DigiFT Research Report: Two Paths for MakerDAO to Implement RWA – Offline Trust and On-chain RWA

DigiFT Report: Two Options for MakerDAO to Implement RWA - Offline Trust and On-chain RWA


Fixed-income products were the first to emerge in Web3, driven by demand from DAOs and Web3 companies for treasury management. The RWA track has also taken the top spot in TVL with tokenized sovereign debt projects.

Combined with RWA, assets held by DAOs can maintain high liquidity while providing stable and low-correlation returns to on-chain activity, achieving better income while diversifying risk.

The governance and operations of DAOs are not necessarily more efficient than those of traditional corporate structures. MakerDAO, for example, incurs high costs in purchasing national debt ETFs through complex trust structures.

By contrast, it is more efficient and feasible for DAOs to purchase RWA tokens issued by professional/compliant asset issuers and put them on the chain.

RWA Enters the Crypto Mainstream

Against the backdrop of the crypto winter and US dollar interest rate hikes, a new wave of DeFi innovation is coming, but the revenue of crypto-native DeFi protocols has plummeted, and even their stable income rates are far lower than US bond yields, the so-called “risk-free interest rate.” Many DeFi projects are turning their attention to real-world assets (“RWA”) outside the encrypted world. The earliest DeFi protocol to enter the RWA track was MakerDAO. As early as 2020, MakerDAO built an RWA vault with 6s capital, a real estate development secured loan project, and cooperated with RWA-based lending platform Centrifuge to tokenize collateral. MakerDAO lists this type of token as one of the collateral for stablecoin Dai, achieving diversification of collateral. MakerDAO’s Endgame plan, released in May 2022, also emphasizes that one of the key parts of MakerDAO’s construction of decentralized stablecoins is to use RWA as collateral.

Recently, major DeFi protocols have been laying out their strategies in the RWA track. In June 2023, Robert Leshner, founder of Compound, established a new company called Superstate and submitted an application to the SEC to create a short-term US Treasury bond fund on Ethereum. MakerDAO’s MIP65 (MakerDAO Improvement Proposal, “MIP”, MIP65 proposes deploying some of MakerDAO’s funds to invest in short-term bond ETFs) passed a new proposal in May of this year, raising the cap of the vault from $500 million to $1.25 billion and purchasing the corresponding amount of bond ETFs in the coming months. In addition, many traditional financial giants, including Goldman Sachs and Citigroup, have expressed a keen interest in the RWA track and many have already entered the market.

In June 2022, Clearpool removed TPS Capital’s lending pool, while Clearpool’s data partner X-Margin downgraded TPS Capital’s rating to B and lowered the borrowing limit to $0. Clearpool and X-Margin announced they will work together to ensure TPS Capital returns its borrowing funds and ensure users do not suffer losses.

Before the avalanche, the world was silent until the last snowflake fell. The loss of tens of millions of dollars is a heavy lesson for the future of RWA developers, who must pay more attention to risk control, compliance processes, and legal frameworks.

What is RWA?

RWA refers to various assets that exist outside the blockchain, but can be tokenized and combined with existing DeFi protocols in certain ways. Currently, the main RWA projects are mainly concentrated in the following types:

Bonds, including private bonds, corporate bonds, and government bonds

– Equity

– Real estate

– High-value collectibles

– Carbon credit scores

We believe that the earliest RWA products to enter DeFi are bond-type products, including government and corporate bond products. The demand side is mainly based on DeFi protocols adopting RWA and Web3 protocol treasury management. According to DefiLlama data, the RWA project with the top TVL is the US Treasury tokenization platform (OpenEden and MatrixDock), followed by real estate-related RWA platforms (Tangible and RealT). However, the total volume of tens of billions of dollars is still relatively small compared to both the DeFi and the entire Tradfi field, and there is huge room for growth.

Figure 2: TVL of RWA projects, source: DefiLlama, data as of 2023.07.10

The driving force behind RWA

Overall, existing DeFi protocols mainly apply RWA assets to three channels: 1) treasury fund management, and some of MakerDAO’s RWA demand comes from this; 2) used as collateral, such as MakerDAO and Solana’s stablecoin protocol UXD Protocol; 3) introduce new asset types to the DeFi scene, such as Curve (MatrixDock STBT) and Flux Finance (Ondo Finance OUSG).

DeFi protocols introduce RWA from multiple sources, including:

– On-chain asset management demand

– On-chain asset management seeks stable income and good liquidity. Real-world products such as government bonds are widely recognized investment targets due to their relatively stable returns and high liquidity, belonging to the asset category worth trillions of dollars.

