Oct 2, 2022

Real World Assets - When a commercial bank partners with MakerDAO for 100 million DAI

it's True - a Philly bank partnered with MakerDAO for 100 million DAI

DeFiPhilly was fortunate to land a great speaker at their meetups on September 26, 2022 - Dan Krewsom from Huntingdon Valley Bank (HVB).  What makes Dan a great speaker is that he is the orchestrator of the MakerDAO and Huntingdon Valley Bank deal - the partnership where MakerDOA made 100 million DAI available to Huntingdon Valley Bank to specifically increase and enhance their business offerings.  Firstly, this is an amazing announcement and experiment - a bank borrowing money from a protocol.  Simply bonkers today.  But maybe not bonkers in the near future.  We’ll dive into why we think this is only the beginning for businesses working with protocols.  But first, here are the deets of the deal that helps us understand why it’s possible businesses will work with protocol’s in the future.  

The deets of the deal:

This deal isn’t the same as creating a vault through the Oasis app, and posting $ETH as collateral.  Instead, HVB is entering a Master Purchase Agreement with a Delaware Trust who’s beneficiary is the MakerDAO protocol (a protocol being listed as a Trust beneficiary is also bonkers).   When HVB wants to access any of the 100 million DAI, they summon the MakerDAO overlords to buy interest in HVB loans (the real world asset).  In return, HVB gets access to the 100 million DAI to use for their business.  This summary is definitely confusing for anyone not intimately involved with commercial lending (which I am not).  My own grounding required multiple readings of MIP6, and some email exchanges with Dan Krewsom for a dummied down summary.

Not to be a downer, but why do the deal?  

According to Krewsom, the deal took 9 months from start to finish.  The deal required the involvement of many regulators, many lawyers, many accountants, and so many other professional heads that I couldn’t help but wonder “why even bother?”  Sure, it’s an amazing testament for a decentralized protocol, tying real world assets to a digital, immutable ledger.  But what’s the value proposition for a publicly traded bank?  MIP6 is over 45 pages of legalese documentation, which is all HVB trying to convince Maker to grant them access to this 100 million DAI.  So what’s the angle?

As stated on Page 5 of MIP6:

the proposed relationship with MakerDAO will be strategic for HVBank insofar as it will allow the Bank to maintain and grow relationships with customers by expanding its effective lending limit. Loans to new and to repeat borrowers will comply with the same credit requirements. 

What I learned was that HVB has a lending limit of about $7 million (meaning the loans they issue are not allowed to exceed that amount).  But sometimes their clients need larger loans.  HVB has an interest in maintaining a working relationship with that client.  To bypass this lending limit, what they do traditionally is work with other small banks to increase the total money to be lent to a client.  So in the relationship between HVB and MakerDAO, Maker is acting like a small bank.  When HVB’s clients are requesting more money than what HVB can offer, HVB taps into its partnership with MakerDAO, and uses them as a 2nd lender for their clients.

Just from a surface level perspective, this is a great way for a small bank to be more self-sufficient.  When one of your premiere clients requests a large loan that you can’t service, then that bank is probably treading carefully introducing a new bank into the relationship.  Replacing that small bank with an unassuming protocol adds a powerful tool for small banks (and probably small businesses) in the future.  

Where does this go in the future?

After listening to Krewsom’s interview, I couldn’t help but wonder if HVB is forging the way for future protocol-business relationships?  My own question for Krewsom was “does this become an industry standard for future business-protocol relationships?”  And Krewsom’s answer was simple: “yes.”  

According to Krewsom, other banks are closely watching how this unfolds.  If HVB proves that this new relationship is viable, then what small (or large) bank wouldn’t want to work closely with Maker to mint DAI using real world assets?  And if you read through the long-winder MIP6, one nugget of info states:

While the facility will be structured with the intention of having the ability to onboard multiple banks, it is currently only intended to be used for HVB

So onboarding other banks is already in the forethought of both HVB and the MakerDAO.  

But why stop with banks?  Every business generally needs a loan.  And with the federal reserve raising rates, Maker is looking very attractive for anyone needing a bump in cash.  Sure, future regulation could limit who deals with the protocol.  But even that’s still a ground-breaking regulation - protocols getting the same treatment as corporations.  We’ve already seen protocols getting sanctioned by OFAC, now we’re seeing protocols becoming a beneficiary of a Trust.  Where will protocols go next?  Either way, their decentralized, immutable ledger is wedging itself deeper into the fabric and policies of society.