MIP6 Collateral Onboarding Application: Stable+; US Treasury Securities Between 2 and 10 Years Duration

1. Who is the interested party for this collateral application?

@GFX Labs; @PaperImperium

2. Provide a brief high-level overview of the project, with a focus on the applying collateral token.

MakerDAO holds more than $3,830,000,000 in minimally-diversified, zero-yielding stablecoins (USDC, USDP, soon GUSD) in its Peg Stability Modules. This presents reputational risk to Maker as a “wrapper for USDC” and existential credit and counterparty risk with regard to the issuers of Circle and Paxos (and possibly Gemini in the future). The stablecoins issued by these entities are themselves generally backed by short-dated-maturity direct US Treasury obligations, but pass on zero yield to Maker and are concentrated enough that there is existential risk should Paxos or Circle blacklist Maker’s addresses for any reason. From the perspective of capital preservation, the large exposure to USDC and USDP should be managed to lower risk of capital loss.

Unfortunately, the number of fiat-backed stablecoin issuers available to diversify this risk and still function as a stabilizer for the DAI<>USD fixed exchange rate is small. The solution is to diversify these stablecoin holdings – which are ultimately rehypothecated tbills and cash equivalents – so that excess funds do not increase counterparty and credit risk when unneeded for peg stabilization.

Risk USDC Stable+
Can Blacklist? Yes No
Unprofitable Issuer? Yes No
Competitor? Yes No
Solvency Exposed To Crypto Market Risk? Yes No
Important Counterparty Exposed To Crypto Market Risk? Yes No
Positive Yield? No Yes
Formal Agreement With MakerDAO? No Yes
Treasuries As Primary Underlying Asset? Yes Yes

To lower the risk exposure of MakerDAO to other stablecoin issuers which are also competitors, GFX Labs will create a bankruptcy-remote BorrowCo (proposed name Stable+). Stable+ will use its line of credit from MakerDAO to purchase direct US Treasury obligations from 2 years to 10 years in maturity. Purchases will be made on a regular schedule with the target of having ample liquidity to replenish the MakerDAO PSMs should they experience outflows beyond a level determined by Maker governance.

This will reduce the exposure to Circle, Paxos, and (soon) Gemini by adding a fourth intermediary that holds the same or similar pool of underlying collateral, and unlike stablecoin issuers, remit some of that yield back to MakerDAO in the form of stability fees. The goal is similar to the use of the Gelato UNI USDC/DAI tokens – diversify direct counterparty risk while creating non-zero yield on what is ultimately the similar underlying collateral.

Additionally, the flow of funds will be structured such that any effect upon the market price of DAI and USDC/USDP should be sterilized, preventing distortions that could simply refill the PSM, unlike direct deployment of USDC/USDP reserves in on-chain markets, which at any meaningful scale would introduce pressure on the USDC/USDP side of the peg with DAI.

The simple nature of operations should allow for low-bandwidth monitoring and evaluation by the DAO. No deal pipeline or personal relationships or confidential information will need to be managed. Data on Stable+ holdings can even be made available regularly to @Makerburn so that the public can see the exact portfolio backing the DAI MakerDAO provides.

3. Provide a brief history of the project.

This is a new project, and will only be launched upon approval by MakerDAO governance.

4. Link the whitepaper, documentation portals, and source code for the system(s) that interact with the proposed collateral, and all relevant Ethereum addresses. If the system is complex, schematic(s) are especially appreciated.

Very little on-chain activity will occur except the flow of funds into and out of the vault, which is detailed in the RWA supplemental section below.

5. Link any available audits of the project. Both procedural and smart contract focused audits.

Regular verification of the Stable+’s holdings can be made whenever the RWF or appropriate MakerDAO core unit requests. All securities will be custodied directly at the US Treasury and will not normally involve a third party broker.

6. Link to any active communities relating to your project.

N/A

7. How is the applying collateral type currently used?

Medium-duration direct US Treasury obligations are utilized as a “risk free” rate of return in traditional finance, and also function as popular sources of collateral. They also produce non-zero yield.

