Overview

Blue Chip DeFi (or DeFi 1.0) has been a relatively underowned sector in this bull cycle, with speculative capital having preference for narratives such as AI, RWA, and memes. This does not come as a surprise, given that DeFi as a sector lacked “macro” tailwinds that others enjoyed. Case in point: the AI thesis was largely driven by a combination of optimism in TradFi markets (i.e. high private market valuations and up-only NVDA price) and market validation from the developments in ChatGPT and its comparables.

Looking at YTD performance, ETH has returned 54%, with outperformance over major DeFi names ranging between 16% and 112%. I believe sector’s underperformance is at its tail end and that MKR will likely be a major beneficiary of the impending macro and micro-level catalysts for Q3 2024.

Thesis: Why DeFi 1.0 Could See a Resurgence

• Blue Chip DeFi could be the next sector of interest for TradFi funds as we venture further down the risk curve

  • Overall familiarity: Fund managers can easily draw parallels with TradFi

  • Bigger DeFi names have solid revenues, market maturity and PMF since last cycle: appeals to TradFi fund managers who may look at tokens through a value and/or fundamental approach.

• Trading of ETH ETF to rekindle interest in ETH ecosystem projects, with DeFi 1.0 being a “sleeper” pick

  • Obvious beta plays would be L2s, ETH memes, LSDs and “newer” DeFi (i.e. PENDLE, ENA) and will likely be priced in more aggressively

  • ETF to trigger potential “hated rally” in DeFi coins. We’ve seen this rally previously in assets with rock-bottom sentiments, with SOL being the prime example after the FTX collapse

The MakerDAO Endgame

MakerDAO’s founder Rune Christensen published the MakerDAO Endgame roadmap in their governance forum back in March. This roadmap is divided into four distinct phases, although I think that phase 1 is the most relevant to the context of this trade idea (will elaborate later on). Below is an overview of the three phases:

Phase 1: Launch Season (Summer 2024)

• Rebranding exercise

• Launch of two new tokens: NewStable and NewGovToken (actual names TBD)

• Launch of Lockstake Engine (LSE): A fancy term for yield/airdrop farming (Likely following the TIA staking playbook)

• Launch of NewBridge (actual name TBD) to connect Maker eco tokens to a major L2 (TBD)

• TGE for SparkDAO (ticker: SPK) and exploration of additional business models such as RWAs and perpetual swap yields

Phase 2: Scaling Up

• Introduce more SubDAOs under the Maker umbrella. These SubDAOs will be in distinct sectors

• SubDAOs to have full governance autonomy, within the boundaries set by MakerDAO

Phase 3: NewChain

• A stand-alone L1 chain to host the tokenomics and governance of the MakerDAO ecosystem

Phase 4: Final Endgame

• A state where all technical and foundational governance mechanisms have been completed

DeFi MakerDAO Summer: Catalysts You Should Care About

Phase 1 of their endgame is the most relevant catalyst to the context of the Maker trade, as I think there is a short but strong window of confluence when the trading of ETH ETF commences. It makes the most sense to play this with a short-medium term horizon given stong tailwinds for ETH-related tokens.

The diagram above is a simplified version of how their two new tokens: NewStable and NewGovToken interacts with DAI and MKR.

• NewStable: The approach here would be to position DAI for crypto-native utility and NewStable for general mass adoption

• NewGovToken: 1 : 24,000 redenomination is potentially bullish from a unit bias standpoint

The diagram above illustrates how the new LSE works. Users can lockstake MKR or NewGovToken and choose 1 of 2 reward options: real yields, or SPK yields. Given that MakerDAO has generated $150m in revenues YTD, option A is a great narrative for risk averse players who believe in the long-term potential of MakerDAO while wanting to capture upside in their growth. Option B will likely appeal to risk seeking participants who wish to speculate on the short term price action for SPK post TGE.

Bottom Line: New roadmap, assets, rebranding, utility and value accrual will trigger near term interest and attention flows towards MKR. This will potentially be exacerbated by the trading of ETH ETF, creating a repricing event into the next 1-3 months.

Execution

A reaccumulation range for MKR was established between Jan to Mar 2024 between $1900 and $2200. As of today, prices have started to tap the top of this range: a decent area to start dollar cost averaging. Given the context of the trade idea, it is possible to set the final TP target at its Apr highs of ~$4000 while targetting various levels on the way up (i.e. first trouble area at $2650, resistance at $3150). A realistic price invalidation for this trade could be at $1770, below the liquidation wick of 5th Mar 2024.

Risks

• Delay in ETH ETF S1 approvals beyond Q3

• Recent Wells Notice served to Uniswap may created continued pessimism over DeFi as a sector (regulatory uncertainty)

• Hawkish Fed (further delay in rate cuts) that may create further derisking in both traditional and crypto markets

• Delay in the launch of their phase 1 rebranding campaign