Article by Hiro Kennelly Edited by Frank America Cover Art by Cosmic Clancy

MakerDAO (Maker) is one of the oldest and most decentralized issuers of stablecoins. As of early January 2022, approximately 9.3 billion DAI are in circulation, while the equivalent of 18 billion USD is currently held as collateral in various Maker vaults. Stablecoins, including DAI, have enabled the explosive growth of decentralized finance (DeFi) over the past 18 months. By some measures, the total value locked in DeFi platforms stands at approximately 250 billion USD, up from 19 billion USD at the start of 2021.

Total Value Locked in DeFi platforms as of January 1, 2022. Source: DefiLlama

This growth is impressive, and yet DeFi still pales in comparison to traditional finance (TradFi) using every meaningful measure. The total market value of the U.S. equity market is about 48.5 trillion USD. Global equity market capitalization is over 100 trillion USD. Crypto adoption is steadily growing, but at least for the foreseeable future, use cases for stablecoins are limited to crypto-native applications.

With the growth of DeFi, stablecoin issuance has skyrocketed. The total stablecoin supply currently stands at just over 150 billion coins.

Total stablecoin supply as of Jan 1, 2022. Source: The Block

USDT and USDC are the clear leaders in terms of total issuance, comprising approximately 55% and 28% of the total stablecoin supply respectively. However, USDC and USDT are more akin to centralized finance, with assets such as commercial paper, commodities, and secured loans underpinning these currencies and their USD pegs.

Maker does finance differently. Maker uses an over-collateralization model to underpin its USD peg, DAI. Although there are currently over 9 billion DAI in circulation, DAI accounts for less than 7% of overall stablecoin supply.

Share of total stablecoin supply as of Jan 1, 2022. Source: The Block

Use of the more centralized stablecoins has soared over the past 12 months, with USDC in particular grabbing a healthy slice of market share, while DAI’s percentage of the total market remains largely unchanged. In response, the Maker community has analyzed different ways in which Maker’s decentralized nature and unique collateralization approach could be leveraged to promote faster growth and wider adoption of DAI.

From discussions within the Maker community, it is evident that connecting Maker’s collateralization model to the TradFi asset world is the key to increasing both the supply of DAI and Maker’s share of the stablecoin market.

Bridging DeFi and TradFi is not simple: there are legal, technical, and organizational challenges to overcome for this effort to become cost effective and rapidly scalable. Maker partners such as 6S Capital and Centrifuge, along with Maker’s Real-World Finance Core Unit, have worked to address these challenges over the past 12 months. The result: a community-designed model that is resilient, flexible, and scalable. It’s known as the Arranger Model.

The Arranger Model seeks to provide a scalable framework for real-world assets (RWA) to serve as collateral for Maker vaults. Maker currently accepts and assesses each real-world collateral proposal in the same way, using its Collateral Onboarding Application (MIP6). This approach does not scale effectively; it is slow, uncertain, too broad, and assumes (incorrectly) that Maker can accurately assess the risk of any potential deal.

"The Arranger Model is a response to these scalability and risk assessment limitations. A parallel from TradFi may help to illustrate the model. Imagine a part of Maker as a large pension fund. Most of the assets of the Maker pension fund are managed by external professional asset consultants/managers with relevant asset knowledge expertise. The Arranger Model is analogous: Arrangers are professional asset managers with specialized asset knowledge."

Rather than the Maker community assessing MIP6 proposals on a case-by-case basis, Maker evaluates an Arranger with respect to overall competency in credit underwriting for a set of asset classes, proposed asset/credit portfolio, legal structure, and technology stack. Based upon this evaluation, Maker approves a flexible credit box, under which the Arranger can extend a loan and a Maker Vault with a matched stability fee, debt ceiling, and collateralization ratio. These Arrangers are pre-approved by Maker Governance in consultation with the RWA Risk Core Units.

The Arrangers form part of a self-regulating system that supports scaling, confines the various actors within their area of expertise, and allows these actors to work together to secure the RWA framework. The scope of the actors is still under consideration by the Maker community, but will likely include a mix of:

• RWA Audit Core Unit (credit professionals promulgating best practices for the RWA Risk Core Units)

• RWA Risk Core Units (assessing risk, recommending onboarding of new Arrangers and their boxes, managing those performing risk assessment for Arrangers)

• Arrangers (professional financiers)

• Attestors (private parties providing risk analysis and monitoring of Arrangers)

• Trustees (adjudicating any claims against the collateral)

• Lenders (distributing funds to end-borrowers)

• Inherently Trusted Counter-parties (can make proposals to RWA Risk Core Units without the need for a preapproved box).

