MakerDAO from the Currency Perspective: What does MakerDAO intend to do by buying 1.2 billion U.S. bonds?

Original author: DrSamo (Twitter: @BirkSamo), Spinach Spinach (Twitter: @wzxznl)

As a leader in the DeFi (decentralized finance) world, MakerDAO has always been obsessed with US national debt. Since MakerDAO officially incorporated RWA (real world assets) into its strategic development direction in 2020, MakerDAO has bought nearly 1.2 billion U.S. treasury bonds. Why should the DeFi protocol in the decentralized world introduce real world assets? What is the intention behind this? Is the creation of DAI (a token launched by MakerDAO) after the introduction of U.S. debt the same as the creation of currency by the Federal Reserve?

To answer these questions, we need to start with the nature of money.

**This article will start from the perspective of currency, from the essence of currency to the dual structure of the central bank-commercial bank into MakerDAO’s balance sheet structure, to explore and understand the meaning behind MakerDAO’s introduction of U.S. debt assets. **

What is currency? What is the nature of money?

There is a widely spread saying that "the essence of money is credit", but many people may know it but don't know why.

We would like to quote Professor Zhai Dongsheng's book "Money, Power and People" to explain: "Money is a set of social coordination system and public goods composed of three basic elements."

An abstract unit of value supported by national law:

As an abstract unit of value, currency does not derive its value from itself (for example, the production cost of a banknote is much lower than the value it represents), but from the trust people place in it. This trust is to a large extent endowed and guaranteed by national law.

Therefore, when we say that money is an abstract unit of value backed by national law, we are actually emphasizing the legal status of money and how this status helps to maintain the value and trustworthiness of money.

An accounting system that tracks and records credit or debt balances as members of a society transact with each other:

In the ancient trading system, when there was no currency, people may trade through barter, for example, if I give you a chicken, you give me a bag of rice.

However, there are some obvious problems with this type of transaction. First, we need to find trading partners with mutual needs, which is very difficult in many cases. Second, we need to determine the exchange ratio, that is, how many bags of rice is a chicken worth? This is also a very complex issue.

To solve these problems, people invented money. Money can be thought of as an accounting system that helps us track and record credit or debt balances. For example, if you provide me with a service, you may not immediately ask me to provide you with an equivalent service. Instead, I might give you a Proof of Debt, which is currency, stating that I owe you a service. At some point in the future, you can use this proof of debt to get me or someone else who accepts this proof (currency) to provide you with an equivalent service.

In this way, the entire transaction becomes simpler and more efficient, and the measurement and transfer of value becomes easier.

The creditor transfers the specific creditor's rights relationship to the third party's standardized representation (Token):

To understand this, we can use a simple analogy to illustrate.

Suppose we are on a small island, and you help me grow grain today, I may owe you a debt, for example, I promise to help you catch fish some day in the future. However, this debt relationship is difficult to manage because we need to remember who owes whom what and when this debt will be repaid.

In order to solve this problem, we can introduce a standardized representation or token (Token) to represent this debt relationship, which is currency. For example, I can give you a shell that represents a debt I owe you. You can use this shell at any time to claim fishing services from me that I owe you, or you can give this shell to other people on the island to claim services from me. In this way, the shell becomes a standardized representation of the creditor's transfer of a specific claim relationship to a third party.

In modern society, the money we use works on the same principle. When you hold a $100 bill, what you actually have is a claim (cash is a liability to the central bank that issued it) that allows you to claim a certain value from society for a commodity or Serve. You can also hand over the bill to someone else, transferring this claim to them.

This allows us to manage and transfer debt relationships more effectively, so when we understand that the essence of money is credit, we can regard the essence of money as a transferable debt or transferable credit.

If we further understand the process of currency creation, you will have a deeper understanding of "the essence of currency is credit".

How is money created?

