In this article, I aim to model the value creation that SPARK brings to MakerDAO (SKY). In the previous article, we defined the various models that traditional finance uses when a company incubates ventures that eventually separate from the parent company. The model followed by SKY is very innovative and does not have a direct analogy in the traditional world (or at least I personally don't know of a similar case). We have defined this model as a Corporate spin-off with no retained equity.
We have made a series of assumptions to simplify the model, which would certainly impact the valuation, but I believe they help in better understanding the differences from traditional models. We will continue to update the model based on the feedback we receive. We believe this exercise is valuable for highlighting the differences and for assessing the impact of Spark on the MRK token, which, under the chosen model, is indirect.
Assumptions
The first assumption is that SPARK's value will be set at $1 billion. We believe this is a reasonable valuation, considering that SPARK is currently one of the leading lending protocols and has $2.30 billion in Total Value Locked (TVL) according to DefiLlama. It is truly impressive if this ends up being the valuation because MakerDAO currently has a market capitalization of $1.5 billion and would have created a $1 billion project with just this first protocol.
We assume that DAI (USDS) can be deposited to obtain SPARK tokens, with the depositor only receiving those tokens, while the interest Maker earns will be full profit for MKR. We have set this at an average of 4%, though this could change over time.
Valuations
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Spin-off with 50% of Equity Retention
This would be the traditional approach. The project would retain 50% of the tokens, with the remainder distributed between the entrepreneurs or developers transitioning to the new company and the project’s own incentives.
These 50% of the tokens would have an initial valuation of $500 million, which would represent a dividend of $511 for each MKR holder, if it were decided to distribute it
Spark should generate additional income for the protocol, but in this case, the protocol would capture the interest rate spread. However, we have not considered this in the simplified version of the model
Spin-off with no retained equity.
In the model that the protocol has ultimately implemented, we are assuming that the protocol earns the interest from the newly generated DAIs used in the deposit to obtain SPARKs. We have set this interest at 5%, though it could vary. We’ve also assumed that the remuneration for depositors is distributed over one year and that they will receive the 50% equity that the company would have retained previously.
We have set the equilibrium interest rate at 8%. If it’s higher, more DAIs would be minted, and if it’s lower, users might prefer the DSR, which carries less volatility risk.
If the protocol generates $10 billion in new DAIs solely for deposit to earn SPARKs, then the result of both options would be the same. Above $10 billion, this option would be more profitable. Assuming the 8% as the equilibrium point, only $6.25 billion in DAI could be attracted.
Conclusions
It seems reasonable to think that the indirect option will generate significant value for the project. At first glance, retaining equity appears to be more profitable in the short term, though it does not create additional demand for DAI within the project. The second option seems less profitable initially, but it should result in a substantial increase in the issuance of stablecoins, which could potentially double the project’s capitalization. Even if that DAI capital is eventually returned, the project will have captured a significant amount of capital, and it's likely that not all of the new demand would be eliminated.
We omitted from the calculation Rune's comment regarding the '3.75% of their total supply per year that will go to USDS holders' in order to simplify the model and make it clearer so that more people can understand it.
Initially, as a delegate, I voted against not giving MKR token holders a share because I believed it would negatively impact the token’s price. Now, after analyzing it, I think this model also allows value to be captured and could have positive long-term effects for the project compared to the first model. It introduces more uncertainty in value capture, and I believe it is more difficult for traditional investors to understand. However, if deposits end up being below $6 billion, the first option would clearly have made more sense for the token holders.
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