To summarize, the Arranger Model permits Maker to outsource expertise to independent nodes, which in turn permits parties to secure vaults with real-world assets at scale, all while minimizing any risk exposure to the Maker community.

The growth potential under the Arranger Model is limited only by the ability of market participants to imagine its functionality — that is to say, the growth potential is nearly unlimited.

Alongside development of the Arranger model, a clear consensus emerged within the Maker community to focus some of Maker’s enormous resources on the major off-chain issue of our time: climate change. The builders of the Arranger Model realized that Maker could also leverage the model to carry out the community’s vision. They saw that Maker’s positive impact on climate change would be best achieved by collateralizing vaults with Green Economy assets.

Several parties are working with Maker to build the Arranger Model and align its scalability with a Green Economy mission. Of these parties, Monetalis is poised to be the first to bring these elements together into a workable, scalable framework that is focused on the Green Economy.

Monetalis seeks to help Maker fund the Green Economy. Image Credit: Monetalis

Monetalis is a privately funded wholesale lender built to bring together the Green Economy and the Arranger Model. Monetalis is structured to operate at an institutional-level scale, with a comprehensive bond issuance and securitization model. Monetalis would focus on low-risk and short-term senior secured loan positions centered around growing the Green Economy. Through the Arranger Model, Monetalis and Maker seek to build a profitable Green Economy business.

With strong support from the Maker community, Monetalis is rapidly moving through due diligence conducted by Maker’s Real-World Finance Core Unit. Pending a positive review and executive vote from the Maker community, Monetalis may be ready to deploy the Arranger Model within the next two months.

By focusing on traditional wholesale, non-bank, small and medium enterprise (SME) lenders in the UK, who have so far been excluded from the greening of industry, Monetalis can immediately play a positive role in the credit market and in the implementation of the Green Economy plans for the UK.

Maker aims to fund the Green Economy at scale. Image Credit: Monetalis

The marriage of DeFi and TradFi is not without detractors, some of whom are vocal within the Maker community. While some skepticism is perhaps warranted, due diligence will show that the Arranger Model enables scalable growth for Maker without exposing it to outsize risks. The Arranger Model seeks to bring Maker into a new future where it facilitates wholesale funding of off-chain enterprises, while also extending the power and reach of decentralized finance.

As Maker matures, it is only natural for it to seek to bridge the off-chain and on-chain worlds. Its community has shown a clear preference to focus on the Green Economy as its anchor point for this bridge.

As Arrangers seek to further professionalize Maker’s RWA ranks while helping it scale, they should follow Monetalis’ example of deep forum engagement and thoughtful governance structures. It’s hard to build new frameworks and best practices, but Monetalis is channeling the solarpunk ethos of transparency and optimism to do just that. Through this innovative model and strategic partnership, Maker and Monetalis are leading the way towards a greener horizon.

However, Maker and Monetalis are not the only innovators working to bring the incentivizing power of the blockchain to pro-climate initiatives. KlimaDAO is tokenizing carbon offsets. The Regen Network is tokenizing sustainable agriculture. While skeptics of crypto wrongly equate the blockchain with wanton energy use, many new projects and protocols are showing that the most impactful energy use of the blockchain is creative. The creative energies of Monetalis, Maker, KlimaDAO, and the Regen Network, and the dreamers and builders who follow, will not only align the Green Economy with the blockchain, but will use the catalyzing force of new technology to address collective goods problems in ways that are not yet foreseeable. Those of us in the cryptoverse are fond of saying that the future is now; implementing these innovative initiatives will also ensure the future is just that: in the future.

Part II of this article will explore in greater detail how Monetalis and the Arranger Model work together to use real-world assets to secure Maker vaults at scale, allowing DAI to be minted to fund Green Economy initiatives.

Hiro Kennelly is a writer and editor at BanklessDAO, Core Team at DAOpunks, and Editor-in-Chief at Good Morning News. Hiro believes DAOs will change the future of political, economic, and social relations, ushering in a new epoch of incentivized agency and coordination.

Trewkat is an editor and active BanklessDAO Writers Guild member. She’s interested in learning as much as possible about crypto and NFTs, with a particular focus on how best to communicate this newfound knowledge to others.

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