MakerDAO, the decentralized autonomous organization (DAO) behind the DAI stablecoin, has voted to proceed with a proposal to purchase corporate bonds and US treasuries. The platform has turned to the traditional market to weather the effects of the bear market and guarantee steady returns for members.
Steady Returns in the Bear Market
On October 6, the MakerDAO voted to approve a pilot transaction of $1 million following an executive vote from holders of its native MKR token. Following confirmation from the community, the remaining funds are expected to be reallocated.
The asset allocation plan was established by MKR holders, with 68,250 MKR – representing about 58% of the total voting pool – opting for an 80-20 split.
Per the terms of the proposal, a majority of the $500 million – up to 80% – will be invested in short-term US treasuries. $160 million will be allocated to the 0-1 year U. S Treasury iShares exchange-traded fund (ETF) and $240 million to the 1-3 year US Treasury iShares ETF from notable asset manager BlackRock.
Then, $100 million will be allocated to investment-grade corporate bonds offered by Baillie Gifford, an Edinburgh-based investment management firm.
DAI is MakerDAO’s stablecoin, which is used to lend money to users. With DAI, borrowers can repay their loans without worrying about the inherent volatility of crypto prices. Most of the asset’s collateralization pool – worth about $9 billion – comprises USDC, the market’s second most valuable dollar-backed stablecoin. USDC is backed short-dated US treasuries and cash.
MakerDAO has explained that their plan will help them to diversify their holdings, which currently collateralize DAI. At the same time, the DAO would offer yields to protocol users without risking the DAI’s peg to the dollar or insolvency.
Although fixed-income investments offer relatively low return rates, they are widely viewed as safe investments that can help hedge against inflation. Risk-averse investors also appreciate their ability to offer steady returns, especially in bear markets like this.
Decentralization Concerns and Falling Revenue
While the plan to purchase government debt to stave off the bear market seems laudable, there are also concerns about rising centralization amid the current market situation.
Committing $500 million for an asset worth $9 billion in total capitalization is quite a significant undertaking. And for a DAO – which depends significantly on decentralization – this could threaten the current structure.
MakerDAO’s shaky finances also pose a problem. This week, an analyst at Messari Research reported that the DAO’s revenue fell to about $4 million in Q3 2022, a downtrend of almost 86% over the previous quarter. This would mark the DAO’s first quarter of net income loss since 2020.
@MakerDAO third quarter was a painful one for the decentralized lender.
– revs fell 86%, collateral ratio down to 1.1
– G-UNI dominating, is this increasing liquidity and on-chain volumes for DAI?
– wBTC reliance on whales/institutions
— Johnny_TVL (@john_tv_locke) October 13, 2022
The biggest indicator of Messari’s losses has been the poor performances of its biggest earners: Ether (ETH) and Wrapped Bitcoin (wBTC). Revenue from ETH-based assets has fallen by 74%, while that of BTC-based assets has dropped by 66% in the quarter. Borrowers use these assets as collateral for DAI loans; with their performances dropping, MakerDAO’s revenues have also plunged.
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