What is MakerDAO?
MakerDAO is the protocol that distributes the Dai stablecoin. It is a ‘debt’ based stablecoin, where users are essentially extended a loan denominated in Dai that is collateralized with another asset. I have written about it previously if you want a more technical discussion of how it functions. However, the brief explanation is that users deposit assets into vaults, and when these assets are not stablecoins the loan needs to be overcollateralized. They are then extended the Dai loan. If the value of the collateral starts to drop, then you must either reduce the size of your outstanding loan (by paying back Dai) or the protocol will attempt to liquidate your collateral. If the protocol is unable to liquidate the collateral then it will use the surplus accumulated from fees paid by those getting loans to try to cover the difference and keep the protocol collateralized. If there is inadequate buffer (which would require many liquidations) then the protocol attempts to mint and sell more of its governance token into the market to keep Dai adequately collateralized.
The complicating factor currently for MakerDAO is that much of their collateral is custodial. Which means that the custodian can often freeze, blacklist, or otherwise instantaneously devalue the tokens. This means that MakerDAO’s continued existence as a functional protocol currently is thanks to the continued cooperation of other entities.
You may remember that this was one of the problems that Reflexer/Rai was trying to solve. As I explained in that piece, MakerDAO sacrificed some amount of censorship resistance in order to continue to grow and maintain a tight peg.
Consider the amount of collateral that is currently in USDC (Circle’s stablecoin) and USDP (Paxos’ Stablecoin) and WBTC (wrapped Bitcoin). These being frozen or otherwise devalued would substantially affect Dai. This is especially true since any of these vaults associated with the ‘Peg Stability Module’ or PSM cannot be liquidated, as they are assumed to always be worth $1 to enable Dai to be easily swapped for another stable asset (and vice versa).
How do 'Real World Assets' fit in?
Over the last several years MakerDAO has begun to extend loans for assets that exist in the real world.
Currently these include extending loans for home flipping, real estate, SaaS companies, Supply Chain Finance loans extended to Snakebyte Asia, and tokenized freight shipping invoices.
They intend to in the very near future expand to a variety of other assets. For one, they intend to begin reducing PSM vaults in favor of investing in short term bonds, and there have been other proposals to begin investing in US treasuries (though those have not passed).
What is the implication?
MakerDAO is moving further away from their crypto-native foundation and are increasingly becoming a web of corporate entities, trusts, and trustees, tied deeply to the real world and real world governance, in a manner more reminiscent of a money market fund.