidst Market Turbulence and Bullish Maker Developments
The cryptocurrency market came under pressure as the new month kicked off. On Wednesday, prices recovered a bit from Tuesday’s losses that saw Bitcoin falling to about $28,800 and Ether to a six-month low of $1,815 due to a recent exploit in DeFi giant Curve.
As of writing, Bitcoin is trading at $29,482, and Ether is exchanging hands at $1,854.
The final month of the summer tends to be a slow month for markets. But because August is cited as a seasonal risk, it “actually makes us think this is less likely to be the case,” says FundStrat. Spot Bitcoin ETFs, in particular, remain the point of focus for the market. However, the ongoing consolidation has Bitcoin’s market dominance pulling back to 48% from over 50% on June 30.
The latest turbulence in crypto assets was seen after a federal judge Jed Rakoff in the Southern District of New York, said some crypto assets are securities regardless of the context in which they are sold. This has contradicted an earlier ruling by Judge Analisa Torres from the same district court that said Ripple’s XRP may not be categorized as a security when sold through exchanges.
This only adds to the uncertainty and regulatory ambiguity surrounding cryptocurrencies, which according to Stephen Palley, a legal partner at Brown Rudnick, will continue to be the case until Congress takes action.
Meanwhile, according to a report by Wall Street Journal, despite the ban on crypto within China, the country is Binance’s largest market, followed by South Korea, Turkey, Vietnam, and then the British Virgin Islands. In fact, the largest crypto exchange in the world, Binance, has 900,000 active users in China, which is an $80.6 billion futures market and a $9.4 billion spot market for the trading platform, as per WSJ.
The report further stated that traders based in China use a Virtual Private Network (VPN) as well as a digital residency program like Palau’s RNS.ID to bypass geographical restrictions. In addition, Binance maintains an active peer-to-peer crypto market that allows trading in Chinese yuan (CNY)-denominated pairs and allows for fiat onramps via WeChat pay and Alipay.
MKR Continues its Rally
When it comes to market recovery, the decentralized finance (DeFi) coin MKR is performing pretty well. After losing more than 7% of its value this week, the price of MKR jumped 12.5% to now trade at $1,346. And as of writing, MKR is trading at $1,313 while managing $142 million in 24-hour trading volume, representing an increase of 14.60% from a day ago.
The $1.2 billion market cap cryptocurrency is actually up 15% in the past week, 44% in the past month, and is also in green by 27% over the past year.
The beginning of 2023 wasn’t as interesting a year for MKR as it was for many other cryptos, as its price only went up by 88.5% by early March. Over the next three months, the price then continued on its downward trend.
However, it was following the significant 33% decrease in price during this period, which led to MKR plummeting to around $615 on June 12, that MKR truly experienced a substantial shift.
In less than two months, the value of MKR has risen more than 116%. Still, the token is nowhere near its all-time high (ATH) of $6,292 and is currently down almost 79%.
MKR is the native utility and governance token of the Maker ecosystem, which consists of several components.
MakerDAO is one which is administered by MKR token holders. MKR holders regulate the Maker Protocol as well as DAI’s financial risks using executive voting and governance polling. In MakerDAO’s system, the more MKR tokens a voter has locked into the contract, the more decision-making power they have.
The Maker Protocol meanwhile allows the creation of the 3rd largest stablecoin DAI. It is one of the largest dApps on the Ethereum blockchain, which involves components like collateral vaults, oracles, and voting. The Protocol, which was created in 2015 by Rune Christensen, uses a two-token system, DAI and MKR. This whole ecosystem is backed by the Maker Foundation and the Dai Foundation.
Currently, just over 901 million MKR tokens are circulating in the market. These tokens are generated based on the demand and supply of DAI stablecoin. As such, it’s not fixed and keeps on changing.
The project continues to thrive all these years with $5.144 billion in total value locked (TVL) in MakerDAO, although it is down from the highs of $19.56 bln, it achieved in Dec. 2021, as per DeFi Llama.
Click here to learn all about investing in Maker (MKR).
Factors Contributing to MKR’s Performance
With the price of MKR currently holding onto the greens, immediate resistance on the upside is present at $1,360, which, if MKR surpasses, the price can soar to $1,600, with the next resistance then available at $1,900. However, on the downside, the price has support available at $1,200 and then at $1,079, the 20-day EMA, and below that at $1,000.
For now, MKR’s Directional Movement Index (DMI) shows that the positive directional index is sitting above the negative directional index, which indicates that MKR buyers’ strength exceeds that of its sellers.
But what exactly is behind this price action? There are several catalysts for the uptrend the MKR price has been experiencing in the last two months.
For starters, total fees on the protocol increased by 22.57% in the past 30 days to $5.18 million, while analyzed fees are up 43.50% at $62.97 mln, according to Token Terminal. Fees here are defined as total interest, positive PnL from liquidations returned workforce expenses, and PSM fees paid by borrowers.
Token Buyback and Burn
A prominent catalyst for this surge in price was a token buyback program introduced a couple of weeks back.
This program, called the Smart Burn Engine, aims to remove MKR tokens from the market. The platform introduced it after MakerDAO deployed its contracts on-chain in June. This smart contract system is designed to allocate any surplus DAI stablecoins and, at the same time, enhance its utility token MKR’s on-chain liquidity over time. The removal of approximately $7 million worth of MKR, coupled with a rise in demand, led to a significant surge in the token’s value.