8. Does one organization bear legal responsibility for the collateral? What jurisdiction does that organization reside in?

The United States Treasury bears legal responsibility for all Treasury obligations, and are backed by the full faith and credit of the United States government. Stable+ will hold a portfolio of these obligations (typically to maturity), which will be custodied directly at the US Treasury with no intermediary to minimize risk. Both US Treasury and Stable+ will be subject to US laws and regulations; US Treasury debt instruments are also issued under and subject to US laws and regulations.

9. Where does exchange for the asset occur?

Stable+ will directly participate in auctions for medium-dated Treasury securities – typically 2-year, 3-year, 5-year, 7-year, and 10-year notes. These securities will be custodied directly at the US Treasury on Stable+’s behalf.

10. (Optional) Has your project obtained any legal opinions or memoranda regarding the regulatory standing of the token or an explanation of the same from the perspective of any jurisdiction? If so, those materials should be provided for community review.

Any token will simply be a placeholder to interact with the MakerDAO smart contracts.

11. (Optional) Describe whether there are any regulatory registrations for the token and provide related documentation (including an explanation of any past or existing interactions with any regulatory authorities, regardless of jurisdiction), if applicable.

Any token will simply be a placeholder to interact with the MakerDAO smart contracts.

12. (Optional) List any possible oracle data sources for the proposed Collateral type.

Aside from a variety of private and public market feeds, the US Treasury regularly updates the daily market yields on most of its securities based on auction and secondary market data.

13. (Optional) List any parties interested in taking part in liquidations for the proposed Collateral type.

US Treasury securities are the most liquid securities in the world, and ready buyers are available on the secondary market. However, liquidation could present losses if rates have risen since purchase, resulting in a lower price-to-face value of the security. These securities are not intended to be sold before maturity, but a forced unwinding could potentially result in realized gains/losses if interest rates change.

The following questions apply to RWA collateral onboarding applications only:

14. Provide (a) proposed legal structure for transaction, including: type of legal entities, (offshore/onshore, form (trust, corporate, other)) and jurisdiction(s) of legal entities, and (b) likely funds flow (DAI => Fiat => DAI).

(a) GFX Labs will create a bankruptcy-remote BorrowCo (proposed name: Stable+). This is envisioned to be a US-based LLC or functional equivalent, which can then interact legally to borrow from and assign creditor rights to MakerDAO’s RWA Foundation in the Caymans or some other entity of MakerDAO’s choosing (perhaps a new trust that has not yet been established). Another option is to utilize an instruction agreement, similar to what may be utilized with other traditional financial counterparties MakerDAO is evaluating.

Due to the simple, mechanical nature of operations, originations, and flow of funds, minimization of complexity risk is highly desired.

GFX Labs is open to input from the MakerDAO RWF core unit(s) on alternative methods of legally structuring the agreement, but has a strong preference to minimize risk arising from complexity.

(b) Flow of funds are anticipated to be:

  1. Stable+ generates DAI from Maker vault (on chain)
  2. Stable+ swaps DAI for USDC or USDP via the Maker PSM (on chain)
  3. USDC or USDP will be directly redeemed from the issuer for USD deposited into Stable+’s bank account (on chain/off chain)
  4. USD from Stable+ is then used to directly participate in US Treasury auctions (off chain)
  5. US Treasury securities owned by Stable+ as collateral are custodied at US Treasury until maturity (off chain)
  6. USD remitted from US Treasury to Stable+’s bank account (off chain)
  7. Stable+ either directly purchases DAI on the market OR mints USDC/USDP through the issuer and swaps for DAI in the Maker PSM (off chain/on chain)
  8. DAI is used by Stable+ to repay the Maker vault (on chain)

This flow of funds is meant to minimize risk of loss in transit and only interacts with smart contracts directly under MakerDAO’s control. This flow of funds also ensures that neither DAI nor USDC/USDP are sold into the market, potentially causing distortions that could affect flows into/out of the PSMs. It also eliminates potential loss from slippage in the exchange rate.

15. Provide details on the organizational structure of the interested party, beneficial ownership, governance/control, key personnel, capital/funding resources and past financial performance.