– Alternative sources of income

– On-chain native income mainly comes from Staking/Trading/Lending. When the cryptocurrency market is highly volatile, the profitability will decrease if the on-chain financial activities decline. In the current market situation, the returns of mainstream on-chain platforms are even lower than US Treasury bonds. If seeking alternative income that is less correlated with on-chain native assets, introducing RWA-related assets is undoubtedly a good choice.

– Diversified investment portfolio

– On-chain assets are relatively single in type, highly correlated, and have high volatility. Introducing more stable RWA assets that are not highly correlated with on-chain native assets can achieve hedging purposes and form more diversified and effective investment portfolio strategies.

– Introducing diversified collateral

– The high correlation of on-chain assets makes it easy for lending agreements to be crowded out or liquidated on a large scale, further exacerbating market volatility. Introducing RWA assets that are less correlated with on-chain assets can effectively alleviate such problems.

Below we take MakerDAO as an example to analyze in detail how DeFi protocols apply RWA (as collateral).

In-depth analysis of MakerDAO RWA application

MakerDAO is a decentralized autonomous organization (DAO) dedicated to creating and managing the Ethereum-based stablecoin Dai. Users lock Ethereum (ETH) as collateral to generate stablecoin Dai. The goal of Dai is to maintain an anchor relationship of 1:1 with the US dollar and stabilize its value through smart contracts and algorithms. Due to the high volatility of the cryptocurrency market, a single collateral can easily lead to large-scale liquidation, so MakerDAO has been trying to diversify its collateral, and introducing RWA is an important means, even written into the Endgame plan proposed by MakerDAO Co-founder Rune Christensen.

Figure 3: Current status of Dai, source: daistats.com, data as of July 10, 2023

The above figure shows the total amount of Dai (about 4.65 billion), and MakerDAO’s upper limit is set at 6.2 billion. The composition of Dai’s collateral has achieved relatively diversified coverage, including some RWA and various stablecoins.

Risk of Single Collateral

On March 12, 2020, the financial market crashed due to the financial crisis caused by the pandemic, and the US stock market experienced continuous circuit breakers. As a marginal segment of the financial market, the cryptocurrency market plummeted even faster. MakerDAO, one of the top DeFi protocols on the Ethereum chain, was also greatly impacted. On the one hand, due to the limited capacity and congestion of the Ethereum network, liquidators were unable to liquidate risky accounts in a timely manner; on the other hand, some borrowers of the stablecoin Dai needed to buy Dai to repay their debts and withdraw the collateral assets, resulting in an increase in demand for Dai in the market and further increasing the difficulty of liquidation. Under multiple factors, MakerDAO suffered bad debt of up to 5.67 million US dollars. In the end, MakerDAO had to raise 5.3 million US dollars by issuing 20,980 MKR tokens in late March 2020 to make up for the bad debt.

MakerDAO Endgame Plan

After experiencing such events, MakerDAO also continuously tries to diversify the collateral. The goal of the MakerDAO system is to gradually establish a decentralized stable currency, and to build a currency system, assets that currently have consensus are needed as collateral, borrowing their credit. Native cryptocurrencies are naturally an important component of collateral, but fundamentally, native crypto assets have a high degree of correlation, and it is difficult to achieve collateral diversification only through crypto assets. To diversify the risk of the current cryptocurrency market, MakerDAO introduced some RWA assets as collateral for the stablecoin Dai.

MakerDAO Endgame is a series of MakerDAO’s future ideas and plans proposed by MakerDAO co-founder Rune Christensen in May 2022, in which plans for the path to building a decentralized stable currency are outlined. This ultimately requires two types of collateral: decentralized assets that can guarantee fair physical properties, and real-world assets that can provide reliable liquidity and stability. At the same time, it is necessary to demonstrate the benefits that DeFi, Maker, and Dai stablecoins can bring to the world, allowing the world economic system to gradually integrate with DeFi and adopt Dai as a payment and settlement tool.

The Endgame plan is divided into three stages, and the three stages are divided based on the collateral composition, ultimately turning Dai into a stable currency:

– Pigeon mode (current state): No restrictions on RWA as collateral, stablecoin Dai anchored to the US dollar

– Hawk mode: Negative target interest rate for Dai, free-floating

– Phoenix mode: Except for RWA with physical elasticity, there are no other types of RWA in the collateral of stablecoin Dai

For each stage in the specific plan, the specific proportion of collateral is designed, which can be referred to the original text and will not be repeated here.

