Original Title: "Uncovering MakerDAO RWA: Examining the Governance System and Trading Architecture of DeFi Capturing Off-Chain Assets"

Original Author: Will Awang

Real-world assets exist off-chain, and asset owners can derive expected returns from them. The relevant ownership benefits are regulated by the legal system and rooted in our social contract. For on-chain DeFi governed by "Code is Law," the current challenge is to explore and solve how to adapt off-chain governance systems and legal frameworks to help capture off-chain assets in a secure and compliant manner for crypto capital.

Following the previous article on the path of bringing off-chain assets onto the chain through Centrifuge, this article will explore the governance system, legal framework, and practical path of capturing off-chain assets through decentralized on-chain protocols from the perspective of MakerDAO's DeFi. We hope this will be helpful for projects and builders involved in RWA and welcome any discussions and exchanges with us at any time.

This article will cover MakerDAO's more mature RWA projects, such as New Silver Restructuring, BlockTower Credit, BlockTower Andremeda, Monetalis Clydesdale, and the transaction architecture provided by Centrifuge for Aave.

One, Why DeFi Needs to Capture Off-Chain Real-World Assets

RWA's narrative can also be said to be MakerDAO's DeFi narrative, and it is very necessary to look at the significance of RWA to the DeFi world from the perspective of MakerDAO.

MakerDAO is a decentralized autonomous organization (DAO) that aims to manage the Maker protocol running on Ethereum. The protocol provides the first decentralized stablecoin DAI (which can be simply understood as the US dollar on Ethereum) and a range of derivative financial systems. Since its launch in 2017, DAI has always been anchored to the US dollar.

DeFi Summer of 2021 saw the emergence of numerous unsustainable DeFi yield products, leading to a crypto market crash and credit default contagion spreading throughout the ecosystem. Although native crypto assets are a key component and long-term value differentiator of DeFi, current demand cannot match long-term development value.

Due to the high volatility of the cryptocurrency market, relying on a single collateral asset may lead to a large number of liquidations. For giant lending protocols like MakerDAO, the key consideration is the stability of the collateral's value. We have seen that MakerDAO's collateral previously included unstable cryptocurrencies, which posed risks to lending due to their unstable fluctuations, severely limiting MakerDAO's development space.

Therefore, MakerDAO or DeFi urgently needs a more stable Baselayer Level of Collateral to support the widespread adoption of the stablecoin DAI in the crypto world and build a sustainable and scalable path.

（Centrifuge & Maker: A Partner's View of Real-World Assets）

RWA, as one of the most important topics for MakerDAO, is constantly being discussed and validated by the community, and is seen as an important solution. In MakerDAO's Endgame plan released in May 2022, it also emphasizes that one of the key parts of building a decentralized stablecoin for MakerDAO is to use RWA as collateral.

The benefits of RWA include:

(1) Improve the transparency of market risks and asset utilization;

(2) Provide composability for DeFi;

(3) Improve the accessibility of banking services and funding for underserved populations;

(4) Capture value from larger and more stable traditional financial markets.

For MakerDAO, RWA has two important characteristics - stability and scalability. Furthermore, DAI can expand its usage by anchoring stable, interest-bearing, and scalable assets without the risk of cryptocurrency volatility, especially in today's market environment where cryptocurrency yields are low and US Treasury yields are high. Through the value capture of RWA, MakerDAO can continue to expand its scale and growth in bear markets and be well prepared for the next bull market cycle.

The most important thing is that RWA can help MakerDAO achieve its grand vision: to allow a credit-neutral, decentralized channel to increase utility for people's daily lives and business development needs. By using an open, community-driven, programmable, and decentralized protocol, a new open DeFi financial market can be created.

However, it is not easy to put real-world assets on the chain, which involves challenges in designing a brand new product architecture, financial and legal compliance, technical risks, and unknown unknowns.

二、DeFi 如何捕获链下现实世界资产

Translation:

2. How DeFi Captures Real-World Assets Off-Chain

After identifying the need to capture real-world assets in DeFi, it is necessary to establish a governance system and legal framework suitable for on-chain protocols or DAO organizations. Of course, some may argue that this is unnecessary and that it is sufficient to simply purchase tokenized US Treasury bonds issued by third parties, which saves time and effort.

For example, we see very successful on-chain fund projects on the market, such as Solv Protocol, which has launched two RWA funds in its V3 version. Solv RWA serves as the fund manager and currently manages assets totaling $2 million TVL. Qualified users can deposit stablecoins to enjoy the returns of US bonds through KYC/AML. According to its press release, the underlying assets of the RWA fund are tokenized US bonds provided by Red Cedar Digital Ltd.