What’s different between this Smart Burn Engine and the previous burn design is that MKR tokens will now be acquired from the Uniswap V2 DAI/MKR pool. This will be matched with additional DAI sourced from the Surplus Buffer, which will be supplied to the same market to increase the on-chain liquidity for MKR. Meanwhile, the LP tokens from this pool will be transferred to a protocol’s address.
The upper limit for the surplus buffer is 50 million DAI, lowered from the current 250 million DAI target, which means the Smart Burn Engine will be activated when DAI tokens available in the Surplus Buffer exceed this limit.
This scheme has been a success so far, with MKR reaching its highest price so far this year.
Increasing DAI Rates
Another factor that could be behind the rising MKR price is a temporary increase in the interest rate paid to DAI holders. This increase has been made under the Enhanced Dai Savings Rate (EDSR) mechanism, which temporarily boosts users’ Dai Savings Rate (DSR) during periods of low utilization.
This move was taken in order to spur demand for DAI, as by enhancing the interest rate DAI holders can earn, the protocol aims to attract more users and create a favorable ecosystem for DAI utilization.
Maker founder Christensen proposed this move, raising the effective DSR to 8% when the utilization is between 0% and 20%. As utilization increases, DSR will decrease.
However, this isn’t the first time the DSR has been adjusted. Over the past few months, the protocol has increased the DSR three times. The most recent hike was in June, when it was raised to 3.49%, up from 3.3% in May. This is a significant rise when compared to the 1% rate back in November.
Despite the recent increase, investors have only deposited just over $300 million in the DSR, representing a mere 6.7% of the total DAI supply, according to DAI Stats. DAI supply has actually decreased to $4.09 billion from over $6.9 billion in the previous year.
Increased Traditional Asset Backing
In its attempt to improve the DAI ecosystem, MakerDAO has been increasingly backing its DAI stablecoin with conventional assets like short-term US Treasuries and corporate bonds.
Amidst the turbulent market, MakerDAO has been diversifying its investment holdings, with traditional assets making up more than half of its overall holdings. With 10-year Treasury yields hovering around 4%, MakerDAO stands to benefit from its sizable $2.5 billion traditional assets holdings. It is important to note that MakerDAO does not pay any interest on most of the DAI supply, and this surplus from its portfolio of real-world assets and productive crypto loans allows it to easily buy millions of MKR per month.
The increase in the protocol’s exposure to the US T-bills and the Federal Reserve hiking rates is increasing the yield on DAI and, subsequently, the protocol’s revenue. In addition to all this, the protocol unveiled an ambitious five-phase roadmap dubbed “Endgame” in mid-May which includes a new blockchain, a rebrand, and updated token functionalities.
Rebalancing the Portfolio
Amidst all this, on-chained data revealed that major venture capital firm a16z has been reducing its MKR position. It deposited $7 mln of MKR tokens to crypto exchange Coinbase, potentially to sell.
Another VC firm Paradigm Capital has apparently moved its $3.5 million stash of MKR to sell, as per blockchain data from Arkham Intelligence. Paradigm also sold about $20 million MKR tokens back in March.
Both these firms invested early in MakerDAO, with a16z acquiring 6% of all MKR tokens for $15 million in 2018 and Paradigm purchasing 5.5% of supply in a $27.5 million investment round with Dragonfly Capital in late 2019.
At the same time, founder Christensen has been increasing the stake in MKR while reducing his positions in Lido DAO (LIDO), as per his public Ethereum address. Additionally, Nansen’s MKR supply distribution data shows that “smart money” wallets have been accumulating MKR since early this year.
Correction Incoming?
While MKR is currently one of the best-performing coins among the top 100 assets in the cryptocurrency space, this might not be the case for long. This is because MKR investors are holding onto a large amount of profits, which means they may soon sell their coins to harvest the gains.
This can be seen with the on-chain metric, the “Market Value to Realized Value (MVRV) ratio,” which measures the ratio between the market cap and realized cap of MKR. The metric is used to measure whether a crypto asset is overvalued or undervalued.
Market value is the usual total valuation of the asset at its current price, while realized value calculates the value of any token at the price at which the token was last transferred on the blockchain. If the MVRV ratio is greater than 1 (meaning if the market cap is higher than realized value), MKR’s value is more than what the holders have put in. With this, it can be assumed that the average investor is holding a profit and may decide to sell to realize it.
With the 365-day Maker MVRV ratio going up sharply, going past 50%, in tandem with the price, a correction might soon be coming for MKR. Additionally, the Relative Strength Index (RSI) is also high at 73.46 and in a state of being overbought.
Final Thought
While the price of MKR is being propped up by several developments happening in the Maker ecosystem, the crypto asset is expected to experience some cool down after recording three-digit gains over the past two months. This short-term market correction is a natural response to the recent aggressive growth.
Despite this anticipated short-term cooldown, it’s crucial not to lose sight of the bigger picture. Continued initiatives to develop its ecosystem may stimulate a broader protocol adoption.
As the Maker protocol attracts more users, we could expect a long-term bullish scenario for the MKR token. The increasing user base may create sustainable demand, which in turn may positively influence the MKR token’s price.
