Hello, another mixtape from @strat-fin-core-unit dropping. The financial report for June 2022 is available here. Please let us know your thoughts and comments on these pages.
A particular thank you to @pipko who is with us for the summer and who put together an enormous amount of data for this report. As always, also big thanks to @Kayleigh for all the work putting it together.
Summary
Overall Net Protocol Income was 6.7M DAI, +33% from May and -23% from June 2021. Annualized ROE on a rolling 6mo basis has begun sliding from 70-80 towards 30-40%.
After-effects from rapid deleveraging in Q2 continue to ripple through the crypto economy (LUNA → Celsius → 3AC → etc.)
ETH/BTC prices continued their decline throughout June
ETH/DAI: 1,955 to 1,024
WBTC/DAI: 31,611 to 18,718
This has driven a substantial amount (impact of -1.4M DAI) of the decline in recurring revenues as vaults liquidated and users covered positions
Collateral locked also in sharp decline as major institutional users exit lending amidst broader market deleveraging
ETH locked in protocol from Ξ2.2M to Ξ1.5M
WBTC locked in protocol from ₿34K to ₿63K driven by vaults protecting positions, as of 11-Jul-2022 collateral is back to ₿39K (due to Celsius loan repayment)
Total interest income decreased from 4.3M to 2.4M (-44%) month on month
Overall income up on liquidations from a volatile month – from 8.6M to 9.5M (11%)
We continue to work towards solving one of the greater urgencies our protocol faces, which is correctly monetizing our balance sheet to match the cost and duration of our liabilities.
Key Strategic Discussions & Next Steps
How do we increase the slope of our balance sheet?
MIP65, Backed Finance MIP6 and other ideas to monetize our PSM
How are we managing the pipeline for new RWA onboarding (Blocktower, others)?
How are we managing the pipeline for new crypto collateral applications?
Can we optimize parameters for existing vaults to drive usage?
Can we restructure delegate compensation to align incentives and intelligently manage the total cap?
Can we ringfence GUNI DAI/USDC LP for Maker use only to capture a greater share of the fees?
Discussion around developing a framework for recommending capital investment in onboarding new collateral types and maintaining existing collateral types
Ongoing work on rationalizing operating expenses => 20-Jul-2022 Meeting
@Recognized-Delegates Please come to the G&R call to discuss these and other topics. Kindly familiarize yourself with the materials ahead of time. Thank you.
Selected Observations
QoQ Recurring Net Protocol Income (rNPI) declined from 21.3M to 5.0M DAI (-76%) mostly driven by change in assets and ongoing yield compression, offset by lower oracle gas costs
Total interest income decreased from 4.3M to 2.4M (-44%) month on month
Collateral locked also in sharp decline as major institutional users exit lending amidst broader market deleveraging
MoM help on workforce expenses driven by overall phasing of drawdowns of CU budgets
Reminder: workforce expenses are reported on a cash basis so some CUs will have a timing issues with higher expenses one month and lower the next
YoY ETH lending market stabilizing and no longer in severe downturn. Long-term trend remains negative
ETH lending market resumed its decline (-19.7%) on month-end
Dai outstanding stabilizing around 6.5bn
Selected Slides
All chart legends are now in 12pt to facilitate legibility during G&R calls, but will still burn your retinas if you’re in Dark Mode
As always this is a very nice work by your CU, thank you. With regards to key strategic discussions, I Personally would like to see an emphasis on the bigger strategies that are being worked on, such as MIP65, the ETF MIP6 proposal by Backed Finance, a request for the future pipeline of RWA onboarding (HVB & SocGen are yesterday’s news), an analysis of the crypto collateral growth pipelines, etc. Maybe some of these points can be highlighted after “We need to increase the slope of our balance sheet”
This is incredibly valuable, thank you for your work.
Since profitability is key, how can we identify low-hanging fruit in optimising parameters to make more money?
How can we attract more vault users, for instance?
Is there anything that stands out from your analysis that could be applicable here?
Thanks for bringing this up, this feels really important given the current pipeline of potential issuers and the existing discourse. There is clear desire for reform and improvement of current RWA practices. There are strong opportunities in the near-term RWA pipeline (I can speak specifically to the Centrifuge pipeline, but my feeling this is true of all RWA partners/providers. The potential for long-term solutions seems to be more clear given recent governance proposals.