Endgame Plan v3 complete overview – Legacy / Governance – The Maker Forum (makerdao.com)

Current components of MakerDAO RWA

Throughout the history of currency, the currency adopted by humans has evolved from commodity currency, which uses a scarce resource that forms a consensus as an equivalent, such as shells, gold, etc., to later issuing paper currency using scarce resources with consensus as collateral, such as reserve gold issuing paper gold, and developing to the current credit currency issued based on military strength, such as the US dollar. Although MakerDAO’s Dai has a volume of tens of billions, it is still small in a larger dimension. It needs to borrow the credit of other assets and highlight its advantages to gradually consolidate its position. In the Endgame plan proposed by the co-founder of MakerDAO, RWA is also introduced as a transition: in the case where the encrypted asset world is not solid enough, real-world assets are needed as an anchor. According to MakerBurn’s data, there are currently a total of 11 RWA projects, with US$2.12 billion in assets as collateral for MakerDAO.

Figure 5: MakerDAO RWA collateral data, source: MakerBurn.com, data as of July 10, 2023

According to the Dune data panel, the income brought by these RWA assets has greatly increased MakerDAO’s profits. Currently, RWA accounts for about 40% of MakerDAO’s total assets and contributes more than 50% of its revenue.

Figure 6: MakerDAO asset composition, source: Dune.com, data as of July 10, 2023

The blue part in the middle on the right is the proportion of RWA, which is currently 41.5%.

Figure 7: MakerDAO protocol profit, source: Dune.com, data as of July 10, 2023

In the protocol profit composition of MakerDAO, the profit from RWA accounts for 51.1%. Therefore, in June 2023, MakerDAO proposed to increase the Dai Saving Rate (the risk-free interest rate of Dai) from 1% to 3.49%, providing attractive returns for Dai holders.

RWA of MakerDAO can be divided into four parts by type:

– RWA 001, 6s capital, provides real estate loans.

– MIP81, RWA014, a proposal submitted by Coinbase Institutional in September 2022, invests part of the USDC held by MakerDAO in Coinbase USDC Institutional Rewards, providing 1.5% APY based on USDC.

– Assets tokenized by decentralized lending platform Centrifuge, purchased by MakerDAO include New Silver (real estate loans), BlockTower (structured credit), etc.

– MIP65, named Monetalis Clydesdale, RWA007, proposed by Monetalis, used stablecoins held by MakerDAO to purchase short-term bond ETFs. In October 2022, it was first passed by proposal (USD 500 million), and later in May 2023, the debt limit was raised (to USD 1.25 billion).

6s capital and Coinbase are separate collaboration cases, this article will focus on the Centrifuge and Monetalis Clydesdale parts, to explore how DeFi protocols combine with RWA. The related issues involved are not only technical solutions and business models, but also governance architecture, legal framework, and asset ownership.

How can DAO buy government bonds? MakerDAO’s Monetalis Clydesdale project

MIP65, named Monetalis Clydesdale, proposed by Monetalis founder Allan Pedersen in January 2022, was passed and implemented in October 2022. The goal was to invest part of the stablecoins held by MakerDAO in liquid and low-risk bond ETFs, with an initial debt ceiling of USD 500 million, and the ceiling was subsequently raised to USD 1.25 billion through a follow-up proposal in May 2023.

In the discussion of the community in MIP13 proposed in February 2022, about 60% of MakerDAO’s balance sheet was various stablecoins (using the Peg Stability Module (“PSM”) mechanism to ensure the value stability of Dai, with reserves mainly in USDC), and for the past 18 months, more than 50% of assets have been stablecoins, but they have not generated profits for MakerDAO. The counterparty risk mainly comes from Circle (the issuer of USDC), and the community hopes to invest stablecoins in some way to obtain profits and diversify risks, including the idea of investing in short-term US government bonds.

Later, 71.19% of MKR token holders who participated in the MIP65 proposal vote supported the proposal, which was ultimately passed. MIP65 will launch an RWA-related treasury, investing funds from the MakerDAO PSM mechanism into high liquidity bond strategies through trusts.

Among them, Monetalis is a consulting firm founded by Allan Pedersen and Alessio Marinelli, providing consulting services and solutions to traditional finance and DeFi institutions. Both founders have extensive experience in traditional finance, consulting, and venture capital firms. Monetalis’ investors include UDHC, Dragonfly, and MakerDAO co-founder Rune Christensen.

The overall business architecture of the proposal is as follows:

– MakerDAO delegates Monetalis to design the overall architecture through a vote, and Monetalis needs to periodically report to MakerDAO

– Monetalis, as the project planner and executor, designs the overall structure of the trust, including

– Riverfront Capital (SHRM Trustee (BVI) Limited) is the only director.

