Maker x Maple: A Partnership to Scale the Digital Economy

MakerDAO needs to scale the DAI supply in a long-term, sustainable way. Maple can be a gateway for Maker to reach an expanded market, providing large amounts of capital backed by real world assets in a highly efficient manner. By leveraging the DAI Direct Deposit Module (D3M) to mint DAI into sector-specific managed liquidity pools in the Maple protocol, Maker will be able to scale through Maple’s crypto-capital infrastructure, and be a catalyst for growing the DAI supply to $100 billion and beyond.

Hi, my name is Lucas Manuel and I am the Ethereum Smart Contracts Tech Lead at Maple. I have worked here since December 2020, developing and deploying the smart contracts that have helped Maple grow to over $1.1 billion USD in loan originations.

Prior to Maple, I was a smart contracts engineer at Maker, helping to design new parts of the system and onboard new collateral types. I had joined just at the beginning of DeFi summer, when DAI supply was below $100 million — by the time I joined Maple DAI supply had grown to over $1 billion.

MakerDAO Background

Maker’s main mission is to provide the world with access to a truly decentralized, stable global currency, DAI. Over the last few years the DAI supply has grown massively, recently surpassing $10 billion DAI in circulation. One of the main use cases for Maker and generators of DAI was demand for leverage on crypto assets.

As the market expanded and the demand for leverage grew, people came to Maker for a decentralized option to borrow against their assets. However, as the market started to turn, the supply of decentralized volatile crypto assets as collateral in the Maker system began to fall in favour of more stable and centralized assets such as USDC. In order to plan for the long-term, Maker is looking into alternative collateral sources.

The two main alternative collateral sources explored here are:

Real World Assets (RWA)
DAI Direct Deposit Module (D3M)

Growth and Scale: Real World Assets (RWA)

To fully realize the vision of the Maker system, DAI must break out of the crypto-native ecosystem and facilitate growth through real world assets. The goal of RWA is to supply DAI to loans backed with value that is represented off-chain, meaning Maker can tap into the massive amount of value outside the Ethereum ecosystem. However, this is no easy task as this off-chain aspect introduces the requirement of trust, and some centralization.

A little more than a year ago, RWA became a priority in the Maker system, with new integrations being introduced with Centrifuge through MIP-22 (https://forum.makerdao.com/t/mip22-centrifuge-direct-liquidation-module/3930).

The biggest pain-point for individual actors/institutions that would like to borrow DAI backed with RWA is that they must go through the full governance process, which includes:

Signal request
Risk evaluation and underwriting
Legal agreements
Technical evaluation
Technical implementation
Executive vote

For a single borrower this amount of work is a barrier to entry. Cumbersome, inefficient and a burden to the hard-working core units that are pushing to expand the supply of DAI.

On-chain Liquidity Provision: DAI Direct Deposit Module (D3M)

One of the most interesting technical innovations that has been integrated with the Maker protocol is the D3M. At a high level, the D3M can directly mint DAI into another DeFi protocol that requires liquidity, and back the issued DAI with LP tokens issued by that protocol.

AAVE’s D3M is a great example of how this can be used. AAVE is an on-chain money market that has variable interest rates based on each asset’s utilization rate (more info here: https://decrypt.co/resources/what-is-aave-inside-the-defi-lending-protocol). The amount of DAI that can be minted is determined by governance and in AAVE’s case is dependent on the DAI interest rate. In its short time as a part of the Maker collateral system, aDAI has grown to generate $300 million DAI, and is on track to grow much larger than that.

Maker’s D3M system positions it to be the “central bank of DeFi”, providing large amount of liquidity to the broader ecosystem at a very low cost of capital. Sam MacPherson of the MakerDAO Protocol Engineering Core Unit shared an inspired article outlining the potential of realizing this vision and, how to scale the DAI supply to be many times larger than it is today.

I spy pancakes.

However, as exciting as the D3M innovation is, it is still limited to the scope of DeFi protocols, which are only a small fraction (<0.2%) of the global financial debt market.