Types of currency: high-energy currency and credit currency

Currency is usually divided into two categories: base money and credit money:

High-energy currency, also known as base currency or central bank currency, is a currency that is directly issued by the central bank and has the ultimate ability to pay. This includes the coins and banknotes we use in our daily lives, as well as commercial bank reserves stored in central bank accounts. Because of the finality of its ability to pay, it is often seen as the basis of the money supply.

Credit currency, this form of currency is mainly created by commercial banks through loan and deposit activities. When a bank makes a loan to a customer, it is effectively creating new money.

In the modern monetary system, most of the currencies are credit currencies. In other words, most of the currencies in the real world are created by commercial banks rather than central banks.

For example, when a person deposits $1,000 in a commercial bank, the bank needs to deposit 10% of it in the central bank as a reserve (assuming a 10% reserve requirement ratio), and then issue the remaining $900 as a loan. When the $900 is finally deposited with another commercial bank, the bank can again reserve $90 at a 10% reserve requirement and issue $810 as a loan.

This process can be repeated over and over again, with new coins being created each round. But their total is limited because the amount of the loan is gradually reduced with each round.

Central Bank - Commercial Bank Dual Structure

In the modern monetary system, the central bank and commercial banks together form a dual structure, which aims to balance the issuance and circulation of money.

Central banks play an extremely critical role in the monetary system. The central bank is responsible for formulating and implementing monetary policy, controlling the supply of base money, regulating the level of interest rates in the economy, and maintaining the stability of financial markets. Central banks affect the money supply through open market operations, such as buying or selling government bonds.

When the central bank buys government bonds, it injects base money into the market, increasing the money supply; conversely, when the central bank sells government bonds, it absorbs base money from the market, reducing the money supply. In addition, the central bank will also set the deposit reserve ratio, that is, the proportion of deposits that commercial banks must keep in the central bank or itself, so as to affect the money creation ability of commercial banks.

Commercial banks are the main source of money creation. Commercial banks keep their businesses running by taking deposits and making loans. When a commercial bank makes a loan, it actually creates new money because the loan amount is added to the borrower's bank account, thereby increasing the money supply in the economy.

This dual structure of central bank and commercial bank allows the monetary system to maintain flexibility and stability. By adjusting monetary policy, the central bank can control the supply of base money, thereby affecting the overall interest rate level of the economy and helping the economy deal with risks such as inflation or deflation.

Commercial banks can adjust the supply of credit money through lending activities to meet the capital demand in economic activities. At the same time, since commercial banks are affected and constrained by multiple factors such as the central bank's monetary policy and the Basel Accords, their ability to create money is not unlimited. This also avoids the risk of excessive expansion of the money supply, leading to inflation or financial bubbles.

The process of money creation

In order to more intuitively reflect the process of currency creation, using the balance sheet is a very good tool. Observing changes in the balance sheet provides us with a magnifying glass for in-depth insight into financial behavior (for ease of understanding, the following charts are simplified Model).

**Central Bank Creates Currency:**Take the Fed as an example. The Fed usually creates dollars through open market operations. Open market operations can be understood as the Fed buying assets (such as treasury bonds, etc.) from market counterparties, and then the dollars are Created "out of thin air". The Fed's "big release" during the epidemic is actually the Fed's frantic purchase of various assets in the market and then pouring dollars into the market.

Assuming that the Federal Reserve purchases US$5,000 of treasury bonds from commercial banks, the changes on the balance sheet are:

When the Federal Reserve purchased US$5,000 of treasury bonds, there was an extra US$5,000 of bonds on the asset side of the Fed's balance sheet, and an extra US$5,000 of high-energy currency on the liability side. At this time, high-energy currency was created "out of thin air". Since then, there has been an additional liquidity of $5,000.

We have seen the process of creating dollars from the Fed’s balance sheet, and this process has expanded the Fed’s balance sheet and increased the liquidity of dollars in the market. This is called “expansion of the balance sheet.” I believe that everyone often hears the term "reduced balance sheet". The so-called "reduced balance sheet" and "expanded balance sheet" refer to the balance sheet.

