The Maker Protocol could extend yet another arm into the traditional finance space if a proposed integration with a Pennsylvania-based bank passes this week.
MakerDAO is voting on a proposal that will bring a traditional bank into its ecosystem for the first time, allowing the bank to borrow against its assets using decentralized finance (DeFi).
Currently 83% of voters are in favor of the proposal. Voting ends at 12pm ET on July 7.
The proposal involves creating a vault with 100 million Dai (DAI) for Huntingdon Valley Bank (HVB) as part of a new collateral type in the Maker Protocol.
This will essentially allow the Maker Protocol to begin issuing real-world loans to borrowers through a fully backed traditional institution by meeting the bank’s standards.
The first collateral integration from a US-based bank in the DeFi ecosystem is getting closer.
The Maker Governance votes to add RWA-009, a 100 million DAI debt ceiling participation facility proposed by the Huntingdon Valley Bank, as a new collateral type in the Maker Protocol pic.twitter.com/fOdusdjCFS
— Maker (@MakerDAO) July 4, 2022
The move to integrate the bank follows hot on the heels of another decision to become more closely entwined with traditional finance after MakerDAO members voted in favor of spending $500 million DAI investing in treasuries and corporate bonds last week.
MakerDAO governs the Maker Protocol, which issues U.S. dollar-pegged DAI stablecoins in exchange for user deposits of Ether (ETH) and nearly 30 other cryptocurrencies. Huntingdon Valley Bank (HVB) is a traditional bank from Pennsylvania founded in 1871.
The deal with HVB is important for the Maker Protocol because it is not currently allowed to issue U.S. dollar loans directly to borrowers. However, a special entity will be established by MakerDAO to make integration with the traditional bank possible.
First, a Multi-Bank Participation Trust (MBPTrust) will be established by MakerDAO in Delaware to link the capital available at HVB with the Dai stablecoin that Maker provides.
The trust would ensure that DAI minting and destruction from the vault is carried out properly and would manage commercial issues with HVB.
At first, HVB would own 50% of the loans issued through this scheme, but would petition MakerDAO to incrementally reduce its ownership down to a minimum of 5%. The remainder would be owned by MBPTrust. This measure would mitigate the bank’s risks as it would essentially be issuing loans through the Maker Protocol under Pennsylvania law.
Maker Protocol (MAKER), which has been trying to find strategies to weather the bear market, would be able to earn revenues through vault stability fees associated with maintaining the vault and minting DAI.
Revenue would also come from yield, which is estimated to be as much as 75 basis points above the 30-day average Secured Overnight Financing Rate (SOFR) of 0.083%.
HVB benefits by effectively increasing its legal lending limit beyond $7 million per borrower.
Assuming the HVB integration is a success after a period of time, MakerDAO believes the same MBPTrust could be used to onboard other banks.