Maker Protocol could revolutionize banking with Pennsylvania-based partnership
If a proposed collaboration between the Maker Protoco and a Pennsylvania-based bank is successful, that could entice another existing financial institution to adopt the former's technology.
MakerDAO is considering a proposal that would allow a traditional bank to borrow against its assets using decentralized finance (DeFi) for the first time.
At the time of writing, 83% of voters support the proposal. Voting ends at 12pm ET on July 7.
As part of a new collateral type in the Maker Protocol, HVB will be given 100 million Dai (DAI) to create a vault in the proposal.
This will essentially allow the Maker Protocol to begin issuing loans that are backed by a traditional institution, while meeting the bank's standards, to borrowers.
The first collateral integration from a US-based bank in the DeFi ecosystem is getting closer.— Maker (@MakerDAO) July 4, 2022
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
The decision to merge the bank with traditional finance is a direct consequence of MakerDAO's recent vote to invest $500 million in treasuries and corporate bonds using its DAI.
MakerDAO, the organization that maintains the Maker Protocol, issues U.S. dollar-pegged DAI stablecoins in exchange for user deposits of Ether (ETH) and nearly 30 other cryptocurrencies. HVB is a traditional bank from Pennsylvania founded in 1871; it is also known as Huntingdon Valley Bank.
The partnership with HVB is important for the Maker protocol because it is not able to directly issue U.S. dollar loans to borrowers at this time. However, a special entity will be created by MakerDAO to enable integration with the traditional bank.
A Multi-Bank Participation Trust (MBPTrust) will be created 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 properly executed, and it would manage commercial difficulties with HVB.
At first, HVB would own 50% of the loans issued through this scheme, but it would petition MakerDAO to 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 essentially was issuing loans through the Maker Protocol under Pennsylvania law.
The Maker Protocol (MAKER), which has been searching for ways to weather the bear market, will be able to generate revenues through vault stability fees linked with keeping the vault and minting DAI.
The expected rate of return on the bonds is estimated to be as much as 75 basis points higher than the 30-day average Secured Overnight Financing Rate (SOFR) of 0.083%.
HVB can increase its legal lending limit by lending to more than one borrower.
After the HVB merger is successful, MakerDAO believes that MBPTrust could be used to onboard other banks.