Will on-chain and off-chain eventually become one? MakerDAO explores tokenized treasury bond governance proposal

Financial consulting firm Steakhouse and research company Phoenix Labs, focusing on DAO, have collaborated to propose in the MakerDAO community an initiative to allocate up to $100 million from the reserves for investing in tokenized U.S. Treasury bill products.

Proposal Discussion on Tokenizing Treasury Bills

In February 2022, following MakerDAO's decision to invest in U.S. Treasury bonds, MakerDAO, through traditional financial means off-chain, invested $2 billion in short-term U.S. Treasury bills T-Bill with Monetalis Clydesdale and BlockTower Andromeda. However, these off-chain Treasury bill investments are not the final goal but just the first step for MakerDAO.

The second step in the proposal is to invest in tokenized Treasury bills on-chain.

Pros and Cons of Investing in Tokenized Treasury Bills

The proposal points out that transitioning to tokenized Treasury bill products will bring the following benefits to MakerDAO:

• Increased transparency: Processes are streamlined for tokenized Treasury bills, as seen in the decentralized investment platform Ondo Finance
• Simplified accounting: Income generated from off-chain investments requires manual profit return. With tokenized Treasury bill products, a formula can be designed to input prices into the system daily
• Lower complexity: Managing off-chain structures is complex and time-consuming as it involves many parties. DAO may not be the best structure to manage this complexity
• Enhanced automation: Tokenized products can automate the current manual and slow asset-liability management
• Faster redemption: For certain on-chain products, the redeemability of stablecoins is much faster than selling fiat off-chain and converting back to stablecoins

However, tokenizing Treasury bills exposes the protocol to higher counterparty risk.

Subsequent Plans for Tokenization

Once MakerDAO can execute tokenized Treasury bill products, there are further plans to drive:

• On-chain tokenized commodities for use as collateral in the repurchase market Aave to gain additional liquidity
• Utilization as Uniswap LP and as collateral in the repurchase market for liquidity when needed
• Due to the highly market-efficient nature of U.S. government bonds and the cost-effectiveness of tokenized issuance compared to traditional finance, MakerDAO can act as a Primary Dealer in the primary market trading

Deepening Collaboration Between On-chain and Off-chain, Facing Expanded Risks

Steakhouse will provide legal and financial advice, PhoenixLabs will offer technical capabilities, and BlockAnalitica will provide advice on risks such as lending protocols. The proposal emphasizes that this plan will not replace existing arrangements but explore new paths for growth and efficiency, welcoming community comments, discussions, or objections.

We can also see numerous comments under the proposal, such as Maple Direct emphasizing the on-chain, verifiable status, where lender deposits are stored in non-custodial smart contracts and not seized; whether to construct a bankruptcy remote special purpose vehicle SPV to ensure immunity from credit risks of other platform's fund pools; or Bonapublica suggesting the need for specific standards or benchmarks to measure the success or improvement areas of this experimental phase, and so on.

Since shifting to real-world assets RWA early last year, MakerDAO has maintained stable returns even in bear markets but has recently faced default risks in two major vaults. The proposal to convert off-chain U.S. Treasury bills into on-chain tokenized commodities appears to further integrate traditional finance and DeFi. As collaboration between on-chain and off-chain deepens, the potential risk scope may also expand gradually.

Who's still making money in a bear market? MakerDAO shifts to real-world assets

Are RWAs really stable? MakerDAO risks $2.1 million defaults, halts additional lending to Harbor Trade

Another blow for MakerDAO! Traditional finance risks spread to the DeFi world through RWAs