Stable+ will be owned by GFX Labs, but structured to be bankruptcy remote from the parent company. It is likely that Stable+ will be formed as an LLC or similar structure in a favorable US jurisdiction like Delaware.

Key contacts are likely to include @PaperImperium and Getty Hill. GFX Labs will provide capital for Stable+ to invest alongside MakerDAO to meet overcollateralization requirements, and Stable+ will be responsible for its own expenses, taxes, legal, and other obligations.

16. Provide detailed summary of the proposed economic terms of the transaction, including, without limitation: commitment term, principal amount, interest rate, frequency of principal and interest payments, disbursement schedule, equity amount, funding ratios (equity/debt pro rata, equity first, etc.), collateral security, coverage ratios, currency (if not DAI) and other material terms. The quality of the proposed economic terms will be a consideration for the prioritization process.

GFX Labs is requesting that Stable+ be granted the following terms:
Stability Fee: 0.5% (fixed)
Collateralization Ratio: 102%
Disbursement Schedule: Escalating; variable dependent upon MakerDAO’s diversification needs (table provided as example only)

Depending upon Maker’s needs to diversify away from Circle, Paxos, and other treasury-backed stablecoins, the example schedule above can be accelerated or decelerated.

The collateralization ratio is identical to that accepted by the US Federal Reserve for Treasury securities dated up to and including 10 years.

The current Fed funds rate is hovering at 0.08% and SOFR (the short term rates for treasury-secured debt) ranges from -0.01% in the lowest 1% by volume up to 0.05% in the 75th percentil by volume.

The stability fee is designed to provide a small net interest margin to cover the expenses of the Stable+’s operations and modest return on the capital invested by GFX Labs to provide the collateralization ratio. The most recent yields on a variety of Treasury securities can be seen in the table below. Stable+ would target a portfolio of maturities from 2 to 7 years, and possibly 10 years.

Should the interest rate environment allow an increase in stability fee, that increase would only be on new – and not outstanding – DAI debt. This likely would require the creation of a new vault with its own debt ceiling while allowing the previous vault to be closed as older securities mature.

17. Identify in reasonable detail the risks associated with this collateral application and the underlying asset(s) and proposed mitigants (if any). The risk summary should address, without limitation and to the extent relevant: market risks, commercial risks (e.g., diversification, credit, etc.), interest rate risks, legal and regulatory risks, general industry risks, competition, etc.

Three parties would bear potential risks, and will be addressed in turn.

GFX Labs bears the risk of reputational damage in the event of unforeseen circumstances leading to some kind of losses stemming from operational mismanagement (such as DAI lost in transit or inability to purchase securities).

At 102% collateralization ratio, GFX Labs would bear capital losses before Maker. This will be mitigated by utilizing the “crawl, walk, run” philosophy as outlined by 6S, and is the primary reason to gradually ramp up monthly allocations. Treasury notes also are considered to have zero default risk.

Stable+ bears primarily smart contract risk. There is always a non-zero chance funds can be lost in transit or due to misbehaving smart contracts. GFX Labs’ policies on fund movements on-chain follow best practices and would be duplicated, as would be expected by former traders experienced with on-chain transactions. The only smart contracts that will be interacted with are the Maker vault and the Maker PSM, both of which are under the direct control of Maker governance.

Stable+ also faces the small possibility that it could be targeted as part of an enforcement action against MakerDAO, but being a completely separate entity (borrower and not core unit) should mitigate any residual regulatory risk stemming from MakerDAO.

MakerDAO’s main risk is of capital loss. Should the US government or Stable+ be unable to repay its debts, Maker would experience a capital loss. Treasury notes are considered to have zero default risk.

Maker also faces peg risk when large amounts of DAI and USDC/USDP enter the crypto economy, but this will be mitigated by preventing any DAI or USDC/USDP from entering the DeFi ecosystem.

18. Outline the applicant’s underwriting guidelines/policies, origination strategy (marketing, sales, channels), servicing strategy (charge-offs, collections), and historical asset performance.