The interest rate increase and balance sheet shrinking that everyone often hears recently is actually that the Fed wants to withdraw the dollar liquidity in the market. Since the Fed can create dollars by buying assets, then conversely, the Fed can "destroy" dollars by selling assets, which will also lead to asset losses. The reduction of the balance sheet has the effect of reducing the supply of dollars.

Commercial Banks Create Money: For commercial banks, the creation of money occurs through the lending process. Suppose a depositor deposits USD 5,000 in a commercial bank. At this time, the deposit of USD 5,000 is an asset for the depositor, but a liability for the commercial bank because it needs to pay interest continuously to the depositor.

Of course, commercial banks don't just hold the deposits of depositors. In order to obtain profits, they will issue loans at an interest rate higher than that of deposits, and obtain the deposit-loan spread as profit. Assuming that the bank is going to issue a deposit of 5,000 US dollars, you will find that there is no imaginary cash transfer in this process. The commercial bank just adds a loan and deposit on the balance sheet out of thin air, and the new currency is thus born ( Of course it also needs to deposit a deposit reserve with the central bank). In fact, the vast majority of bank deposits are created by the banks themselves, and these are credit currencies.

And commercial banks can continue to repeat this process, each round will create new currency. Therefore, although the initial high-energy currency is only 5,000 US dollars, the total money supply will often far exceed this amount through the deposit and loan activities of commercial banks. This is the effect of the so-called money multiplier. Assuming that the deposit reserve ratio is 10%, when all the high-energy currency of 5,000 US dollars is returned to the reserve account of the commercial bank in the central bank, the corresponding deposit will eventually become 50,000 US dollars, an expansion of 10 times.

So in the end you will find that commercial banks can create "currency" out of thin air, but the currency that people can withdraw (high-energy currency) is far less than the currency (credit currency) that is created. The game of "one bottle and nine caps" is also the reason why any honest bank cannot withstand a bank run.

Before the modern credit currency system matures, any country may issue currency at will. The current legal currency issuance system binds the issuance of new currency to the debt of the sovereign state. Behind each high-energy currency is an equivalent amount of national debt, and national debt needs to pay interest, so that the issuance of additional currency becomes a Things that have a price can theoretically limit the government's impulse to issue money indiscriminately.

But when the Federal Reserve creates money by buying treasury bonds, you will find that if the U.S. Treasury continues to issue new treasury bonds to borrow new ones to repay old ones, and the Fed keeps buying them with fresh dollars and then paying interest, isn’t it true that the U.S. government still wants to print as much money as possible? How much can you print?

The modern credit currency system actually implements a decentralized checks and balances mechanism here. The Federal Reserve can print unlimited money, but has no right to spend it at will; the U.S. Treasury Department does not have the right to print money, but it has the right to issue treasury bonds. The Ministry of Finance still needs to borrow funds at market interest rates, and excessive issuance of national debt will lead to an increase in borrowing costs. At the same time, there is still a legal debt ceiling for the issuance of treasury bonds by the U.S. Treasury Department.

However, although the modern monetary system has made certain institutional designs to prevent the sovereign government from issuing currency indiscriminately, in practice there are still loopholes in "constantly borrowing new and repaying the old" to avoid the cost of issuing bonds. , which invariably ends in a last-minute debt ceiling increase.

The entire modern monetary system is still essentially a game of drumming and spreading flowers. National debts need to be repaid with interest. What if they can’t repay? What should I do if I have to spend money? Continue to print money to pay interest and continue to spend. Of course, if you are a small country like Venezuela, this kind of excessive currency issuance can only lead to the depreciation of the local currency, and cannot solve foreign currency debts.

But if your currency is the most powerful hard currency in the world, and there will be no greater power to make you pay any extra price for borrowing new ones, then it will be fun to borrow money for a while, and it will be fun to borrow money all the time. Seeing this, you will find that the anchor behind modern currency is actually debt, and debt can be understood as a kind of credit. Seeing this, you will have a deeper understanding of the saying "the essence of money is credit".

