An RWA style solution to replace the PSM

Following a comment by @PaperImperium and @alexis in several other threads as well as the ridiculous rate at which the PSM is filling up, here’s an idea to start removing USDC from the PSM. I have to admit this is kind of vague at the moment because I don’t yet understand fully how our RWA vaults work but hopefully the @Real-World-Finance guys can comment about what obstacles stop us from this.

The goal would be to have a USD bank account serve as a Real World Asset with stability fees slightly set to be slightly lower than prevailing interest rates. I don’t know how hard this is to achieve but if our RWA framework is able to handle this, the account owner is then able to deposit a small amount of seed USD, generate DAI, sell it on the open market for profit and receive USD, put that USD back into the account and repeat the process as long as DAI trades above $1. I’m sure we’d have lots of people who want to take advantage of such an arbitrage opportunity with zero risk.

While this idea is still at a very early stage, the idea of replacing an additional PSM middleman entity (Circle for USDC, Binance for BUSD, etc.) is quite appealing to me. We would end up holding large amounts of USD in a bank account (or mutliple accounts) instead of stablecoins in PSMs but risk wise, most people might find this more palatable. The fact that the stability fees are nonzero also means more revenue than the one time fees we get from the PSM. And lastly, we lost the bad PR of being a “USDC wrapper”.

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Tbh, this will be much riskier as it also creates a risk of embezzlement, or potential loss coming from whether it’s corruption or mistake. Not to mention they might require license for such.

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I will also share that Dai is available on certain significant platforms where no other stablecoins exist due to the fact that there’s no USD bank account associated with it. Doing this will literally remove ourselves from several large markets.

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With the current structure we are working on (Cayman STAR Trust/Cayman Foundation, it’s probably possible to use it to invest in money market mutual funds (not that it would earn much if any, less than 0.1% currently before structure fees).

But while this is fine for something like SolarX (20M investment), I’m not in the view of using it for $2B anytime soon.

So high complexity, low reward, and not enough smart contract work (we are a blockchain protocol after all).

In a sense, fiat-backed stablecoin are already that (bank deposits) and being easier to integrate. I agree that they they keep all the reward currently, but as there is none those days, it doesn’t really matter. This is why I tend more to diversify our counterparty exposure to stablecoin issuers and to dig a bit deeper what they are doing with the cash.

If risk-free rates are improving at some point, someone will step up and provide a tokenized money market mutual fund on which we would be able to create a PSM.

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Just on side note, I am in favour of decreasing the rate, and regaining market share.

I am happy to decrease nearly everything we want to decrease to 0.5% for 3 months and “wait and see”. As already signalled with the maker summer party.

The RWA solution can’t be implemented quickly enough.

I don’t believe the bond solution is a good idea as we can archive the same with eth-c.

Nail on the head. How to maintain control of an entity with that much money is the real puzzle.

Licenses/regulation shouldn’t kick in for just holding cash in interest-bearing accounts. But anything beyond that gets into the Investment Act of 1940’s extra regulations. Can’t recall, but that may be pushed back if you only hold federally backed securities.

But yeah. Embezzlement risk is 100% the hardest thing to nail down. DAO gives 1% of the USDC to a CU. CU decides they’re good and head to the Bahamas to live happily ever after. DAO isn’t an entity so what’s the recourse?

I suspect there’s a solution, but we’re not there yet. Note that this problem is exactly why 6s has such a ridiculously complex proposed structure with about a dozen entities all told.

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Interesting. How does this compare to the money market mutual fund investments that @SebVentures talked about earlier? The structure there to ensure that we retain control of the collateral bonds seems to be the thing that we aren’t able to apply to a plain Jane bank account?

Investing strategy is different from structure. There’s lots of ways to deploy even 10% of what’s in the PSM fairly quickly.

The issue is who gets to sit on a pile of real world cash and be trusted not to end up on a private island in a hot tub surrounded by a bevy of beautiful men/women. Same problem if we custody the funds with an institution, as the DAO cannot sign a contract itself. That all likely involves a trust structure or some other entity that has ways to be forced to take instruction from the DAO. Remember, the DAO won’t have any ownership rights.

What would make this all a lot easier is if the Fed or Treasury or someone whom we already are critically exposed to if they fail would simply offer tokenized versions of their securities. Someday that’s likely to come. Until then? We keep scratching our heads and trying to figure it out.

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And last question for now: What about SEC approved tokenized securities such as https://arcoin.arcalabs.com/? This was after a cursory Google search but seems to fit the requirements you’ve pointed out.

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Structure-wise, there are many options. The question of scale will come down to tax compliance and confidence of custody of those securities.

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This collateral is already in the process. Here is the thread. The issue for this one is that fees are above earnings (at least currently).

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This is and will always be an ever-present trade-off. The DAO needs to make sure they are well capitalized and will “be around”. The net margin is tough. While UST (or similar and set aside the tax implications for a moment) represent great collateral (if not ideal), the challenge is having a structure that has the custody and having a party that will run it with minimal margin.

On the opposite side, if we have LendCOs that have excessively high-net margins, this points to the LendCO taking way more risk than the DAO should probably embrace (unless it is also pricing for that risk). A gross example would be sub-prime used car lending (great margin but material default rates).

Finding the sweet spot in the middle is name of the game.

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So one option – and I think I would only advocate for this as a temporary measure until we can build up our own investing infrastructure – is to find a partner like Genesis or Anchorage (does Anchorage do yield generation stuff?) and let them have a few % of our USDC.

The obvious pros:

  • Quick to deploy compared to what we will need to do for ourselves
  • Crypto friendly, obviously, so fewer square pegs in round holes
  • A $1 IOU from Genesis is likely as good as a $1 IOU from Circle, though we’d want to do our due diligence
  • Gets yield
  • Reputational risk to them if they screw us, unlike some new or unknown player
  • Has at least some regulatory oversight unlike some of our other options

The obvious cons:

  • We’d have to custody assets with them (though not sure how that’s different from using a CU to do the same thing)
  • We’d need to ensure they can do business with us and that any agreements are enforceable if/when we want our USDC/equivalent back

Edited to add: I have a suspicion if we put out word to investment firms that we have multiple billions potentially looking for a home, there would be no shortage of applicants looking for our business.

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Growth Core Unit is working on something related to this, we will present it to the community once is ready. :slight_smile:

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I think what gives me a great sense of relief is knowing how many different teams are at work to solve this supply side issue!

Looking at daistats, it’s doom and gloom as USDC becomes a bigger chunk of the backing behind DAI but the last few posts illustrate that a plan to change that is taking place :sunny:

A question about these new vault assets - do any of them give their users an arbitrage opportunity when DAI trades above $1? Ideally, we want that DAI above peg leads to a mint from these new categories. This would take the pressure away from the PSM.

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Agreed.

What is also important is that the solution be done in a portfolio manner. We do not want to have one RWA vault have 100x more DAI issued than its peers (even if it is UST). We need more LendCOs that provide a diverse portfolio of secured collateral.

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