1. Who is the interested party for this collateral application?
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 (short-dated US Treasury debt that ranges from 0 to 12 months in duration) and cash equivalents – so that excess funds do not increase counterparty and credit risk when unneeded for peg stabilization.
|Solvency Exposed To Crypto Market Risk?||Yes||No|
|Important Counterparty Exposed To Crypto Market Risk?||Yes||No|
|Formal Agreement With MakerDAO?||No||Yes|
|Treasuries As Primary Underlying Asset?||Yes||Yes|
To lower the risk exposure of MakerDAO to centralized stablecoin issuers which are also competitors to MakerDAO, 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 up to 12 months in maturity – commonly referred to as tbills. 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 same 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 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 involve a third party broker, ensuring the shortest possible chain of credit while still housing the collateral in an entity that is unlikely to be subject to any legal risk related to MakerDAO’s core business activities.
6. Link to any active communities relating to your project.
7. How is the applying collateral type currently used?
Short-dated US Treasury obligations are typically tbills with maturities of several days to 12 months. They are sold at a discount, and upon maturity can be redeemed for face value. They are heavily utilized as the collateral of choice in traditional finance, as they are considered to be close to risk free.
They are also utilized by corporate treasuries to hold cash, because bank deposit insurance does not cover amounts that are material to large businesses – meaning that tbills serve as a substitute for bank accounts because they do not carry the counterparty risk of a bank’s failure or decision to sever relations. Thus, corporate entities utilize tbills in order to reduce existential exposure to banking counterparties, just as MakerDAO would utilize them to reduce existential exposure to the issuers of USDC and USDP.
These two factors combine to create the level of demand that has held borrowing rates low for the US government in recent years.
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 short-dated Treasury securities. These securities will be custodied directly at the US Treasury on Stable+’s behalf.
(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.
10. (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.
11. (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.
12. (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. Alternatively, the portfolio will target regular maturities, with a maximum time-to-maturity of 12 months on any given security, allowing for a complete unwinding of the portfolio within 12 months’ time.
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, currently proposed to be named 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, but the specific mechanisms are negotiable.
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:
- Stable+ generates DAI from Maker vault (on chain)
- Stable+ swaps DAI for USDC or USDP via the Maker PSM (on chain)
- USDC or USDP will be directly redeemed from the issuer for USD deposited into Stable+’s bank account (on chain/off chain)
- USD from Stable+ is then used to directly participate in US Treasury auctions (off chain)
- US Treasury securities owned by Stable+ as collateral are custodied at US Treasury until maturity (off chain)
- USD remitted from US Treasury to Stable+’s bank account (off chain)
- 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)
- 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: 0.05% (fixed)
Collateralization Ratio: 101%
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 to limit existential exposure to counterparties with no legally binding agreement with MakerDAO.
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 percentile by volume.
The stability fee is designed to provide a small net interest margin to cover the expenses of Stable+’s operations and modest return for GFX Labs to provide the service. The most recent yields on a variety of Treasury securities can be seen in the table below. Stable+ will target a range of maturities between 4 weeks and 12 months, with the primary goal being to preserve capital and liquidity for repayment should the Maker PSMs experience outflows.
Should the interest rate environment allow an increase in stability fee, that increase would only be on new – and not outstanding – DAI debt. This may 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 101% collateralization ratio, GFX Labs would bear capital losses before Maker. This will be mitigated by utilizing the “crawl, walk, run” philosophy as outlined by the 6S operational philosophy, and is the primary reason to gradually ramp up monthly allocations. Tbills 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 smart contract risk. GFX Labs’ policies on fund movements on-chain follow best practices 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 most residual regulatory risk stemming from MakerDAO.
MakerDAO’s main risk is capital loss. Should the US government or Stable+ be unable to repay their debts, Maker would experience a capital loss. Tbills 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 a portfolio of various maturity tbills, with a maximum date to maturity of 12 months. The main risk is inflation risk. Given Maker’s near-zero cost of capital, it can lend profitably against ultra-safe collateral for any nominally positive yield. Tbills are considered to have zero default risk, though in 1979, one issuance of tbills was unexpectedly defaulted upon due to unprecedented failure of word processing programs that were necessary to compile information for checks to be mailed to individual investors. US Treasury made the payments over the following days. This is the only known default of US federal debt in more than 200 years.
19. Outline the applicant’s risk monitoring and operations guidelines/policies (e.g., charge-offs, collection, recovery provisions, data collection and technology, etc).
Only short-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 to 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.
The general parameters of collateralization at 101% and Stability Fee at 0.05% have similar precedents 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 currently 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+ also 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 short-term 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 same underlying securities Stable+ seeks to purchase. Stable+’s proposal replaces a block of 100% collateralized, 0% yield lending against Treasuries with 101%, 0.05% 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.
Like other real-world assets approved by MakerDAO, Stable+ will utilize a “mint first” approach that relies upon legal safeguards to draw DAI to purchase the underlying collateral and/or develop it to unlock value. In this case, it is less complex than existing real-world asset arrangements. 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.