Last week I analyzed Maker's business metrics, and explained why I think their business should be valued using traditional equity valuation methods.
However, even though P/E ratios and DCF analyses can be good rules of thumb for valuing cash producing crypto protocols, it would be foolish to blindly assume that crypto protocols work exactly like public companies.
One significant difference between Maker and a mature S&P 500 company is that DAI demand over the long run is still unknown, and as a result, so are Maker's earnings.
Roughly 59% of Maker's earnings today come from ETH being used as collateral to mint DAI, and another 7% come from WBTC collateral. Long term investors must ask themselves a few important questions:
- What happens if investors find better ways to get leverage on their ETH or WBTC?
- What happens if other protocols find ways to undercut Maker's stability fees?
- What happens if crypto investors use less leverage as Bitcoin and Ether become more mature assets with less upside?
These questions and many others could have significant consequences for Maker's business in the long run, and they all stem from the issue of collateral concentration.
To overcome these issues, Maker has already diversified their collateral types within the crypto ecosystem, and has now begun venturing beyond crypto markets.
Today I want to highlight the beginning of a new era for Maker collateral.
Real world assets (like homes, inventory, business revenues, royalty rights, etc...) are already being used as collateral backing DAI, and as adoption grows, they could significantly improve Maker's resilience to crypto market volatility and Maker's earning potential.
How is Maker accomplishing this? They've started by integrating with a dApp called Tinlake.
Real World Assets As Collateral
Tinlake is a two sided decentralized marketplace for asset financing. It lets businesses collateralize their assets, and borrow DAI against them. All of this without relying on the banking system, fiat payment rails, or delayed approvals on evenings and weekends.
In short, Tinlake helps businesses get funding on assets for less time and/or money than a bank might require.
How Does Tinlake Work?
Tinlake brings together asset originators and investors in a trustless manner.
Asset originators own things like real estate, inventory, business revenues, or music streaming royalty rights. They also want to borrow against those assets.
Investors just want to earn yield on their money.
On Tinlake, investors can lend DAI into a pool consisting of an asset originator's collateralized assets (expressed as NFTs), and the asset originator can then use that DAI as a decentralized line of credit.
Each party benefits from side-stepping the slow, opaque borrowing and lending arrangements offered by most financial institutions:
- Asset originators can collateralize assets that banks might not approve of, get funding in real-time, and pay back their borrowed funds on a flexible schedule.
- Investors can make liquid investments into asset classes that might otherwise be illiquid, or entirely inaccessible to them. They can also track and trace the individual assets being securitized at all times.
Investors can lend money into different Tinlake pools, each with their own interest rate, asset type, and collateralization ratio. Investors can also choose among two tranches within each pool depending on their risk tolerance and yield requirements.
All of the transactions between DAI, pooled NFTs, and the interest-bearing tokens investors can purchase are controlled by Tinlake's set of smart contracts.
You can read more about Tinlake here.
Why Tinlake Matters to Maker
Tinlake's dApp helps real world businesses get funding in a more efficient way, which creates steady demand from businesses looking for alternatives to bank loans. Better yet, this demand is entirely independent of the ebbs and flows of crypto market cycles.
And better still, the addressable market for business loans is measured in the trillions of dollars. By integrating with Tinlake, Maker's adoption of real world assets as collateral will have knock-on effects that help stabilize DAI, and strengthen the overall Maker ecosystem.
Remember, investors must supply DAI to invest in a Tinlake pool. As the real world demand for DAI grows, the Maker system gains a more diverse group of DAI token holders using it for new use cases that don't involve extra leverage on Ether.
But that's just the tip of the iceberg. The real magic happens when Tinlake asset originators can borrow DAI against their collateral directly from a Maker vault.
Tinlake Pools and Maker Vaults
New Silver is a real estate lender and Tinlake asset originator with their own pool of 26 real estate bridge loans, valued at roughly $5 million today. They have one of nine pools available on Tinlake today, but theirs has a critical difference.
New Silver is directly integrated on Maker with their own vault.
What does this mean?
This means that instead of waiting for an investor to lend DAI in a Tinlake pool, New Silver can use their own collateralized assets to borrow DAI directly on Maker. For New Silver, it's like having on-demand access to their decentralized line of credit.
It also means that New Silver's collateral (real estate) is directly backing the value of DAI.
The importance of this cannot be overstated.
New Silver's vault integration on Maker is the first time any real-world asset has been used to back a stablecoin, and is an important step towards reducing Maker's dependency on crypto assets to maintain DAI's value.
During every crypto market crash, investors collectively hold their breath to wait to see if DAI will hold its peg, and whether Maker's liquidation system will work correctly. I was certainly watching both earlier this morning when crypto markets tanked.
But what if a majority of DAI wasn't backed by a single crypto asset?
- What if 10% was backed by apartments all over Europe?
- What if another 10% was backed by US streaming royalty rights on Spotify?
- And what if another 10% of DAI was backed by the value of overseas freight inventory? And so on...
Maker may never completely eliminate the risk of a failed liquidation or a massive crypto crash, but it can improve DAI price stability and Maker's resilience by diversifying the collateral that backs DAI, and by finding new use cases for that DAI.
As Maker rolls out more direct vault integrations with other real world asset pools, the Maker ecosystem will only get stronger.
Tinlake and Maker by the Numbers
Tinlake launched in October 2020 as a dApp on the Centrifuge protocol, and by December it was already providing $1 million of DAI financing for real world assets. Since then, growth has been parabolic.
Tinlake had $5 million of DAI locked on the platform by March, $10 million by April, and $15 million by May 14th. In the five days since breaking $15 million, Tinlake is already up to $18.1 million of DAI for funding real world assets.
With $5 billion of DAI outstanding, $18.1 million is equal to 0.3% of all DAI supply.
You can track changes to Tinlake's TVL here.
New Silver has used their $5 million pool of collateralized assets to borrow $1.3 million of DAI so far. That $5 million of collateral represents 0.05% of the $9.4 billion of collateral in the Maker system today.
Maker's Tinlake integration has only just begun, but if you squint a little you can see how real world assets might be a significant catalyst for increasing DAI demand and diversifying Maker's collateral portfolio in the future.
If Maker and Tinlake can continue providing better alternatives to traditional business loans, there is a multi-trillion dollar collateralized lending asset class that is up for grabs.
Winning this market will have a significant and direct impact on Maker's future earnings and valuation.