MakerDAO may soon be the first decentralized finance protocol to offer conventional loans to borrowers backed by traditional institutions
The latest MakerDAO governance proposals are signaling ways in which the protocol is slowly embracing real-world assets.
Last week, the DAO passed a proposal to invest $500 million in stablecoin DAI into United States treasuries and corporate bonds. Voters agreed there would be an 80% allocation to US short-term treasuries and 20% into investment-grade corporate bonds.
This proposal was an attempt for the DAO to generate yield from its DAI holdings with professional bond managers and to diversify counterparty risks, ultimately strengthening the DAO’s balance sheets.
Maker protocol members are currently in the process of understanding if and how the integration can happen, Luca Prosperi, who leads MakerDAO’s lending oversight.
“I think the decision of investing half a billion dollars on US treasuries was a good one,” Prosperi said. “But given the amount of money, things need to be done properly because we need to make sure that the money is actually being used that way.”
A stalwart of Ethereum’s decentralized finance ecosystem, MakerDAO is a token-powered system that supports borrowing and lending cryptocurrencies, peer-to-peer.
MakerDAO has, since December 2017, issued and regulated the overcollateralized DAI, intended to be pegged 1-to-1 with the US dollar. It’s currently the fourth largest stablecoin, with a $6.4 billion market value.
The DAO also has its own native token, MKR, allowing users to vote on governance matters such as adopting US Treasurys and corporate bonds. The community’s decision to allocate funds into fiat securities may have been prompted by the collapse of Terraform Labs’ LUNA and its algorithmic stablecoin UST, but it’s crucial to note that, unlike LUNA, MKR does not back DAI issuance directly. Instead, MKR holders guarantee DAI’s stability; in exceptional circumstances, MKR can act to recapitalize the protocol as a last resort.
Embracing real-world assets can help maintain DAI’s peg to the US dollar. But fund allocation is not the only decision that has been proposed to maintain the protocol’s position as a leader in the cryptocurrency lending and borrowing space.
Rising real-world rates present opportunity for MakerDAO
Currently, it is forbidden to provide loans in US dollars. MakerDAO may be the first protocol to offer conventional loans to borrowers backed by traditional institutions if its latest proposal is approved, which would add Huntington Valley Bank (HDV), a Pennsylvania Chartered US-based commercial bank, as a new 100 million DAI debt ceiling participant.
To put it simply, HVB will provide real-world assets as collateral to receive a 100 million DAI loan that they can use to grow their existing business. At the time of writing, 84.55% of voters are supportive of this decision.
“As demand for crypto leverage is decreasing, rates in the real world are rising, so there’s an opportunity where Maker can mint DAI at a low cost of capital and lend it against, really good, robust real-world assets at a higher rate,” TJ Ragsdale who manages real-world assets at MakerDAO told Blockworks. “Revenue coming from the real world can offset some of the revenue we’ve lost from crypto.”
In the long term, Ragsdale believes that integrating with TradFi will enable DAI to “really grow into its full potential, it needs to be regarded as legitimate, not only by crypto participants but also by real-world participants.”
Although embracing real-world assets has mostly been encouraged by community members of MakerDAO, there are concerns around the protocol becoming more centralized.
“Crypto was born because we didn’t like centralization and dependence on governance, but now here we are digesting government bonds,” Prosperi said. “I think we are back to the start, which to me is fine, but for the purists, not necessarily.”
For Ragsdale, iterating and building MakerDAO to become a transformative tool that is trusted in the real world remains a priority.
“The goal is really to take advantage of all the value that lives out there in the real world, and as Maker — with our unique position in the market, build in transparency and determinism that we all love about crypto into those traditional systems.”