This analysis looks at the consequences of the MKR Debt Auction on the price of the MKR token. To learn more about the events leading up to the auction, read our explainer article:

What Really Happened To MakerDAO?
Black Thursday: The sell-off of 12 March resulted in $4.5 million of unbacked DAI in the MakerDAO system. What really happened?

MKR Debt Auction Mechanics

The MKR Debt Auction will take place at approximately 10:28 ET (14:28 UTC) on March 19, with MKR being auctioned off in lots for 50,000 DAI. This DAI will then be burned in order to cancel out the Maker system's DAI debt.

The auction mechanics allow Keepers to bid on how many MKR they are willing to accept for this price. Offers will start at 250 MKR per bundle (or 200 DAI per MKR), and Keepers can bid to buy less MKR for the same 50,000 DAI cost.

From the MakerDAO blog:

The protocol offers a Keeper (bidder) a lot of 250 MKR for 50,000 Dai, which translates to a price of 200 Dai/MKR. A second keeper bids 50,000 Dai but only requires 230 MKR, which translates to a price of 217 Dai/MKR. The bid prices increase through the Keepers’ willingness to take slightly less MKR in exchange for 50,000 Dai.

How Much Will MKR Sell For?

The auction mechanism means that it is unclear how many MKR will be added into circulation in order to redress the deficit faced by the protocol. The core factor that will affect the final amount minted will be the market value of MKR and DAI at the time of the auction (and how these affect demand at various price points).

While the exact number of MKR being minted is uncertain, some basic estimates can be made using widely available information and some assumptions about how much it will sell for in the auction.

The Current Price of MKR and DAI

The price of MKR a month ago was over $600, whereas since the crash, it has sat at slightly over $200 USD.

Figure 1: MKR's price and market cap over the past week (Glassnode Studio)

Due to higher-than-normal demand (and despite being under-collateralized), DAI is currently valued at around $1.02 USD per token, after peaking at a price of $1.11 on 14 March.

The following analysis will use current prices for these assets.

What is the minimum bid required to break even?

Taking the current MKR and DAI prices, ($214 and $1.02, respectively), and assuming these hold until the auction takes place, we can calculate a number of possible scenarios:

Figure 2: Possible MKR auction outcomes based on current prices for MKR and DAI

Opening Price

Looking at the first row in Figure 2: if DAI and MKR stay at current prices, a successful bid at the opening price of 200 DAI/MKR (i.e. 250 MKR per bundle) would equate to $204 USD/MKR at $51,000 per bundle (50,000 DAI/bundle). This would result in a profit of:

  • 9.8 DAI/MKR ($10/MKR); or
  • 2450 DAI per bundle ($2500/bundle); or
  • 4.9% profit

This high profit margin means we can likely expect bids at higher prices (i.e. lower MKR amounts per bundle).

Break-Even Price

The fourth line in Figure 2 above indicates the break-even price, below which anyone who bid on the auction would be buying at a loss.

The minimum break-even MKR amount for a bid would be 238.32 MKR per bundle (i.e. 209.8 DAI/MKR).

To What Extent Will MKR Be Diluted?

Current MKR Supply

When MakerDAO was launched in late 2017, there were a total of 1,000,000 MKR tokens. Of these, 530,000 were released into circulation, while 470,000 were held by the Maker Foundation's development fund. Because the supply of MKR is fluid, however, these figures are not fixed:

Figure 3: MKR supply across its lifetime (Glassnode Studio)

The current supply is 985,464 MKR.

How much MKR might be minted?

Based on the system's current deficit, we can calculate how much MKR will be added into circulation based on various auction scenarios.

MakerDAO deficit: 5,362,718 DAI

Number of bundles for sale (based on the deficit): 107.25436 DAI

Figure 4: Possible MKR dilution scenarios

These figures show that if MKR is sold for a low price (i.e. the opening price of 200 DAI/MKR), the total supply will only increase by 2.72%.

The scenario is not very different if MKR is sold for market (break-even) price; then, the supply will only increase by 2.59%.

Even if all MKR were sold in bundles of 230 MKR (well below market price), dilution would still only be 2.50%.

This would bring the total supply to 1,010,133 to 1,012,278 MKR.


What Impact Will This Have On MKR?

The addition of ~25,000 MKR to the existing supply should, in theory, not affect the price of the MKR token too drastically (i.e. not more than a few percent).

Overall, given the current low market cap of MKR (and all cryptoassets) and the fact that the dilution event will not meaningfully increase the MKR token supply, holders should not be too worried about the effect of the auction on the price of their MKR tokens.

While a single inflation event of >3% is not insignificant, the effect of the dilution will probably have less of an effect on the price of MKR than the events that led to the auction itself. The more important effects to be aware of are:

  • The impact of the zero-bid exploit on the reputation of the Maker project.
  • The general state of crypto markets as a result of the COVID-19 pandemic.

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Disclaimer: This report does not provide any investment advice. All data is provided for information purposes only. No investment decision shall be based on the information provided here and you are solely responsible for your own investment decisions.