Detail of a robe from the 12th century, which is in the Viennese treasury. Photo by John W. Schulze via flickr.com . License: Creative Commons
The Maker DAO issues the most successful algorithmic stablecoin with the DAI dollars. Now the Decentralized Autonomous Organization also wants to use government bonds as a cover. This would be a milestone for both the DAO and DeFi. But it’s not quite that simple …
The Maker DAO is a fascinating entity that has evolved from a relatively straightforward DAO to a sprawling network of groups and smart contracts.
One of the most exciting current proposals is that the DAO should invest in government bonds maturing in the short term. This intensifies the connection between DeFi and Cefi, between DAO and stock corporation, between token and security.
The proposal comes from a Swiss company, the “Backed Finance AG”. It brings securities to the Ethereum blockchain as 100 percent covered tokens. In the Maker DAO forum, she now suggests that users can use tokenized ETFs on bonds maturing at short notice as collateral to borrow DAI dollars from the Maker DAO.
Backed Finance AG is thus responding to the recently adopted proposal of a working group on “Real World Assets” (RWA) to invest in short-term bonds. These should have the same stability as stablecoins, which make up more than 50 percent of the DAO’s treasury, but, unlike these, also yield interest.
With Backed Finance AG, a fully regulated Swiss company offers to fulfill this proposal. By tokenizing securities such as bonds, ETFs and shares, the AG allows the Maker DAO to invest in them without becoming active on the traditional capital market itself. For backed finance, this should be an opportunity to prove the added value that the tokenization of securities can have.
The security proposed by backed Finance is the “Backed iShares $ Treasury Bond 1-3yr UCITS ETF” issued by asset manager Blackrock. This ETF is backed by low-interest short-term U.S. government bonds. The smart contract for this already exists on the Ethereum blockchain, even if no tokens have apparently been minted yet.
In the Maker DAO, backed finance runs against partly open and partly locked doors. The proposal is a “gamechanger”, several members of the RWA working group cheer, both for the Maker DAO and for DeFi in general. Stocks and tokens merge, a DAO invests in government bonds. How can you not want that?
Other members ask skeptical questions: will the DAO use this to put government bonds into unregulated circulation? Will the Maker DAO from the issuer of a stablecoin become a market maker for government bonds? Will the assets subject to the tokens be liquidable in any case? Does the process expose the Maker DAO to legal and regulatory risks?
And in general: is it possible to talk about real ownership if the assets that are subject to a token are owned by a company? Are there sufficiently reliable price APIs that can be put on the blockchain? Such doubts have so far ensured that the Maker DAO has not yet made a decision on the proposal and continues to discuss it.
At the same time, the Maker DAO is opening up more and more to the integration of banks, such as the French Societe Generale or the US Huntington Valley Bank. These banks can generate dollar tokens using the DAO. Most members of the DAO are looking forward to this merger with traditional finance with friends and excitement; however, some are afraid to charge the DAO with regulatory risks that may threaten its existence.
The inclusion of “real world assets”, i.e. assets that do not have their origin on the blockchain like tokens, seem to be the inevitable future of the maker DAO. This makes it a strange, decentralized organization that operates at the interface of blockchain and traditional finance, perhaps one could also say an investment fund with a stablecoin as a token.
But this is anything but simple or straightforward. For example, Pando Climate, a fund that focuses on investments in renewable energies, recently advertised a loan of $ 220 million and offered solar systems with the equivalent of $ 250 million as cover. However, this proposal was rejected because it is too risky.
The Maker DAO apparently has yet to find its course in dealing with real assets. But it is already serving as a catalyst for the tokenization of real-world assets.