On the price difference between similar DAO tokens
Twins born on the same day do not have equal influence(Tyler and Cameron Winklevoss are a perfect example). How then do we expect DAO tokens launched in the same year and operate the same business model to have the same price?
$MKR and $AAVE are the DAO tokens of Maker and Aave Liquidity Protocols respectively. I decided to pick them as a case study to further this question by @tomideadeoye for three reasons:
- They are DAO tokens launched in the year 2017
- Their protocols both have the same business models: lending protocols
- They are hosted primarily on the Ethereum blockchain.
Notwithstanding these significant similarities, there is a massive price difference between these two tokens. As of the time of writing this, MKR trades at $931.62 per token while AAVE trades at $87.92 per token. That’s about $843 difference!
In this post, I will explain three major factors causing this price difference with inspiration from Yhlas Sovbetov’s research paper. The factors considered are:
- Supply and Demand
- Investors and services provided
- Total value locked
If you are an investor or trader, this will probably help you make a better informed decision on these two tokens.
Supply and demand
One of the primary factors investors consider before investing into a cryptocurrency is its maximum supply. Investors tend to be attracted to fixed asset tokens as they are deflationary on the long term. Bitcoin is a good example of a fixed supply cryptocurrency at 21million coins.
Both MKR and AAVE tokens are fixed asset tokens with maximum supplies of 1,005,577 MKR coins and 16,000,000 AAVE coins
Looking at these figures, the supply of $MKR is much less than that of $AAVE. In economics they say, the less the supply the more the demand thus the higher the price. This justifies $MKR higher price.
Investors and services provided
One of the most important factors in a cryptocurrency project is the community behind it. The people invested in a project can influence others in making their investment decisions.
Maker protocol started offering lending service before Aave protocol. As early as 2018, the Maker protocol was already running its lending service. Aave on the other hand experienced some setbacks which led to its name change and token switch. It was originally known as EthLend and the token was called LEND.
This early advantage gave the maker protocol an edge over the Aave protocol in terms of trust and reputation. More investors got more acquainted with Maker because the more the year of service the more the trust it wielded.
Apart from the MKR tokens, Maker also had DAI as a stable coin. DAI is one of the most popular stable coins today with about a $6bmarket cap. This is another interesting service and edge that Aave lacks.
Total value locked
Total value locked (TVL) measures the amount of funds held in a DeFi protocol. You can argue that this is a secondary factor as it is a function of the investors and investment in a DeFi protocol. The more the investment, the higher the TVL.
According to Defillama, the TVL locked in Maker protocol is $7.74b while that of AAVE is $4.95b. This is a positive point for MKR as it gives investors more confidence to invest in the token.
In the long run, more money invested in MKR leads to higher token price considering that it has a smaller token supply.
Conclusion
There are so many factors that cause price differences in DAO tokens. This post highlights three of such factors causing the price difference between MKR and AAVE tokens. This way it establishes why the MKR token is more priced than the Aave token.
If there are other factors you have in mind, you can directly reply to this post to further this discussion.