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5th October 2021 > > SocGen & MakerDAO.


SocGen is exploring the myriad possibilities of Decentralised Finance (DeFi)

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24-hour high recorded as $49,749 so BTC remains resilient even though stocks are nervous.

Curious Cryptos’ Commentary – SocGen & MakerDAO

SocGen have previously covered themselves in glory by being an early adopter and enthusiast of blockchain tech.

It was one of the first financial institutions to use Ethereum for issuing a bond, way back in 2019.

Its digital subsidiary – SocGen Forge – is tasked with investigating and developing the application of blockchain tech to the financial services industry.

MakerDAO is a decentralised organisation that allows for the lending and borrowing of cryptocurrencies utilising smart contracts on Ethereum. This not only cuts out the need for a middleman but remarkably it also allows you to lend crypto to yourself.

After depositing ETH as collateral, the protocol mints a stablecoin called DAI which you can then withdraw and exchange for more ETH or use as collateral in a liquidity pool. The loan – or more accurately your collateralised debt position - is redeemed by returning the DAI to the protocol.

MakerDAO also has its own native token, MKR which is minted or burned to keep DAI pegged at $1.

Owners of MKR, which has long been a CCC top pick (NOT investment advice), have governance and voting rights over the protocol. Fees are paid in MKR.

The CCC would never suggest that anyone should use ETH in this way to loan themselves DAI. In effect you are leveraging your crypto holdings and you are subject to the risk of being closed out on your loan in the event of a sharp drop in the price of ETH.

That would be a deeply distressing outcome in the event of a sharp rebound in the price of ETH, which is most likely if the cause of the sharp drop was a long squeeze.

However, plenty of people seem to be comfortable with this risk, such that MakerDAO is undoubtedly a successful venture in the decentralised finance (DeFi) space.

SocGen has submitted a proposal to MakerDAO to accept on-chain bond tokens issued by SocGen in 2020 as collateral in exchange for a loan in DAI.

The notional amount is very small, at just $20mm of DAI, so this experiment doesn’t change the world by itself.

What is interesting is that the tokens issued by SocGen have been rated AAA by Moody’s and Fitch and both the tokens and DAI are recognised under French law. SocGen have described this as a “pilot use case … to help shape and promote an experiment under the French legal framework”.

Note that borrowing against fixed income instruments deposited as collateral is worlds away from borrowing against cryptos deposited as collateral. The two scenarios cannot be compared.

This experiment is probably the largest example of institutional adoption of DeFi and is certainly the most high profile to date.

The opportunity for MakerDAO is huge.

Collateralisation of fixed income instruments and the associated repo market is vast. It is difficult to get precise numbers, but ICMA (International Capital Market Association) estimates globally the market is over EUR 15 TRLIION with turnover of EUR 3 TRILLION per day.

If this experiment is successful, then the migration of fixed income instruments to blockchain tech based solutions is going to make decentralised platforms that facilitate repo a lot of fees, to the detriment of investment banks everywhere.

Curious Cryptos’ Commentary – Unbound

I have come across a protocol known as Unbound which describes itself as a “debt free liquidity provision system” that seems to work in principle like MakerDAO i.e. you collateralise your cryptos in exchange for minting native tokens that can then be exchanged for more crypto or staked in a liquidity pool.

The remarkable aspect to Unbound is a lack of fees, but even more importantly NO LIQUIDATION RISK.

This sounds way too good to be true but is worth some serious investigation. Note it is still in the test phase. I do not yet know the timetable to go live.

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