MakerDAO has the ability to create currency?

Introduction to MakerDAO

We know that MakerDAO is a project that runs on the Ethereum blockchain and integrates over-collateralized stablecoins, lending, storage, user common governance and development. The core of MakerDAO is the Maker protocol, also known as the Multi-Collateral DAI (Multi-Collateral DAI) system, which allows users to use assets approved by the protocol as collateral to generate decentralized stablecoin DAI, such as mortgaged $10,000 of ETH to generate $6,500 USD in DAI.

In 2022, MakerDAO passed a proposal to use the funds in the pegged stability module (PSM) to purchase US Treasury bonds. This proposal is of great significance to MakerDAO.

First, let me introduce PSM (Peg Stability Module), which is an important part of the MakerDAO project. Its main function is to help DAI maintain a 1:1 peg with the US dollar.

Specifically, PSM works like this: when the market price of DAI is higher than $1, arbitrageurs can exchange stablecoins (currently only USDC is supported) for DAI at a 1:1 ratio through PSM, which is equivalent to a discounted price Exchange for DAI, and then sell it on the market at a price higher than $1 for a profit. Conversely, when the market price of DAI is lower than US$1, users can exchange DAI into US dollar stablecoins at a rate of 1:1 through PSM. The circulation of DAI will decrease and the exchange rate will rise back to US$1. Such a mechanism automatically adjusts the supply of DAI through market forces and keeps its price stable.

Looking at MakerDAO's balance sheet in 2022, we can find that the assets of PSM account for more than half of MakerDAO's assets, and almost all of PSM is the centralized stable currency USDC, which also means that DAI is actually a set of USDC to some extent. shell.

source:

But when MakerDAO started buying U.S. treasury bonds, we can find an interesting phenomenon, that is, the assets and liabilities of MakerDAO's balance sheet are almost the same as those of the Fed's balance sheet (U.S. treasury bonds: US dollar high-energy currency vs. : DAI stablecoin):

So here comes the question: Does this mean that MakerDAO is sharing the right to "create money based on U.S. Treasury bonds" that was monopolized by the Federal Reserve in the past? What does it mean for MakerDAO to buy U.S. bonds?

Is MakerDAO creating money?

First throw the answer, MakerDAO did not create currency, so what is wrong?

To understand the problem, we need to keep three concepts in front of us:

1. Central bank: The central bank represented by the Federal Reserve has the strongest ability to create currency, and the additional currency issued will be high-energy currency. In the simplest model, the Federal Reserve can create money out of thin air, but in practice it cannot. The U.S. dollars it prints cannot flow directly into the market. The U.S. Treasury Department has the power to issue U.S. debt but not the power to print money. The Federal Reserve has the power to print money but not the power to spend it at will. Relying on such decentralization, the issuance of legal currency is anchored by the debt of the sovereign state, and the impulse of the sovereign government to issue currency indiscriminately is restrained.
2. Commercial banks: they have the ability to create currency through credit expansion, and all they create are credit currencies. As mentioned above, after a loan is approved, the "transfer of a sum of funds" in our understanding will not actually happen, but the bank will record an extra asset in its balance sheet. At the same time, write down an extra debt. Banks only need to maintain their "core capital adequacy ratio" at a safe level macroscopically, and the general requirement is 8%.
3. Stablecoin issuer: has the simplest business, collects USD from customers, issues stablecoins corresponding to 1: 1 and is responsible for acceptance. Similar to Circle’s issuance of USDC and Tether’s issuance of USDT, they theoretically do not have the ability to expand credit. They just keep U.S. dollars for customers and then issue corresponding U.S. dollar stablecoins. The DAI issued by MakerDAO is also very close to them, especially the 1: 1 exchange service between DAI and USDC provided by its PSM module. If USDC is considered to be a "dollar voucher", then the DAI in the PSM module can also be considered as a "USDC token". coupon".

