MIP39c2-SP16: Adding Maker Portfolio Core Unit - MPCU-001

Unfortunately, the math will not work with the cost structure at such a low rate. At the least it’s estimated the trust will charge around 10 bps for anything under $15 million in size, and 7.5 bps from $15 to $25 million. Interest rates can and do change, so perhaps there will be less demand or more supply at the front end of the Treasury curve in the future.

I would like to see us attempt slightly higher yielding (but still very safe) dollar-denominated debt like agency debt and certain corporates. I propose Treasuries as a beginning point for a few reasons. The first, is of course, that it exposes us to not much more risk than we have just by being pegged to the dollar. The second is that it is simple – it is an instrument we do not even need a broker for. The third is that it is such a deep market, we can use it to scale should we want to increase supply to help manage the peg. The fourth is the PR aspect – “Maker: lender to governments” and the novelty of using the government’s own debt to fund whatever causes will earn us the most goodwill.

As to supply, note that fixed income in general will not only provide us with regularly scheduled income far into the future, but also future demand for DAI (the trust would need to take USD it receives in interest and buy DAI to repay debt to its vault). How helpful would it be to know that the week of June XX, 20XX, there will be XX million DAI that will be purchased on the open market? It won’t replace the PSM for fine tuning, but may help us hold less than multiple billions inside it.

This is intended to be the first phase of a more comprehensive area of growth for Maker. Larger scale, different investments, and more flexible structure can and will be iterated on – at the very least, the legal world is rapidly evolving in response to blockchain and DAOs. I recognize this CU’s program would be a significant shift in the DAO’s real world involvement, beginning to spread funds around for political self-defense and actually doing business with governments and traditional markets head-on instead of remaining in a self-imposed isolation.

I want to take this program in small steps in recognition that it may take the DAO some time to digest that Maker has become financial evolution’s favored child. That the very idea is controversial with regard to using the US government’s funds own debt funding to send cash to underserved causes tells me not to push further until skeptics can see firsthand that profits, generosity, and integration into the heart of the financial system will provide benefits to everyone involved.

I deeply appreciate your support, and most (perhaps all) of your suggestions are already a priority for the middle- and long-term for this CU. If there’s a way to move forward when they get implemented, I’ll do it.

What are some of the other types of investments this CU could diversified into? I think you have a super conservative approach–which is good–but would it be possible to diversify into ETFs & REITs? Or, even buy & hold SPY (Spdr S&P 500 ETF)? Just thinking outside the box–not sure if the community wants a Boomer portfolio haha. Or, maybe they do. not sure.

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At the moment I would say only fixed-maturity investments due to the 20-year maximum lifespan of the charitable trust. Anything where we are forced at some point to sell into the market — like an ETF or stock — exposes us to market risk. That’s not necessarily a problem, but to begin with, I wanted to strip out as many forms of risk as possible.

I suspect we can find a way to both keep the structure simple and to grant us more flexibility in the future.

Well, there are many ETFs, including SPY that supposedly perform better when they are held for 20-years++, no? Of course, past performance is not indicative of future performance–but if the S&P returns flat, or a negative Yield for the next 20 years–then I guess we’ll have bigger worries on our hands…

But yea–I get your drift.

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I agree @MarianoDP it would be good to see how it develops and hope for good ways in which our treasury is diversified, I have some doubts, but may it all work out for the best.

Unfortunately, the more I read about it, the more I am confused. So you are asking DAO for 300k budget to invest in extremely low yield such as US treasuries to…give to charity?

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The trust borrows from Maker, and some portion (up to us) is left to charity, yes.

For example, the trust may pay Maker 110 bps to buy bonds that pay 140 bps. Of that 30 bps left to the trust, the trust will pay the expenses of administration, filing tax returns (but no taxes will be paid), and any “profit” given to charity. We can make that spread as large or narrow as we choose — particularly if we are willing to pay the trust’s expenses. It is only assets inside the trust when it winds down (after it has repaid Maker in full) that are strictly required to go to a charitable organization.

In theory, that “profit” could be given to Maker, but the trust would then need to KYC Maker, which is not possible.