A pipeline management conversation to balance all of these factors is exactly what is needed.
My thinking is that this could occur productively along the following lines:
Identify current appetite. This should really be a discussion about desired size over the short-term timeline. Ideally informed by the Strategic Finance perspective (current portfolio, market trends, revenue needs and opportunities, etc.), but also balanced against existing resource capacity. When we talk about doing some deals, but then holding off for a reformed structure, it would be great to understand what that actually means from a size and timeline persepctive.
Immediate opportunities for improvement. Along with appetite, I think it’s critical to have an understanding of what should be prioritized, both from an asset class perspective and a process perspective, in the near-term. Less real-estate? More geographic diversity? More process documentation? Better legal framework? Obviously there is a world of desired improvements, but understanding what the DAO feels is most strongly a concern and an opportunity area is useful for issuers and service providers. Identifying where there may be low-hanging fruit we can collectively execute on would be ideal.
Long-term governance reform. RWA is a critical touch point within the recent governance proposals and discussion, so I think it’s necessary to discuss it in the context of the RWA pipeline. There was some great discussion at the end of yesterday’s DVC on this (not to mention the past two weeks) and it was centered around desires, timeline, and implementation. Taking what our current appetite is, where there are immediate opportunities, and then balancing this against a prospective timeline will help to focus activity. This is the least developed area in my mind, with the most unknown unknowns and details of governance plans still being developed, so there is no expectation of hard deadlines and details. But simply starting these discussions within the RWA context is really important for developing the long-term view.
Appreciate any feedback or other ideas from folks on this particular topic. Thanks as always to the Strategic Finance CU for some fine work.
I have been thinking about this too, made an informal poll with some options on how to incentivize borrowing in its current state and during this cycle (i.e. bear market). PSM and RWA initiatives are great too but growing (ar at least attempt to) core vaults in parallel would diversify DAI collateral and reduce USDC dependency.
I am really excited for the L2 vaults.
No matter the incentives, its clear that macros and crypto market dictates demand. However, I had proposed allowing a portion of the vault collateral to be investable in DAO approved investment options while MKR maintains a claim on the collateral in case of liquidation. This has the potential to increase SF fees but also commission fees, i.e. a % of the collateral’s investment return would be allocated to MKR for referring the funds to investment providers via a shared revenue agreement. It is important to note that this structure would not be possible under the existing vault configurations but could be considered in the creation of new vaults. It does seem like a high effort initiative though and given the tightening of budgets and resource constraints I don’t think the timing is great.
Helpful.Thanks.i have been reading these for some time.need to protect this protocol, which is resilient imo, from poor vault choices.recent crypto explosion shows value of resilient defi.rwa is exciting.really intrigued by metadaos and need to dive in deeper.if I missed it in link, my apologies, but are there spreadsheets available to run my own separate analyses on the data shared.
Are core unit expenses inclusive of $MKR vesting, or that just USD/DAI expense?
Also is “Other interest expenses” on the interest income decomposition from the D3M?
Excellent report. Is there a Dune dashboard to dig into the unprofitable collaterals? I’d like to better understand if it is just bad debt in the protocol caused by vaults with this collateral + implementation expenses, or some other costs too.
One approach to lower SF sustainably and increase ROA is to effectively create a new variety of ETH/WBTC vault that allows rehypothecating the underlying collateral in exchange for a lower stability fee. As @One_Pastrami mentions above though, it would likely require some concerted engineering effort to develop and deploy.
All the data is sourced from Dune dashboards such as this one. What data might you need to run your analysis? We can help put something together.
On the above just the DAI expense, reconciles to the surplus buffer.
@pipko put in some great work in digging into operating Oracles for various collateral types. This analysis is not surfacing bad debt, rather, it is allocating overall Oracle gas unit usage to each ilk type and subtracting it from net interest income to derive a proxy for contribution margin. Associated Dune dashboard shows the effortized gas usage per vault type, as well as highlighting the enormous work the Oracles team have put in to optimize these feeds.
The takeaway is probably along the lines of ‘smaller collateral types require a higher minimum usage to justify ongoing Oracle operation’ and our next step is to derive a quantitative framework for determining the cutoff.