The PSM module is very confusing when the liquidity is good, and it continues to provide stable liquidity between DAI and USDC. But in essence it is a "reserve treasury". When everyone wants to exchange their DAI for USDC through the PSM module 1: 1, obviously this treasury will be exhausted.

The USDC in this reserve belongs to MakerDAO, but MakerDAO has no lending agreement and no ability to expand credit. It cannot and should not re-lend this USDC. Instead, these USDC should be locked. Only when DAI and USDC are provided 1: 1 exchange, just as Circle cannot easily access customers' USD.

**So where did MakerDAO get the money to buy U.S. Treasury bonds? **

If you directly use DAI to buy US treasury bonds, people will not recognize it. MakerDAO exchanged the USDC belonging to the DAO treasury in the reserve for US dollars, and then purchased US treasury bonds.

After understanding the modern credit currency system based on the "central bank-commercial bank", we can see that the process of the third role, the issuer of stable currency, is very different. Compared with the ability of the central bank to create high-energy currency out of thin air, and the expansion ability of commercial banks to create currency through loans, the ability of stablecoin issuers to create currency can be said to be negligible. It is like Nongfu Spring - we do not produce currency, we are just currency porter.

Even looking at currency issuance from a longer scale, the way stablecoin issuers supply currency is completely different. In the era of the Bretton Woods system, the U.S. dollar issued by the U.S. reserve gold gradually played a game of ten bottles and nine caps. As the dollar was issued and the gold reserve was lost, the number of caps became less and less.

Of course, if we only do a good job of voucher stablecoins, the issuers will starve to death, so we also accept that Circle will replace part of its customers' US dollar deposits with short-term U.S. Treasury bonds. This essentially replaces the more liquid U.S. demand deposits with less liquid but higher-yield U.S. bonds, so that the income can be used to pay the company's business operating costs. What MakerDAO does is similar, which is to replace the interest-free USDC reserves with interest-bearing U.S. bonds to generate income and support the agreement.

This kind of behavior will cause USDC to be unable to cope with 100% run now (it is theoretically possible when it only enjoys demand deposit interest), and it will also weaken the anchoring of DAI to USDC. The act of profit, but it's more like 99 caps for 100 bottles than nine caps for ten bottles.

Judging from the balance sheet

In addition, from the perspective of the balance sheet, DAI is a liability for MakerDAO, and USDC in the PSM module is an asset of MakerDAO. This behavior is essentially MakerDAO replacing some of the assets in its balance sheet, USDC, with another asset, U.S. Treasury bonds. This is a very normal asset replacement process for any company or a DAO. DAI, and did not use DAI as a high-energy currency for credit expansion to amplify the currency multiplier.

Taken together, MakerDAO does not share in the Fed's ability to create money. In particular, it is very difficult to create a currency with a strong value-scale function such as the US dollar stable currency. This is also the original ideal of BTC, making the decentralized currency the anchor of all economies, and exempting people from being exploited by the sovereign government's excessive currency issuance. Even BTC still has a long way to go on the journey of replacing legal currency, and DAI still has a long way to go on the journey of replacing legal currency (or centralized stable currency).

What does it mean for MakerDAO to buy US bonds?

We pointed out that while MakerDAO increased U.S. debt on the asset side, it did not increase the corresponding DAI on the liability side, it was just a replacement of assets.

But looking at it from another perspective, can it also be considered that some DAI endorsements were reserved USDC, and after the replacement, some DAI endorsements became U.S. Treasury bonds issued by the U.S. Treasury, thus enjoying the sovereignty of the United States? National credit endorsement?

This switch of endorsement is established, and similar things have happened many times in the real world.

Other legal currencies mixed with US dollar endorsement

Historically, it is not uncommon for countries with small economies to use the US dollar as an anchor to increase credit for their currencies.

• European countries after World War II

After World War II, all European countries were devastated. There was not enough gold reserves in the national treasury, and the government did not have enough credit to issue bonds. lose-lose situation.