– Hatstone (Fiduciary Group Limited) acts as the transaction manager, and transactions of the trust must be approved by the company.

– Belvaux Management Ltd is the trust executor, ensuring that the trust operates according to its objectives.

– MakerDAO MKR token holders are the overall beneficiaries and can purchase and dispose of trust assets through governance instructions;

– James Asset (PTC) Limited (“JAL”) is the trustee;

– Coinbase provides exchange services for USDC and USD.

– Sygnum Bank provides trading and custody of trust assets, and sets up another account for trust operating expenses.

– Funds are used to invest in two types of ETF products, iShares US$ Treasury Bond 0-1 yr UCITS ETF and iShares US$ Treasury Bond 1-3 yr UCITS ETF by Blackrock.

Among them:

– JAL is the shell company that holds the trust and is a newly established company in the BVI.

– Riverfront Capital (SHRM Trustee (BVI) Limited) is a company established in the 1990s that provides professional trust services.

– Hatstone (Fiduciary Group Limited) has total assets of over $1 billion and provides fund management, corporate services, and fund investments.

– Monetalis, as the project manager commissioned by MakerDAO, sets up the overall architecture. The situation of Monetalis will not affect the assets of MakerDAO. Monetalis receives a management fee of 0.15% per year, paid quarterly.

– Sygnum Bank is the world’s first regulated digital asset bank and a global digital asset expert headquartered in Switzerland and Singapore. Its products include regulated cryptocurrency trading. With Sygnum Bank AG’s banking license in Switzerland and Sygnum Pte Ltd’s capital markets services (CMS) license in Singapore, Sygnum enables institutional investors, qualified private investors, corporations, banks, and other financial institutions to invest in the digital asset economy with complete trust.

Figure 8: Monetalis project trust structure, source: DigiFT Research

The purchase process is as follows:

Figure 9: Trust operation flowchart, source: DigiFT Research

JAL is the holder of various bank accounts. Each transaction is initiated online and requires approval from both Riverfront Capital (the sole director of JAL) and Hatstone (JAL’s transaction manager).

With this legal structure design, MakerDAO MIP65 can achieve the following goals:

– Third parties or Monetalis have no ability to change the legal terms or access the relevant funds

– Through the trust, MakerDAO MKR holders have the ability to trigger liquidation through community voting and governance

– No single third party has the ability to block MakerDAO’s governance of the trust or modify the terms

– There should be no obvious weaknesses or special circumstances that lead to the misappropriation of funds

– Determine that the trust structure can only purchase specified types and amounts of assets

To realize the DAO-held RWAs, MakerDAO has designed a complex trust structure and new legal regulations, along with high expenses, including an initial $950,000 for various expenses and ongoing payments to various institutions and project managers Monetalis for trust-related expenses.

In addition, MakerDAO’s latest community proposal, Project Andromeda, was proposed by community members at the end of May. BlockTower serves as the project manager and purchases short-term US Treasury bonds, with a debt ceiling of $1.28 billion Dai, further increasing MakerDAO’s investment in RWAs. BlockTower has worked with Centrifuge and MakerDAO multiple times, and the team has rich experience in traditional finance. With the Monetalis process in place, if the MakerDAO community only wants to increase investment in RWAs, the proposal is likely to be passed.

Tokenized Assets included in DeFi Protocol – MakerDAO <> Centrifuge

Centrifuge is a decentralized lending platform that provides a range of smart contracts to create a transparent market for RWA assets without unnecessary intermediaries, enabling decentralized financing of RWA assets on-chain. The ultimate goal of the protocol is to reduce the cost of borrowing for businesses while providing stable RWA collateral for DeFi users.

Figure 10: Centrifuge Fund Flow Diagram, Source: Centrifuge documentation

In fact, the process of issuing assets on Centrifuge is similar to the process of issuing Asset-Backed Securities (ABS). The asset issuance process is as follows:

– The asset originator (such as BlockTower) creates a special purpose entity (SPV) as the issuer for each funding pool, which serves as an independent legal entity for each funding pool. The Centrifuge contract will create a corresponding funding pool on Ethereum and associate it with the corresponding SPV.

– The borrower decides to use some real-world assets as collateral for financing, which can be invoices or real estate.

– The asset originator issues RWA tokens corresponding to the collateral, which are verified and minted as NFTs as on-chain collateral.

– The borrower and the SPV agree on the financing terms; the asset originator locks the NFTs in the Centrifuge funding pool associated with the SPV and extracts stablecoin Dai from the pool’s reserves. Dai can be transferred directly to the borrower’s wallet or converted to US dollars and transferred to the borrower’s corresponding bank account by the SPV.

