👉 First of all what is MakerDAO?

MakerDAO is the decentralized autonomous organization (DAO) that manages DAI, the fourth largest dollar stablecoin in the market ($5 billion in capitalization). The protocol was launched in 2018 on the Ethereum blockchain.

Unlike centralized stablecoins such as the USDT ($65 billion) and USDC ($63 billion), the DAI is not based on a traditional dollar reserve.

Its value is "backed", i.e. supported, by crypto-assets, which is not without consequences: to ensure the stability of the reserve, an over-allocation mechanism is needed in case the prices of the crypto-assets fall.

An example: you need to send $1000 of ethers to generate 500 DAI. In case the ether drops by about 50%, the collateral is liquidated on the markets, but the DAI remains stable. Pretty smart 🤓.

In recent months and to cope with the continued depreciation of crypto prices, the DAI reserve has been fed mainly by other stablecoins (USDC, GUSD, USDP). Currently, the DAI is thus "protected" by about $7.7 billion of cryptos placed as collateral by the community, which is paid for it.

Maker is paid by the Gemini exchange platform 1.25% of the GUSD (Gemini's stablecoin dollar) it holds if its balance is maintained above $100 million. According to the latest figures, Maker holds $500 million in GUSD.

In a sign of the trend, Maker is also in discussions with the Coinbase platform for a $1.6 billion USDC loan against a 1.5% yield.

All these decisions were voted by the community, i.e. the holders of the MKR governance token, whose price is around 600 dollars.

Originally MakerDAO did not plan to work its reserve; its goal is to maintain parity with the dollar. But this was without taking into account the new macroeconomic environment and the very strong competition from other stablecoins...

👉 A problematic dependence on the USDC

Since 2020, most of Maker's reserve has relied on the USDC stablecoin (nearly 50%) issued by the US company Circle. "This stablecoin has the advantage of being very liquid and regulated in the United States, but its weight has become too great and its returns are limited with the new market conditions," concedes Sebastien Derivaux, who manages risk at MakerDAO.

According to financial analysis firm Kaiko, the payout on USDC in the Aave loan protocol has dropped from 2.3% to 0.6% in just 15 months. As a result, MakerDAO had its least profitable quarter between July and September since at least 2020.

To adapt, the organization is exploring other options such as investing in traditional finance assets (the word is out 😬). "There are other ways to find returns," confirms Sebastien Derivaux.

This decision also comes in a context where the USDC is particularly exposed. This summer, several of its addresses were frozen after U.S. sanctions against Tornado Cash, a tool that anonymizes cryptocurrency transactions. 

👉 U.S. Government Bonds

But let's get back to the "real world" assets that Sebastien Derivaux talks about. At the beginning of October, the Maker community decided to invest $500 million in US Treasury bonds with a short maturity, i.e. "1 year".

Why? Because interest rates have skyrocketed, and MakerDAO can take advantage of that. The interest rate on US bonds has gone from 0.04% to 4.7% in just over a year! A system that its competitor Circle (which issues USDC) has understood well and has already been using massively for months.

Maker has also set up other arrangements. "We lend DAI to projects such as those of Société Générale ($30 million) or the American Huntingdon Valley Bank ($100 million)," explains Sébastien Derivaux.

"These investments are intended to finance projects that show that DeFi has a positive impact on society," he continues. "We could eventually diversify into corporate bonds," explains the Frenchman, who concedes, however, that this will take time.

And so much the better, because this gradual shift towards traditional finance and its "centralization" is not to everyone's taste. "Maker goes where the yields are and right now they are in US government bonds," says an industry expert.

"People were starting to leave DeFi, so we had to be able to remain attractive," says Sébastien Derivaux. And traditional finance products are partly the solution. At least for the next few months.

In a note published in mid-October, the analysis firm Kaiko explains that this decision is "good in the short term", but also points out that it has an impact on the decentralized dimension of the DAI and raises questions about the long term.