At that time, the U.S. dollar stood up and acted as a stable bridge for the world economy. The United States reserves gold and other countries reserve U.S. dollars. In fact, countries borrowed U.S. dollars as an endorsement, adding credit to their weak legal currencies.

This story is Web3, the United States reserves gold, which means MakerDAO over-mortgages ETH and other core assets to mint DAI; countries reserve US dollars, which means DAI reserves USDC.

• China after reform and opening up

Economic development requires capital, and capital was very scarce in China at that time, and money could not be printed indiscriminately to avoid inflation. How to solve the stability problem of anchoring the newly issued RMB?

It is also the reserve of U.S. dollars to increase the credit of the renminbi. China has begun to advocate the introduction of foreign capital, and foreign capital (mainly U.S. dollars) cannot be directly circulated after entering China. The actual process is that the Administration of Foreign Exchange accepts the U.S. dollars, and then issues additional RMB according to the exchange rate to the foreign investors who want to invest, and the foreign investors invest in the country with the RMB. After China's accession to the WTO, this trend has grown rapidly, making a large part of the newly issued RMB backed by US dollars. Of course, the Administration of Foreign Exchange cannot wait for the depreciation of the U.S. dollar. While buying a large amount of U.S. debt to earn interest, it also uses the U.S. dollar and U.S. debt to endorse the credit of the U.S. government for the renminbi to indirectly introduce.

This story is Web3-oriented, can’t the RMB of private placement be understood as a kind of wrapped USD (Wrapped USD++++++++++++++++++)? These RMB issued by reserve dollars borrow the credit of dollars.

• Countries and regions that implement the linked exchange rate system

The most typical example is Hong Kong. The linked exchange rate system has been implemented in Hong Kong since 1983, guaranteed by 100% foreign exchange reserves, so that the Hong Kong dollar exchange rate remains stable within the range of 7.75 to 7.85 Hong Kong dollars to 1 US dollar. The Hong Kong dollar turns itself into a voucher for the US dollar, but not 1:1.

The Hong Kong Monetary Authority will not intervene in exchange rate fluctuations under normal circumstances. The three note-issuing banks (Bank of China Hong Kong, Hongkong and Shanghai Banking Corporation, and Standard Chartered Bank) conduct arbitrage activities to stabilize the exchange rate. When the Hong Kong dollar is about to exceed the narrow range of 7.75 to 7.85, the Financial Management Authority The bureau will use US dollar reserves to buy Hong Kong dollars or sell Hong Kong dollars in exchange for US dollars, using two-way methods to forcibly lock the exchange rates of the two currencies.

This story is Web3-oriented. The stock Hong Kong dollar before 1983 was on the gold standard, just like the DAI previously issued with over-collateralization; the arbitrage behavior of the three note-issuing banks is the arbitrage robot on the chain trying to level the price difference between DAI and other stable coins; and The role of the Hong Kong Monetary Authority is equivalent to MakerDAO's PSM module.

Two forms of currency endorsement

From the above example, we can abstract two sources of endorsement:

• The part endorsed by hard currency (mainly US dollars today) and precious metals (mainly gold) is "hard endorsement".
• The part of the endorsement by a small country with its own credit is relatively weak, which can be called "soft endorsement".

Almost all the legal currency of small countries do is to use the "hard" part of the reserve to improve the "fineness" of their own currency, and then quietly mix it with the "softer" national credit to dilute it and collect "seigniorage" .

If it is an irresponsible country, such as Venezuela, it also has a certain amount of hard currency foreign currency reserves, but after adding a few zeros to the face value of the currency, that little bit of hard currency is meaningless. Such hyperinflation cannot solve the problem of foreign currency debt, it can only harvest the people of the country.

If it is a more responsible country, it can fully enjoy the benefits of the "hard endorsement" in the currency, and slowly add its own "soft" elements while maintaining a relatively stable currency value, and complete the gradual expansion of its own credit. Just like Rome in the era of the precious metal standard, at the end of the empire, it was constantly mixed with water to reduce the fineness of gold and silver coins, and it continued to collect mint taxes for more than a hundred years.