Alternatively, an LLC could perform this same function as the trust, but then you have shareholders in the LLC who have an incentive to cheat Maker. A trust has no incentive or legal ability (since we draft the trust documents) to run away with Maker’s money.

While this program is meant to turn a profit, the profits should be considered secondary, as they will not be as large as our core crypto and RWA businesses. It can provide a floor to our revenues in lean times, but won’t create a bonanza in good times.

This program does offer a large peg management tool without the middleman risk stablecoins offer, coupled with a building of goodwill and political protection. With Maker visibly funding charitable work (from the government’s own debt payments) we will gain advocates for our continued existence. With Maker holding government debt, we ensure that an attempt to outright ban Maker would result in a credit event for the government.

TL;DR Relieve pressure on the PSM, get friends, buy protection, grow supply. There will be profits, but profits are not as valuable as becoming integrated with the real world both socially and financially.

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That trust can be designed by you to charge whatever, so why not take 0 spread, start with some capital given by Maker which should be enough for the trust lifetime, and then whatever is left at the end can be sent to a charity?

I should rephrase. The corporate trustee charges that. Thank you for catching that.

These will be designed so that they require no more oversight from us except if we are in a cash crunch and choose to liquidate. I am not proposing the MPCU be the trustee. We will outsource that to a company that does that full time.

Sir, interesting article on the man who knows shadow banking inside and out:

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While I can’t get through the gate at the moment (password stored on a different device, apparently), I can almost certainly tell you why “investors have started storing billions of dollars at the Federal Reserve each night.”

Generally, banks under the purview of the Federal Reserve are required to hold 3% capital for all assets. This typically includes assets at the Federal Reserve, but during the COVID pandemic’s darkest days, the Federal Reserve relaxed that rule. Now the rule is back, so the risk-free rate of return is no longer free money to a bank. This has prompted many banks to shift customers’ deposits into money market funds. Unlike a bank deposit, there are less stringent capital rules for a money market fund, even if the same bank oversees it. Those money market funds need a place to get a return – any positive return is still a return and risk free returns are still risk free, no matter how small – and so are increasingly finding their way into the central bank’s accounts in a world where interest rates are so low for short-term alternatives.

TL;DR is that regulatory arbitrage has encouraged a migration of deposits from formal bank savings accounts to money market accounts. By altering the label on the account, the funds are once again profitable to deposit at the central bank and earn 15 bps as excess reserves, and there are not a lot of alternatives that earn more and are of similar low risk. You would need to buy and hold a 2-year Treasury obligation in order to achieve a better risk-free return, and then you’re exposed to duration/market/inflation/interest rate risk if you want to keep that cash 100% liquid.

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Banks Reserve Accounts go down (pretty much empty) as they move their liabilities (USD) into the Feds Reverse Repo Account for that low rate you’re describing above—-this means there will be deflation—as banks won’t have enough reserves (USD) to make loans ( especially to RWAs such as RE). Enter MakerDAO + DAI to save the day :wink:

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So this is literally losing money business for Maker as the profit can’t be returned to Maker. Isn’t following which said it will give Maker predictable income a false statement then?

"Each trust will only purchase one batch of securities, and proceed to hold them to maturity, providing both Maker and the charity beneficiary with predicable, regularly scheduled income. "

In terms of government protection, there are literally countless organizations and governments buying billions in US Treasuries daily that what Maker does with treasuries won’t make a dent. That will never shield Maker from getting cracked down on.

In terms of good will, might as well use $300k directly to charity via governance if that’s the main objective.

Now reducing USDC exposure in PSM point is interesting but I don’t get why current RWA groups can’t solve that instead of creating new CU. Either way, I will wait to see the Maker holders’ decision. Also I appreciate that you are active in Maker community. Don’t take my criticism personally

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No. The trust pays Maker a stability fee for the financing. It is designed to turn a profit, not lose money. My emphasis that profits aren’t the main goal of this program should not be construed that it will lose money. Maker loans to the trust at X%, the trust buys Treasuries yielding Y%. Maker gets X%, the trust pays for its expenses Z. Then Y-X-Z = what is given to charity. We can make that amount as large or small as we wish, as long as we do not charge the charitable trust more than the yield on the Treasury note.

