MakerDAO Adopts Real-world Assets as Crypto Leverage Demand Wanes

MakerDAO may soon be the first decentralized finance protocol to offer conventional loans to borrowers backed by traditional institutions


Source: MakerDAO


key takeaways

  • MakerDAO members have agreed to invest $500 million worth of DAI in US Treasurys and corporate bonds
  • “Revenue coming from the real world can offset some of the revenue we’ve lost from crypto,” said MakerDAO’s TJ Ragsdale

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 worth of stablecoin DAI into US Treasurys and corporate bonds. Voters agreed 80% of the funds would be allocated to US short-term Treasurys 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, prominent MakerDAO contributor and former incubating lending oversight facilitator, told Blockworks.

“I think the decision of investing half a billion dollars on US Treasurys 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 stablecoin 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 opportunities 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 Huntingdon Valley Bank (HVB), ​​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.” 

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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.”

Correction, July 7, 2022 at 10:40 am ET: Luca Prosperi is MakerDAO’s former incubating lending oversight facilitator. MakerDAO doesn’t currently have a lending oversight role. The Pennsylvania bank is Huntingdon Valley Bank (HVB), not Huntington Valley Bank.

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