To reassure the community, this pivot to decentralized finance is supposed to be temporary. Investments in "real world" assets should be limited to 25% of the pool within three years. "This date is not set in stone, however. It could be pushed back depending on the evolution of regulation and market conditions," concedes Sébastien Derivaux.

Eventually (if all goes according to plan), Maker's reserve will have to be composed solely of ethers, the cryptocurrency at the heart of the Ethereum ecosystem. "The goal is to make as much profit as possible to acquire as many ethers as possible and do without traditional finance," explains Sebastien Derivaux.

"Holding ethers or any other decentralized asset is the only way to resist regulation because the reserves will be beyond the reach of any sanction," Kaiko points out.

To date, traditional assets account for two-thirds of Maker's revenue, valued at just under $1 million a month ($4 million in the third quarter, according to analytics firm Messari).

👉 The dilemma of centralization

So what to do? I hear the complaints," says Derivaux, "but no one has yet found a fully decentralized solution. If there was one, we would obviously have chosen it."

Projects that have remained exclusively in the decentralized universe are not at their best. One of the most striking examples is the RAI stablecoin. Currently, its holders are exposed to negative returns of 6% 🫤.

"What is happening at Maker is, in my opinion, an illustration of a DeFi at a crossroads," analyzes Stanislas Barthélémi, crypto expert at KPMG. "We find ourselves with two contradictory trends: on the one hand, a DeFi that wants no connection with traditional finance and risks being marginalized, and on the other hand, a TradFi-DeFi hybridization that creates risks with respect to regulators and reinforces the centralized nature of DAI," he emphasizes.

For him, this vagueness is maintained by co-founder Rune Christensen: "He put to a vote a proposal that is ideologically pure in the long run (doing without real-world assets and de-anchoring with the dollar to avoid censorship from Washington), but which is not simple, if not impossible, to implement and runs up against reality."

👉 Governance inadequate to the issues?

Does Rune Christensen have too much power? What is certain is that the project is not sufficiently decentralized in practice, notably because of the non-participation in the votes of many members - venture capital funds and exchange platforms that refuse to take a position for legal or neutrality reasons.

In the last major ballot organized by the community at the end of October, Rune Christensen's vote represented 74% of the votes cast 😵💫. We've had better decentralization!

"MakerDAO is one of the oldest DAOs and has actually been operating in this form since 2020, but the governance models are still too simplistic to be resistant to attacks from inside or outside in what are called DAOs, so it's a term that should be put into perspective," analyzes Stanislas Barthélémi.

The symbolic case of MakerDAO was analyzed by Ethereum co-founder Vitalik Buterin in a lengthy blog post published on December 5. "The protocol and its financial reserves have not been attacked because the majority of MKR tokens are held by a fairly small group that is not willing to sell because they believe in the project. This is a good model for launching a stablecoin, but not for its long-term management and development. For decentralized stablecoins to work over the long term, they need decentralized governance.

CQFD.

👉 Towards a new system?

The Maker community spoke out on October 31 in favor of the "End Game" proposal by Rune Christensen. It plans to reorganize Maker into a series of "MetaDAOs" that will independently develop their own business models.

These MetaDAOs will run in parallel to the main protocol and should have their own governance token.

"MakerDAO had become too complex, so we had to split it up into several subparts," explains Sebastien Derivaux. "We will keep the Maker Core structure above that will take care of supervision, while the MetaDAOs will focus on more concrete applications," he continues.

This new organization will allow for new economic incentives to attract more users. "Yield farming mechanisms (returns from cryptocurrencies) will make their arrival," confirms Sebastien Derivaux.

All these changes are in any case not without consequences on the project and its future. According to our information, a schism of the community which would result in a "fork" (separation of the opponents who would preserve the functioning of the historical protocol) is not to be excluded.

Even in DeFi, the temptation of traditional finance can come at a price.

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