Erik Weijers, a year ago

MakerDAO loans 100 million DAI to traditional bank

MakerDAO has officially tied its stablecoin DAI to the traditional financial system: it will lend 100 million to Huntingdon Valley Bank (HVB), a local bank in Philadelphia. It is the first integration between a decentralized financing protocol and a traditional bank.

Earlier there was already talk about collaboration between MakerDAO and the French bank Société Générale. Simply put, HVB will guarantee collateral from the traditional financial system - this could be government bonds or dollars, for example. In return, it will receive a loan of 100 million to DAI.

What is DAI?

DAI is a decentralized stablecoin, which means that no central party can determine the amount of DAI. It is an application built on Ethereum. The Decentralized Autonomous Organization (DAO) MakerDAO is the community that votes on major changes to the protocol.

Unlike the failed UST (Terra), DAI has more collateral than the total amount of stablecoin dollars outstanding. Someone who wants to mint DAI must first put in 150% collateral (e.g. Ether or USDC). When selling DAI, this collateral can be retrieved.

What is the importance for DAI?

In its own words, MakerDAO wants to spread their counterparty risk. All the collateral that guarantees DAI's stable price is currently in crypto - mostly in USDC and ETH. But the crypto ecosystem is so intertwined that there is always a risk of contagion. For example, former competitor stablecoin US Terra ended up using Bitcoin as (part) collateral. When the price of Terra and Luna started to fall in early May, that collateral had to be sold like mad and the entire crypto market crashed. DAI survived this crash well, but still. Investing part of the DAI in traditional markets reduces relative exposure to crypto crashes.

There is another more recent reason why DAI wants to move to tradfi in part. Namely that the censorship resistance of crypto has recently been under the magnifying glass. DAI's collateral currently consists of approximately 50% stablecoin USDC. After the US sanctions against Tornado Cash, Circle, the company behind USDC, informed that USDCs that had passed through Tornado Cash were no longer valid. So the fate of USDC owners - including the DAI collateral vault - rests in the hands of a corporate boardroom, which is (understandably) sensitive to pressure from the US government. That is a risk factor for DAI.


The irony, of course, is not lost on us that an cutting-edge decentralized stablecoin is taking a step into the traditional banking world. In a sense, MakerDAO gives up the ideal of a currency that is not under the influence of central governments. On the other hand, this is of course a stablecoin, which by definition is linked to a government-controlled currency. So maybe the move isn't that alien.

The increasing intertwining between crypto and the traditional system is a signal that crypto will stay. It is conceivable that crypto will split into two worlds. That some of the crypto projects will want to completely withdraw from regulations, but that another part will be more encapsulated. MakerDAO seems to be following this latter path.

Featured articles
Four trading strategies for crypto
Bitcoin and Ethereum: what are the differences?
What determines the Bitcoin price?
Related articles
Stablecoin issuer Tether has bought BTC for its reserves

May 18, 2023

Stablecoin issuer Tether (USDT) in its recent reserves report reveals that the company holds approximately 52 thousand BTC, worth a respectable $1.5 billion. This is only a fraction of its total assets but signals an interesting potential trend of institutions allocating a piece of their capital to Bitcoin.

Trade anytime, anywhere

Boost your trading impact and reaction time in over 80+ cryptocurrencies via instant access to your portfolio with the LiteBit app.

App Store
Google Play Store
  • 2525 Ventures B.V.
  • 3014 DA Rotterdam
  • The Netherlands
More info
  • Support
Subscribe for updates

Sign up to stay informed via our email updates

Explore popular coins
    © 2023 LiteBit - All rights reserved