（Solv V3's Milestone Achieved: The First Ever RWA Fund Launch）

For projects with small capital and under controllable/affordable risks, it is possible to directly purchase tokenized US bonds provided by third parties without any issues. However, we still need to consider a few questions:

(1) How to ensure that the counterparty (Red Cedar Digital. Ltd.) providing underlying assets will not go bankrupt and run away? Think about FTX, which was once thriving.

(2) Furthermore, after the counterparty goes bankrupt, how can this entity-less on-chain protocol participate in asset liquidation/restructuring as a creditor in court?

Although building a governance system and legal framework for DeFi projects may come at a huge cost, it is a hedge against risks. In any case, this does not prevent us from exploring and studying successful RWA cases in the market to make our own choices.

2.1 The Necessity of Legal Packaging for DeFi

As MakerDAO, with a fund size of billions of dollars in RWA, considers the identifiable risks from both a fund security perspective and a legal entity qualification perspective. These risks include: counterparty risk. Imagine a scenario where a counterparty goes bankrupt or runs away, MakerDAO needs to ensure that no third party (including fund managers/investment advisors) has the ability to directly control, dispose of, or transfer its huge funds; entity authentication. On-chain protocols or DAO organizations cannot complete the customer identification and authentication (KYC/AML) required to legally hold assets, resulting in the inability to legally purchase and hold off-chain assets.

Similarly, it is also impossible to hold its own IP assets; bankruptcy liquidation qualifications. Once there is a default, bankruptcy, or liquidation of off-chain assets, since the on-chain protocol or DAO is not a legal entity, it cannot immediately interact with real-world courts or liquidation institutions. Therefore, it is necessary to ensure that MakerDAO has the ability to exercise the right to dispose of off-chain assets in a timely manner through its governance system and legal framework.

Therefore, it is very necessary to build a governance system and legal framework for on-chain protocols or DAO organizations through the method of legal wrapper, and to achieve governance control of off-chain assets in DeFi through the integration of DAO governance and legal entity governance system.

（The DAO Legal Wrappers and why you need them）

（BlockTower Credit - Commercial and Legal Risk Assessment - Part I）

3. The funds in this section are used to subscribe to the DROP token on the Centrifuge platform, which is issued by the SPV issuer holding Blocktower's underlying assets.

From the perspective of asset financing:

5. In order to ensure the independence of the issuer's SPV assets and the safety of MakerDAO funds, the issuer's SPV will sign a trust agreement with Ankura Trust, stipulating the mortgage of SPV credit assets and the pledge of SPV equity, with the beneficiaries being the holders of DROP/TIN tokens (i.e. TACO Foundation), to ensure the integrity of MakerDAO's assets and timely and full disposal of defaults, providing a guarantee for the safety of MakerDAO funds;

6. The issuer SPV issues two types of tokens, DROP and TIN, through the Centrifuge asset tokenization platform. DROP is a priority token subscribed by TACO through the above-mentioned channels, while TIN is a subordinated token subscribed by BlockTower Credit Partners.

3.3 MakerDAO - BlockTower Andremeda (US Treasury RWA)

BlockTower Andremeda is one of the largest RWA projects in MakerDAO, with a debt ceiling of $1.28 billion and current asset size exceeding $1 billion. This is a US Treasury RWA project initiated by BlockTower Capital and executed through the TACO Foundation, aimed at diversifying treasury funds and investing in off-chain US Treasuries.

In the BlockTower Andremeda project architecture, the main participants include:

TACO Cayman Foundation, established in 2022, operates the BlockTower S3/S4 credit asset RWA project with a previous asset management limit of $150 million. Like the RWA Foundation, the foundation is governed and controlled by MakerDAO, and according to Article 4.16 of the Articles of Association, the foundation's director must make any decisions or exercise any rights based on MakerDAO's governance resolutions.

BlockTower Capital, as the investment advisor for this project, has signed an investment advisory contract with TACO Foundation. They are responsible for managing the funds in TACO Foundation's various accounts and making investment decisions. Coinbase and Galaxy Digital are the deposit and withdrawal service providers. Celadon Financial Group acts as a broker to execute the investment decisions made by the investment advisor. Wedbush Securities Inc. serves as the fund custodian, and Ankura Trust acts as the payment agent.

