Lending protocol and stablecoin issuer MakerDAO has recently passed a proposal to increase its portfolio holdings of United States Treasury bonds. The proposal calls for an increase from $500 million to $1.25 billion, providing a 150% increase in holdings. This move is intended to boost exposure to real-world assets and “high-quality bonds” following a loss of $1 peg by its Dai (DAI) stablecoin during market volatility on March 11. With a 77% approval rating, the $750 million debt ceiling hike was approved by Maker’s delegates. According to a MakerDAO representative, the deployment of these funds will enable MakerDAO to use $750 million of USDC in the PSM to purchase more US Treasury bonds, thus diversifying its liquid assets that back DAI.
Under the new strategy, an equal amount of bonds, biweekly and over a six-month period, will be purchased, totaling 12 slots of $62.5 million each. According to MakerDAO, the strategy is expected to deliver a net annualized yield of 4.6% to 4.5% after custody. Furthermore, trading costs could boost Maker’s revenue stream, according to the proposal. The proposal enables Maker to take advantage of the current yield environment and generate further revenue on Maker’s PSM assets, in a flexible and liquid manner.
Federal Reserve data shows that Treasury yields for 10-year constant maturity were at 3.64% on March 14. The decision to invest in US Treasury bonds is an extension of a current $500 million U.S. Treasury allocation managed by decentralized finance (DeFi) asset adviser Monetalis Clydesdale since October 2022, which by January 2023 had brought in approximately $2.1 million in lifetime fees. Nonetheless, some participants in the governance forum stipulated that Maker has not yet received any payments from the first half-billion DAI from Monetalis, while delegates also complained that questions in Maker’s Discord and governance forum were not answered promptly, thus not offering enough time to analyze the proposal.
MakerDAO’s Dai has been making headlines for over a year now, primarily due to its stability as a decentralized stablecoin for the DeFi industry. However, the stability didn’t last long as Dai experienced a loss of $1 peg during market volatility on March 11, causing panic across markets and leading to the depeg of several stablecoins, including USD Coin (USDC) and Dai. In a March 13 Twitter thread about the volatility, MakerDAO stated that the community was working on proposals to switch its stablecoin exposure to money market investments, such as U.S Treasuries, with the purpose of diversifying DAI’s liquid collateral.
While the decision to invest in US Treasury bonds will undoubtedly diversify MakerDAO’s liquid assets and provide a more robust portfolio, some reasonable concerns have been raised in the community forums. Traders are still grappling with the fallout of the rapid depeg, which highlights the risks associated with an asset’s liquidity when the market is volatile. The delegations’ complaints regarding Maker’s Discord and governance forum not providing enough time to analyze the proposal is also a concern. However, the bond purchase will likely increase Maker’s exposure to real-world assets, which means it would be less likely to depeg if a similar situation occurs in the future.
The bond purchase will not only increase Maker’s exposure to real-world assets but will also provide a substantial yield during a positive yield environment. It is worth noting that Maker’s new strategy ladder for the next six months indicates a high level of flexibility and liquidation. According to some analysts, Maker’s plan to invest in US Treasury bonds could create a “virtuous cycle” for the DeFi industry’s increasing institutionalization by attracting attention from traditional finance. Overall, MakerDAO’s decision to diversify liquid assets is a sound strategy to bolster funds while—more importantly—increasing their resilience against market volatility.
In conclusion, MakerDAO’s move to increase its portfolio holdings of US Treasury bonds is a promising step towards diversifying its liquid assets and providing further stability to its decentralized stablecoin. While concerns have been raised regarding the promptness of communication and the first half-billion DAI payment not being received from Monetalis Clydesdale, the substantial yield provided by US Treasury bonds indicates a future positive outlook for MakerDAO. The decision to invest in U.S. Treasury bonds could also help increase interest from traditional finance in the DeFi industry, further strengthening the industry’s institutionalization.