Total On-Chain DeFi Lending TVL (DeFi Pulse) $36 billion
Global Bond Markets Notional Outstanding (ICMA) $128.3 trillion

A Partnership for Growth: Maker x Maple

Now for the part that I am most excited about.

Maple is an institutional crypto-capital market infrastructure that enables experienced credit experts (Pool Delegates) to underwrite and allocate large amounts of growth capital to creditworthy institutional borrowers. This is done by aggregating capital from institutional and independent DeFi users into liquidity pools, and then lending these funds out once all legal, due diligence and credit underwriting work is performed by the pool delegate.

Maple has grown to facilitate over $1.1 billion in loans since its commercial launch in May 2021, and is managing over $850 million in assets at the time of writing.

Maple is uniquely positioned to help Maker scale DAI, through a combination of the alternative collateral sources mentioned above. Since Maple is a DeFi protocol that issues LP tokens, it is eligible to be integrated with the Maker protocol through a new D3M. Additionally, since Maple deals exclusively with loans to institutional borrowers backed by enforceable legal agreements, these LP tokens represent a diversified lending portfolio that is backed by real world assets.

Maple can be a vehicle for Maker to mint DAI to sector-specific liquidity pools managed by experienced pool delegates, who perform the following on behalf of Maker:

Borrower onboarding
Borrower relationship management
Legal infrastructure management, Master Loan Agreements, etc.
Financial, operational and risk due diligence on borrowers
Credit risk analysis of borrowers
Underwriting and negotiation of loan terms
Managing liquidity and outstanding loans
Managing defaults and all corresponding legal proceedings necessary to recover capital

A Maple pool only has to go through one Maker onboarding and governance process. The pool can then grow and continuously diversify the lending portfolio with new borrowers. This can be done without any Maker governance/core unit intervention outside of collateral debt ceiling raises.

Outlined in the diagram below is what a mature Maple integration could look like for Maker. For example, after the successful approval of four individual MIP-6 applications, the Maker system onboards four Maple D3Ms. Each of these pools would then lend to a specific sector, aligned with Maker’s values, and managed by an institutional credit-expert or entity that is specialized in that sector. Since each pool delegate has long-term relationships with borrowers in the sector, they are able to establish diversified lending portfolios.

In this example, and as Maple functions already, pool delegates will continuously onboard new borrowers and extend credit to existing borrowers in their portfolio. Periodically, the Maker governance system can evaluate the performance of each of the pool delegates and can adjust the amount of capital accordingly. This workflow will facilitate a steady, sustainable, and continuous vector for DAI supply growth and adoption by institutions around the world.

Conclusion

DAI has a massive opportunity to become the go-to stable decentralized currency for global digital finance. Although DeFi has gotten much more traction than it had at Maker’s inception, we still have a long way to go. MakerDAO’s superpower as a DeFi protocol is the ability to mint DAI and issue it at an extremely low cost of capital. In order to grow efficiently and to the scale necessary to be recognized on the world stage, Maker needs to start outsourcing capital allocation and management to specialized parties.

Maple’s capital markets infrastructure is currently the best positioned protocol to effectively manage and deploy MakerDAO’s capital at a massive scale, expanding into real world assets specifically.

The recent deal that Maker facilitated with Tesla is a perfect example of how DAI can provide real world value to real world companies.

With Maker’s integration with Maple’s protocol, I see a future where MakerDAO’s governance will make decisions about high-level goals that they want to achieve with DAI, such as:

Sustainable energy funding (solar, wind, etc.)
Nuclear reactor research and development
DAI multi chain liquidity
Advancing emerging economies
Purchasing low-risk treasuries/bonds
Healthcare advancement
Growth capital for tech companies
Neurological advancement research
Global supply chain optimization
The list goes on…

With these high level objectives for DAI allocation, MakerDAO can onboard multiple Maple pools within each sector, each with highly experienced and mature fund managers, specialized in the field. This will provide a highly efficient, highly diversified infrastructure for MakerDAO to grow DAI and to realize its vision of being the world’s preferred stable medium of exchange.