The goal is to own 5% of the Treasury market, which would be a run-rate of $30B in monthly purchases. For reference, the Federal Reserve currently makes $80B in monthly purchases. In theory, we are limited only by the peg’s appetite to absorb DAI on the market. In practice, this is likely to be used as a peg management tool rather than pushing the peg to its limit. We would begin with smaller amounts and work up from there. Note that the market readily absorbs large amounts of DAI. There was a day last week when 180m DAI were minted, and half of that was the PSM to hold the peg.

At the margin, every million of Treasuries is a million less of USDC.

I think I have failed to articulate that the MPCU is not going to be holding money or making the investments. Its role is to establish the trusts, which can then use financing from Maker. The bulk of the MPCU funding is pay for drafting of trust documents, reviewing them, establishing the trust, etc. The MPCU is more akin to a loan officer than a wealth manager.

The trusts then pay Maker a stability fee for that money, which is paid for by the purchase of fixed-income securities – in this case Treasuries, though if the DAO wanted more yield in exchange for risk, there are other things we could buy. I prefer to start with the goal of making the next billions of stable backing a positive-yielding Treasury instead of 0% yielding USDC.

The goal is for tens of millions to go to charity, tens of millions to go to Maker, and to give us stable asset backing aside from USDC. It’s a simple structure that touches upon a lot of areas, so I feel that I’ve not done a good job explaining how this purchase program would work following the parallel threads of peg management, stable revenue, PR/lobbying.

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Ok, now I see how it can be profitable

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@PaperImperium

I can see the appeal of having something like this, but I want to echo these words of wisdom:

Crawl, walk, run

Custodying all sorts of securities, treasuries, etc., can bring about its own tangled web of a regulatory nightmare, imo.

Also, I want to note… I noticed a mention of off-boarding risk assessment. I believe part of our entire ethos is assessing risk in-house. I mean, look at how we caught the Polygon risks.

I don’t see Maker as this like… “hedge fund” which is presiding over managing all sorts of assets, securities, financial derivatives for generating revenue. I don’t think it’s what meant to be… and again, invites a whole regulatory mess.

We shouldn’t rush into generating yield from any and every direction, especially when it involves tradfi assets. I’m open to the idea of bringing in all sorts of RWAs, and we’ll need to, but in a very measured careful way.

Crawl, walk, run

:innocent:

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Don’t worry. I want to off-board Risk assessments to the Risk CU, as opposed to the MPCU. That’s different from how RWF does it, so I want to make it clear that risks would be assessed in the same manner they are for crypto collaterals. A return to a tradition that has served Maker well

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As an update, it has been confirmed that there should be no legal hangups with this general structure, and should cost ~$8k to draft documents + ~$2k to have a second firm review them.

The big hurdle appears to be finding a trustee without a blanket “no crypto” policy, but I believe we already have one whose fees run a flat $7500/year for the first $5m in assets, then 10 bps up to $15m, then 7.5 bps up to $25m. They can prepare and file taxes for $1250/year for each trust. They have also expressed an openness to discounts for regular business, particularly as this structure would require less effort to administer than many complex trusts.

If the MPCU is approved, it is estimated to take around 8 weeks to get the first trust operational. Subsequent trusts should be both even less expensive and even quicker to establish.

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Great! We should be experimenting with different structures that can grow MakerDAO in a safe and efficient manner,

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I have stated publicly at least twice that it is inappropriate for a CU facilitator to also be a delegate. Separation of powers within Maker is also one of the pressing challenges I introduced during my Meet The Delegates Q&A.

After some personal reflection, I want to lead by example.

Now that delegation has arrived, it would be hypocritical of me to simultaneously stand as a delegate and present myself as the inaugural facilitator for a new CU.

While I feel this CU would provide a valuable tool for peg management and integration with the real world, it is important that I adhere to my own pledges and commitments — particularly with regard to governance quality.

I am withdrawing this and related proposals from formal submission.

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