After polling on the idea to invest in financials assets here, it was incorporated in the RWF strategy (the Scalable off-chain investments bucket). It was also discussed with the RWA Committee this week. This post provides more information on the current status.
Even with the bull run resuming, we still hold more than 50% of stablecoin on the balance sheet. This is a strength for the peg, but doesn’t generate any revenue, is a concentration risk, and is bad PR.
Institutional vaults and “regular” RWA might, at some point, solve the problem but it is impossible to expect perfect balance sheet management with such tools. You don’t fire DAI supply in short term. We are extending the credit line so we also need a buffer.
Therefore, we will always need a buffer of liquidity (defined as any assets that can be sold in short term to keep the peg (from a few minutes to a few days).
The final idea would work like the diagram below. For each fiat-backed stablecoin PSM we would define a target DC (let’s say 3% of DAI issued) with a min/max range (2.5%-3.5% for instance). When the DC of the PSM is above the the max target, the excess (possibly converted in DAI) would be send to a cryptobroker to be converted to cash, send to a stockbroker and invested in a ETF. We would increase a ETF-A vault in our system. The ETF would be a short term investment grade bond.
The opposite can be done when the a PSM is below a min target. This might require human judgement (MKR executive).
This way, we limit our exposure to fiat-backed stablecoins to a defined level. There is a counterparty risk with the stockbroker and the ETF. Nevertheless, even $1B would be small.
The idea is to leverage the work done on the RWA Foundations. The first, RWA Foundation, used for SolarX, is incorporated in Caymans and all the corporated servicers have been appointed. They are currently working on getting a KYC/AML package for US Bank (which is not used here). If we pass US Bank KYC/AML we should be good to move to other providers.
There is still the formal Articles of Associations to be implemented and defined the MakerDAO/RWA Foundation communication processes.
The final setup will have a to be rubberstamped by a global law firm.
The legal entity would have nothing to do on the DAI → ETF way (beside accounting). For the other way, I’m not sure a stock broker will be able to take the decision itself or take direction from a third party (i.e. MKR executive). So the legal entity will have something to do.
We have two leads but waiting on the KYC package.
I’m still trying to find a global servicer provider that could take DAI and deal with everything. So far no luck.
Not much work here aws being done. Waiting on the KYC package and the actual ETF selection to find the best partner. The ETF providers are able to introduce us.
I had discussion with VanEck and Vanguard at this stage. They all favor the use of an ETF (versus a managed account) for simplicity and cost.
Both are low duration risk (duration < 2 years), with exposure mainly US (but not only which adds diversity). Both are able to provide 100M of volume over a day if we go through a market-maker like Jane Street.
The proposed products are the following:
- VanEck Investment Grade Floating Rate ETF: US based ETF. Duration risk on this one is almost 0 as the bonds are floating rates. Currently below 0.5% yield, more safe.
- Vanguard USD Corporate 1-3 Year Bond UCITS ETF (USD) Accumulating Ireland based ETF. Currently 0.6% yield.
In order to add an ESG product:
- iShares $ Corp Bond 0-3yr ESG UCITS ETF Ireland-based. Not super convinced by the ESG (you have stuff like Toyota, all the bank, …)
So it’s about scale, reducing/managing the USDC exposure and getting some revenues (but not much in the current environment).
The risk is up to a 5% drop which was seen during the Covid crisis. It was not that bonds defaulted but credit spread increased and there was strong liquidity issues. In normal markets, not much happens. This remains to be analyzed.
We can go higher on the quality ladder but we would get nothing in return (there will be structure/trading fees).
The poll was to go forward with MIP21. I still have doubts it would work at scale, but we can start experimentation with that. I’m drafting a study on how to fix this problem (at least to frame the problem).
Assuming there is no strong opposition, we will continue working to move the project forward.
Feel free to provide comment and ideas.