Crypto analysts AlfaBlok has published a report that claims the number of circulating Dai will need to increase by more than 70% each year in order for MakerDAO (MKR) to maintain its current capitalization of close to $350 million.

According to AlfaBlok’s modelling, published May 5, the supply of Dai will need to exceed several trillion by 2040 — up from the current supply of roughly 100 million.

The analysts said they had conducted “a fundamental analysis on this decentralized business based on discounted earning flows” and concluded:

“The bottom line is that the current valuation implies very aggressive growth rates, of over 70%+ Dai circulation increase per year reaching trillions of Dai in circulation, in order for current valuation to make sense.”

DAI will need supply of several trillion

AlfaBlock said that this is possible, but challenging:

“Demand for Dai has clearly been there so far. So much so, that it’s been difficult to keep the peg close to $1. The big challenge remains to increase in supply in a structural way that allows it to reach hundreds of billions of Dai in circulation over the next decades.”

In order to achieve a circulating supply that large AlfaBlok speculates that real estate, presumably tokenized, may need to become an accepted form of collateral.

“There is over $170T worth of real estate in the world today, and so this should be mechanically feasible,” the report states.

Alternatively, the report discusses the possibility of the protocol breaking its peg and operating with under-collateralization.

Under-collateralization triggers debt auction

MakerDAO is the decentralized finance protocol that generates the Dai (DAI) stablecoin. 

DAI are created when a user deposits Ethereum (ETH), Basic Attention Token (BAT), USD Coin, (USDC), or Wrapped Bitcoin (WBTC) into a Maker smart contract. 

The deposited funds are entered into a collateralized debt position called a ‘vault,’ with a sum of DAI equal to that of the deposited crypto assets minus a maintenance margin being created. Users are then able to earn interest or lend funds from their Vault.

The collateralized crypto can only be accessed after the corresponding Dai are repaid and destroyed, and can be auctioned off to recapitalize the Maker system should its value fall below that of the outstanding loan.

AlfaBlock concluded the report by saying that Maker was breaking new ground for DeFi projects:

“MakerDAO is a very important project for DeFi - not only is it a critical Lego piece, it also is a model for how DeFi DAO-based orgs can operate. We’re all going to learn much from how this will all unfold.”