– The borrower repays the financing amount and fees on the NFT expiration date, either by repaying directly in Dai on-chain or by transferring funds through a bank and converting them to Dai to pay the Centrifuge funding pool through the SPV; once all NFTs are fully repaid, they will be unlocked and returned to the asset originator and can be destroyed.

The SPV is created by the asset originator, and the borrower generally has business contacts with the asset originator.

Figure 11: Centrifuge BlockTower series 4 partial assets, Source: Centrifuge

The image shows the Centrifuge App page, with a screenshot of BlockTower Series 4, and a list of NFTs that serve as on-chain collateral, with each NFT corresponding to an off-chain real-world asset verified by the asset’s initiator, in this case a structured loan.Centrifuge provides tools and a market for projects/users who need to purchase RWA, allowing assets to be embedded in the DeFi world and providing higher returns than the market average, but there are also risks, which come from the borrower as a counterparty.The data shows the types and quantities of Centrifuge platform assets purchased by MakerDAO, as well as the amount of Dai issued using these assets as collateral, sourced from Daistats, as of July 10, 2023.The borrowing data from Centrifuge adopted by MakerDAO is small in relative volume compared to national debt projects, with the largest-scale BlockTower overall just reaching hundreds of millions of dollars. Compared to MakerDAO’s direct purchase of national debt, the advantage of this approach lies in its simplicity of process and the fact that MakerDAO itself does not need to build complex legal structures. In recent community discussions, Centrifuge will charge 0.4% to help these projects obtain loans, and MakerDAO does not need to bear any additional costs. However, due to the higher risk of default for these projects compared to national debt, there is a greater counterparty risk overall, and Centrifuge has not yet experienced any bad debt situations.Conclusion: MakerDAO, as one of the largest DeFi projects, has tried two forms of RWA-related community operations over the years: direct purchase and holding of assets (MIP65) through DAO + trusts, and purchase of tokenized RWA (through Centrifuge), which is currently the best case of combining Tradfi and DeFi. Compared to smaller DeFi protocols, MakerDAO has enough financial strength to achieve direct purchase of national debt by DAO, but the cost is high. MakerDAO has set up an innovative legal structure through a complex trust structure to ensure the safety of assets in the MakerDAO community, bringing RWA returns to Dai and MKR token holders. To this end, MakerDAO has paid upfront costs of $950,000, and Monetalis needs to charge a management fee of 0.15% of the total amount annually, with the other three companies involved in the trust also incurring corresponding costs. Reports suggest that MakerDAO paid approximately $2.1 million for the January 2023 purchase of the first $500 million national debt ETF. This cost is too high for ordinary DeFi projects.

The reason for this can be traced back to the fact that the holders of MKR tokens cannot be fully mapped to the legal framework of the real world. Anonymity, lack of KYC, and different national and regional affiliations (which need to comply with different laws and regulations) make it incompatible with the existing legal framework in the real world, in order to ensure the safety of token holders’ assets (especially off-chain assets). Therefore, such a complex legal framework is designed to achieve the purchase of national debt ETFs. Whether this legal framework will have problems remains to be seen.

For most DeFi protocols and project parties, they do not have the energy, resources, and ability to build a complete system. The second way to directly purchase tokenized assets will be easier. If there are compliant asset issuers (traditional financial asset issuers require relevant licenses or permits), only simple community voting is required. After the purchase, the assets are saved on the chain through multi-signature and the address is made public for community supervision. The risk is more on the counterparty risk of the issuer. The market opportunities for RWA token issuance, as mentioned earlier, are relatively high in demand for bond-type RWA in the short and medium term. The first to emerge are national debt projects such as OpenEden, MatrixDock, Maple Finance, and Ondo Finance. According to DefiLlama data, the two largest RWA TVL projects are also national debt projects.

In the case where DeFi development encounters bottlenecks, the DeFi community has also begun to further consider asset security issues, from only worrying about smart contract vulnerabilities, to further focusing on compliant assets; traditional finance is originally highly compliant, through asset isolation, governance role allocation and isolation, process standardization, institutional restrictions, etc., to avoid small loopholes leading to large-scale systemic risks.

It is expected that in the future, we will see more protocols and projects incorporating RWA into their balance sheets to achieve diversified asset allocation. Here, compliant asset issuers will be indispensable, and better governance structures that combine on-chain and off-chain will also be gradually discovered and explored. Looking forward to the virtual world becoming more tangible and real.