MakerDAO’s $500M US Treasuries and Bonds Investment a New DeFi-TradFi Pipeline?

In a surprising move, MakerDAO has voted to invest $500 million outside the DeFi ecosystem. As the issuer of the fourth largest stablecoin, Maker treasury is turning to US Treasuries and corporate bonds amid decreasing DeFi yields. With the Fed on the road to keep raising interest rates, is this the beginning of a new DeFi-TradFi pipeline?

How Much Does MakerDAO Hold in Funds?

Launched in 2017 by Rune Christensen, MakerDAO has been the cornerstone of decentralized finance. Through the use of smart contracts called Vaults, MakerDAO enables users to deposit a wide range of cryptocurrencies in order to mint the Dai (DAI) stablecoin. 

Presently, Dai has a debt ceiling of $8.8 billion, with outstanding Dai at $6.78 billion. Most of the DAI collateral consists of USDC stablecoin (53%), while ETH and its wrapped version make up 23.5%. Wrapped Bitcoin (wBTC) contributes to Dai collateral at 7.3%. 

Why is MakerDAO Integrating TradFi?

Over the last year, the Fed shifted the macroeconomic environment with interest rate hikes, reversing monetary policy from quantitative easing (QT) to quantitative tightening (QT). Consequently, not only did the dollar strength index (DXY) go up by +17.63% YTD, but US Treasuries yield went up as well.

US Treasuries represent federal government debt, which means they are perceived as the safest form of investment. After all, the government has the permanent tool of taxation to service its debt and is highly unlikely to default. Year-to-date, the 10-year treasury yield rate rose from 1.7% to 3.89%, the highest in a decade.

This is why MakerDAO voted to allocate 80%, out of $500 million, into US Treasuries, at 10-year maturation. The remaining $100 million will go into IG Corporate Bonds,  managed by Baillie Gifford. The UK-based Monetalis Clydesdale bond manager will follow through with this allocation “to diversify MakerDAO’s balance sheet into scalable legacy finance investments“.

The first $250 million should be allocated to BlackRock-issued iShares ETF dealing with short-term Treasuries. After that, another $150 million to BlackRock’s Treasury ETFs.

At the same time, DeFi rates have been falling amid the new macroeconomic alignment. Case in point, variable USDC yields on Aave have been steadily dropping this year, from January’s 3% to 0.55% APR. In fact, the USDC market cap itself suffered a -10.7% decline in the last 30 days, from $51.63 billion to $46 billion. 

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MakerDAO Weening Off USDC

Last month, MakerDAO tokenholders voted to raise stETH collateral ceiling to 200 million DAI. The goal is to replace centralized stablecoins that collateralized DAI with more decentralized assets. This was an expected move after the US Treasury made an unprecedented decision to sanction open-source code. 

Following OFAC’s sanction against Tornado Cash currency mixer, the Centre consortium, as USDC issuer, started blocking USDC addresses. In August, Christensen announced the move to ween off USD and its stablecoin equivalents.

“I think we should seriously consider preparing to depeg from USD. It is almost inevitable that it will happen and it is only realistic to do with huge amounts of preparation.”

Although Vitalik Buterin warned against it in the short run, the community was largely on board. Erik Voorhees of ShapeShift suggested that this unwinding process should start sooner rather than later.

Macroeconomic Conditions Force MakerDAO’s Hand

With $1 million worth of DAI already executed into treasuries and bonds, MakerDAO has gone from a “full-stack decentralization” effort into government/corporate securities. This is not that surprising given that DeFi summer of 2020 began with the quest for yields.

Year-to-date, the total crypto market cap dropped by -57%, with more Fed hikes to suppress the price of assets on the way in November. However, if the MakerDAO community aims to ween off centralized stablecoins, yields are needed to make that transition. MakerDAO’s official statement makes that clear.

“The generation of yield on MakerDAO’s asset reserves allows for the enhancement of the protocol’s capabilities and the ability to secure capital investment,”

Nadia Alvarez, Head of MakerGrowth

Monetalis CEO, Allan Pedersen, views this milestone as the beginning of a new trend, in which DeFi assets are integrated with TradFi at an increasing pace. Interestingly, Pedersen invoked Climate Change as the reason why DeFi and TradFi should join hands.

“we believe the global problem of combating climate change will be the impetus that finally brings DeFi and TradFi productively together.”

Allan Pedersen, CEO of Monetalis

Monetalis’ stated motto is “financing the green economy in practice“, using the UN’s definition of green economy as one that is socially inclusive and resource efficient, which aligns with BlackRock’s existing ESG framework.

Do you think MakerDAO will follow through with its decentralized stack, or become entangled with TradFi? Let us know in the comments below.

About the author

Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird’s US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firm specializing in sensing, protection and control solutions.