DAI is the legal currency of a small country

For DAI, if USDC and U.S. debt are considered to be external hard endorsements, what is its "soft endorsement"? Obviously, it is the part generated by over-collateralization. This is not "soft", and it is the only issuance method among decentralized stablecoins that can stand the long-term test. This is more like a behavior of "mixing hard with hard", replacing the "soft" part, which is similar to the continuous issuance of currency by small countries and mixed with water, with open and transparent issuance rules for over-collateralized and full reserves.

The problem with over-collateralization to generate stablecoins is that when the price of the underlying assets fluctuates rapidly, large-scale liquidation activities may cause fluctuations in the exchange rate and circulation of DAI, and the growth rate of the money supply is relatively slow. For DAI, the meaning of this kind of "hard mixing with hard" is more to take advantage of the massive influx of US dollars into the decentralized world to rapidly increase the issuance of DAI (through the 100% reserve issuance of the PSM module), and to increase the amount of DAI exchange rate stability.

Relying on foreign credit to achieve rapid growth in circulation is of great significance. One of the reasons why gold has gradually withdrawn from the international trade settlement currency is the explosive growth of productivity in modern society after the Industrial Revolution. The supply of gold as money cannot keep up with the rapid increase in goods and services, resulting in a deflationary trend. Deflation is as bad for an economy as hyperinflation. In addition to maintaining the stability of its own anchor, DAI is also a very important ability to increase the circulation to match the demand when the entire cryptocurrency market grows.

Significance of Reserve Diversity

After understanding the above examples, we found that the seemingly process of MakerDAO creating currency is actually the process of MakerDAO replacing the reserve components in its own balance sheet.

• Increase USDC reserves: When real-world dollars continue to flow into the encrypted world through stablecoins, DAI also gains the ability to rapidly increase supply. No longer limited by the predicament of slow supply expansion when mainstream cryptocurrencies such as ETH were used as overcollateralization.
• Increase U.S. treasury bond reserves: Skip Circle’s intermediary and directly enjoy the endorsement of U.S. Treasury bonds issued by the U.S. Treasury Department. If more U.S. treasury bonds were replaced to endorse DAI, then in the last USDC run-off crisis, DAI’s The impact received will also be smaller, which is the positive effect of reserve diversity on exchange rate stability.

In MakerDAO's asset categories, we can also clearly see that the proportion of real-world assets RWA (such as U.S. Treasury bonds and other assets) is increasing, and the reliance on stable currency assets is becoming less and less.

source:

Summarize

After analyzing the question "Does MakerDAO share the Fed's ability to create money" from two perspectives, we can find that its answer is no longer important. MakerDAO's purchase of U.S. bonds means that it, as the "central bank" of DAI, has replaced the assets allocated on the asset side of its balance sheet, and this replacement capability is the most critical.

In fact, central banks in the real world also have the ability to choose the assets they allocate. For example, in 2008, in order to rescue the subprime mortgage crisis, the Federal Reserve began to accept housing mortgage securities MBS into its own assets; the Bank of Japan miraculously held a large number of Japanese company stocks as assets through trust funds, so that the Bank of Japan became the capital of many large companies. largest single shareholder.

To sum up, the significance of MakerDAO's purchase of U.S. dollar treasury bonds is that DAI can use external credit capabilities to diversify the assets behind it, and the long-term additional income brought by U.S. treasury bonds can help DAI stabilize its own exchange rate, increase the flexibility of issuance, and Incorporating U.S. treasury bonds into the balance sheet can reduce DAI's dependence on USDC and reduce single-point risks. The combination is conducive to its development. We expect it to achieve greater success in the development of decentralized stablecoins achievement.

References

[1]

[2]

[3] Hong Kong Linked Exchange Rate System

[4] Balance sheet in popular science-web3-fc41440b3e1c

[5]

[6]

Original link