The origination strategy is to target medium-duration Treasury notes. Historically, this security has zero defaults, and the main risk is inflation risk. Given Maker’s near-zero cost of capital, it can lend profitably against ultra-safe capital for any nominally positive yield.

19. Outline the applicant’s risk monitoring and operations guidelines/policies (e.g., charge-offs, collection, recovery provisions, data collection and technology, etc).

Only medium-dated Treasury securities will be purchased with this borrowed funding from MakerDAO. The entirety of the portfolio will also be custodied directly with the US Treasury Department, making it easy to monitor and provide proof of collateral to the RWF core unit(s) on whatever schedule is required.

Because the portfolio is intended to be laddered for liquidity and held to maturity for rollover or redemption, Stable+ will not elect to utilize mark-to-market accounting, and will report all Treasury securities at face value.

20. Describe the regulatory regime applicable to the underlying asset (if any) and the applicant’s legal and compliance program relating thereto.

US Treasury securities are lightly regulated – generally requiring only KYC and cash for purchase. US government securities enjoy a number of exceptions to securities laws as well (e.g. does not require a broker to purchase). Aside from federal taxes, there is minimal legal or compliance work expected to be required of Stable+.

21. Identify any 3rd party persons likely to be relied upon by applicant to implement the transaction (legal, accounting, servicers, trustees, etc.).

Stable+ will have a limited scope of business activities and operations. This mainly consists of movement of funds, participation in US Treasury auctions, and standard business requirements such as filing taxes.

Circle, Paxos, or a future stablecoin issuer that offers redemption to US dollars will be relied upon to transition between on-chain and off-chain without risk of slippage.

Supplemental Consideration

The collateralization of 102% and Stability Fee of 0.5% have precedent within MakerDAO’s system, and this proposal for GFX Labs to form a Stable+ is in line with or superior to historically accepted risk parameters.

Comparable collateral assets include the Gelato UNI USDC/DAI (0.05% pool) tokens, which enjoys a 102% collateralization and includes intermediaries of Gelato, Uniswap, and Circle. Gelato tokens also have a fee of 0.1%, and are meant to serve a similar purpose as Stable+’s proposal – to distribute outward some of the blacklisting and other counterparty risk while generating non-zero yield. Stable+ provides additional diversification, but rather than layering more intermediary smart contracts on top of USDC, it does so by replacing Circle/Paxos as the intermediary between MakerDAO and Treasury securities.

USDC and USDP themselves, within the PSM, are treated as worth face value as well, with an effective collateralization ratio of 100%. Circle and Paxos notably hold a portfolio whose safest components are the shorter-dated versions of the securities Stable+ seeks to purchase in this proposal. Stable+’s proposal replaces a block of 100% collateralized, 0% yield lending against Treasuries with 102%, 0.5% yield against Treasuries while also diversifying counterparty risk.

MakerDAO also lends at 0% fees against two UNI LP tokens – DAI/USDC and WBTC/DAI. The former is similar to the Gelato UNI USDC/DAI and Stable+ proposal in that it serves to diversify direct counterparty risk. The latter boasts a 140% collateralization ratio but still provides no yield to MakerDAO to compensate for any risk or opportunity cost.

ETH-C, which lends against ETH at highly collateralized ratios accepts a 0.5% fee as well.

Like other real-world assets approved by MakerDAO or the Dai Direct Deposit Module, Stable+ will utilize a “mint first” approach that relies upon legal safeguards to draw DAI to purchase the underyling collateral and/or develop it to unlock value. In this case, it is less complex than the former examples, but chronologically slower than the latter. Stable+ relies upon the inexhaustible supply of US government debt securities and the short credit chain of MakerDAO>Stable+>United States Treasury to ensure drawn DAI can be deployed in a timely fashion.

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For long dated securities held to maturity, we need to be very cautious about raising the debt ceiling. If the stability fee is set to 0.5% then we will be paying out a subsidy if we want to raise the Dai Savings Rate (DSR) above 0.5%. For example, suppose we invest $1B in 10 year securities at 0.5%. If we raise the DSR to 1% then we’d be net paying out 0.5% on 1B DAI.

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