In this architecture, MakerDAO mainly uses TACO Foundation as a legal entity to fulfill the relevant matters of off-chain investment, and separates investment decision-making and asset custody in traditional finance to achieve risk control compliance.

Comparing with the BlockTower Credit project, we see similarities in the use of the MakerDAO on-chain governance and foundation off-chain governance system in the DAO governance aspect, ensuring that MakerDAO can achieve complete control at the legal entity governance level.

The difference lies in the way Andremeda and BlockTower S3/S4 invest in underlying assets. Andremeda invests funds directly in US bond assets through methods such as deposits and withdrawals, investment advisors, brokers, fund custody, and payment agents, which are implemented through the TACO Foundation. On the other hand, BlockTower S3/S4 incorporates a foundation and SPV structure due to the difference in underlying assets. The SPV is specifically used to capture underlying assets tokenized through the Centrifuge platform.

3.4 MakerDAO - Monetalis Clydesdale (US Treasury RWA)

Although we have seen several successful projects from Blocktower in the operation of MakerDAO, some members still express concerns about the concentration of trading counterparts, such as Blocktower playing multiple important roles in the project, such as investment advisor and asset initiator.

Therefore, the Monetalis Clydesdale project initiated by Monetalis founder Allan Pedersen aims to explore a more secure RWA path. The project was proposed in January 2022, passed and implemented in October 2022, with an initial debt ceiling of $500 million and a debt ceiling increase to $1.25 billion in May 2023, with assets invested in US Treasury ETFs.

In the trading architecture of Monetalis Clydesdale, the operations on the funding side are crucial, that is, how to securely and compliantly convert on-chain assets to off-chain while still being controlled by MakerDAO:

· Establishment of Property Trust. First, establish a BVI trust company named JAL, which establishes the James Asset Trust through a Declaration of Trust. JAL, as the trustee, holds the DAI/ETF trust assets provided by MakerDAO, and MakerDAO MKR token holders are the beneficiaries, controlling the trustee through trust governance documents to instruct the purchase and disposal of trust assets.

·Governance control of MakerDAO: According to the Declaration of Trust, the trustee JAL must take any action based on the MakerDAO Resolution; and any action taken must be approved and agreed upon by the transaction manager's MakerDAO Resolution; the trustee JAL cannot take any action unrelated to the MakerDAO Resolution.

Establishment of Equity Trust: After dealing with the governance and control of the trust property of JAL, the trustee of MakerDAO, it is necessary to establish the James Asset Share Trust with the equity of JAL as the trust property. SHRM Trustees (BVI) Limited will act as the trustee, Belvaux Management Ltd will act as the enforcer, and MakerDAO MKR token holders will be the beneficiaries.

As a result, MakerDAO controls the JAL trust assets (corresponding to the DAI trust assets provided by MakerDAO) and also controls the equity of JAL's trustee. In this case, all operations require verification through MakerDAO Resolution, and the flow of funds does not go through any third-party control (MakerDAO Vault - JAL trust asset custody account - Sygnum Bank custody account).

Under this trading architecture, MakerDAO has achieved:

1) Less or no counterparty risk, meaning that third parties or investment managers have no ability to alter legal terms or access related funds;

2) Accessible on-chain and off-chain governance architecture;

3) Through trust protection, MakerDAO MKR token holders have the ability to timely handle default relief and liquidation risks of underlying assets.

4) Clarify the fixed use of funds and ensure that there is no risk of misappropriation.

Next, it is relatively simple for the trustee JAL to invest assets. They will withdraw DAI to USD through Coinbase and use Sygnum Bank for fund custody and ETF trading.

3.5 Centrifuge——RWA Roadmap (US Treasury RWA)

Centrifuge has been involved in several credit asset RWA projects of MakerDAO, such as New Silver Restructuring and BlockTower Credit, as mentioned above, in the early stages. The specific process will not be elaborated here, and those interested can read our previous analysis of Centrifuge - "From the essence of RWA, looking at the decentralized asset financing agreement Centrifuge".

Here, what I want to talk more about is the Centrifuge Prime service, which aims to help crypto capital/DeFi protocols/DAO treasuries capture the value of real-world assets (such as risk-free returns on US Treasury bonds). Previously, the Aave community proposed on August 8, 2023 to invest stablecoins in the Aave treasury in RWA assets through cooperation with Centrifuge, capturing risk-free returns based on 5% RWA on US Treasury bonds.

（POP: Anemoy Liquid Treasury Fund 1）

The Centrifuge Prime service shown above is divided into two parts:

（Anemoy Liquid Treasury Fund 1）

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