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Want to read our RFC on the MakerDAO forum? It’s right here.
MakerDao recently passed proposal MIP13c3-SP12 as a declaration of intent to invest in short-term bonds/treasuries to earn yield on Maker’s idle stablecoins. Stablecoin holdings currently represent over 50% of Maker’s treasury, and Maker targets a yield-to-maturity of 1%.
According to the Maker forums, the organization aims to invest in liquid, low-risk investment strategies. It recently ratified MIP-81 to earn yield on USDC via Coinbase to the tune of $1.6 billion; however, this proposal maintains counterparty risk from several parties, which Maker addressed it wants reduced in MIP13c3-SP12. Through scaling Maker’s exposure to DeFi money markets, the organization can earn yield in a decentralized manner while maintaining full custody of its assets.
Earning yield via OUSD will help scale Maker’s exposure to DeFi money markets, as yield is optimized between leading blue-chip protocols Aave, Curve, Convex, and Compound. Average yields from OUSD are higher than direct lending, as yields are optimized between protocols weekly.
MIP-87 enables MakerDAO to deploy its USDC into OUSD to earn yield without going through a centralized service or giving up custody of their funds. OUSD generates yield via Compound, Aave, Curve and Convex. OUSD uses the DAI, USDC, and USDT that it’s collateralized with to earn yield on these platforms. Yields are distributed daily, automatically rebasing in user wallets in the form of additional OUSD.
OUSD has undergone multiple security audits by Trail of Bits, OpenZeppelin, Solidified and Certora, with the next audit reports being published in the coming weeks. We suggest Maker start with a $100m allocation and mint OUSD via a custom module that supports PSM. This way, Maker can direct deposit its USDC, remaining completely within its custody and fully decentralized. We are aligned with MakerDAO’s core principles and believe OUSD allows MakerDAO to remain as decentralized as possible, while putting its stablecoins to work.
To align incentives between MakerDAO and Origin Dollar’s governance, Maker will receive OGV, the governance token associated with OUSD. At a $100M allocation to OUSD, Maker will receive 1% of OGV supply. At a $600M allocation to OUSD, Maker will receive 3% of OGV supply. As Maker scales its stablecoin strategy with OUSD, we are prepared to offer Maker increasing OGV allocations.
OGV is used to vote on which protocols are utilized to earn yield on stablecoins and the proportions of stablecoins backing OUSD. Moreover, OGV stakers earn protocol revenue associated with OUSD.
The prices of bonds and Treasuries have an inverse relationship to the amount of yield it generates. For example, if a 1-year bond was issued at an interest rate of 1%, redeemable for $100 and has a market price of $100, its yield would be 1%. But if interest rates rise to 3% and new bonds are issued, the market would no longer be willing to pay $100 for the previous bond, and its price should decline to approximately $98 for a yield of 3%.
This is exactly what happened when the Federal Reserve raised rates––we can see from the chart below that US 2 Year Treasury Notes have declined by approximately 6.6% in the past year.
If MakerDAO had $1 billion invested in these 1 year ago and had to liquidate their position due to redemptions, they would have suffered a huge loss. Furthermore, the fear of USDC depositors being unable to redeem their money at face value may cause bank runs and instability in DAI’s peg.
Regulatory and mismanagement risks when dealing with centralized parties include but are not limited to:
The lack of precedent and transparency along with increased uncertainties and complexities may not bode well for DAI’s stability during turbulent market periods. If the party managing funds goes bankrupt, what and how long is the asset recovery process? Does MakerDAO have any legal recourse if counterparties become bad actors? We have had several reminders this year that funds are never truly secure when keys are handed to a third party.
While we recognize the legitimacy of the MIP-86, MIP-81, and GUSD PSM proposals made in response to MIP13c3-SP12, we believe OUSD better aligns with Maker’s core principle of decentralization. Moreover, earning yield through centralized custodians introduces counter party risk, which isn’t applicable to OUSD.
MIP81 proposed by Coinbase requests $1.6B from MakerDAO to earn interest via Coinbase institutional rewards. The USDC yield Coinbase offers Maker is 100bps on the first $100M, and 10bps more APY on each $100M thereafter. However, Coinbase’s political activism and lawsuits involving exchange crashes, securities violations, and TornadoCash sanctions bring about significant regulatory uncertainty.
Gemini’s Proposal: PSM GUSD requests a portion of Maker’s treasury to be swapped into GUSD. If Maker’s PSM holds ≥$100M GUSD, Gemini will pay Maker at a rate of 1.25% APY, monthly. If the PSM holds less than $100M, however, Maker earns nothing. Consideration should also be given to Gemini’s recent lawsuits filed against the trading platform by the CFTC and IRA Financial, as the repercussions from these lawsuits may increase volatility around GUSD.
Lastly, CoinShare’s MIP86 requests $500M of funds from the PSM to earn yield via its platform’s USDC institutional rewards. CoinShares aims for a variable 2.28% APY through investment in traditional financial assets. However, given uncertainties in the macro environment, paired with the significant losses CoinShares sustained from its UST holdings, we believe this proposal exposes Maker to high counter party risks.
We believe it’s important for Maker to diversify its yield strategies to mitigate counter party risks. OUSD offers a solution to the increasing counter party risks from the aforementioned centralized entities.
The layered risks and opacity of using a third party and investing in bonds seems egregious when compared to DeFi alternatives such as OUSD. By deploying yield-generating strategies on-chain via blue-chip protocols Compound, Aave, Curve and Convex, OUSD has significantly more transparency and liquidity than the alternatives. MakerDAO would be able to monitor transactions that are executed with a timelock and maintain full custody of their OUSD, which is redeemable for the underlying stablecoins DAI, USDC, or USDT at any time.
As of 10/28/2022, OUSD’s 30-day and 365-day trailing APY is 2.1% and 9.2%, respectively. This is much higher than MIP13c3-SP12’s target yield of 1%. Origin Protocol, the team behind OUSD, has been established since 2017, maintains a $100m+ treasury, and has raised $38.1M from top investors including Pantera, Spartan Group, Foundation Capital and BlockTower Capital. OUSD has also undergone multiple security audits by Trail of Bits, OpenZeppelin, Solidified and Certora, with the next audit reports scheduled to release by the end of October.
We believe Origin Protocol’s OUSD is fully aligned with MakerDAO and its declaration of intent. Hence, we propose MIP87, which enables MakerDAO to deploy its USDC into OUSD to earn yield on its USDC, while remaining as decentralized as possible.
Putting MakerDAO’s balance sheet into bonds under a centralized party’s hands poses a threat not only to the protocol, but every other DeFi protocol that utilizes DAI. We encourage web3 users and MKR holders to get involved on the MakerDAO forum and vote on future governance polls.
