Unveiling MakerDAO RWA: Governance Systems and Trading Architecture for Capturing Off-Chain Assets in DeFi

The existence of real-world assets (RWAs) off-chain allows asset owners to reap expected returns, governed by legal systems and rooted in our societal contracts. For on-chain DeFi, which operates on the principle of “Code is Law”, adapting to off-chain governance and legal structures to securely and compliantly capture off-chain assets is a challenge that needs exploration and resolution.

Following an analysis of off-chain asset tokenization paths via Centrifuge, this article delves into MakerDAO’s perspective on DeFi, detailing the decentralized on-chain protocol’s governance system, legal framework, and practical paths for capturing off-chain assets. This will hopefully assist those working on RWA projects and builders, and we welcome discussions and exchanges of ideas.

The content covers mature RWA projects in MakerDAO, such as New Silver Restructuring, BlockTower Credit, BlockTower Andromeda, Monetalis Clydesdale, and the trading architecture provided by Centrifuge for Aave.

1. Why DeFi Aims to Capture Off-Chain Real-World Assets

The narrative of RWA is essentially the narrative of MakerDAO in DeFi, making it crucial to understand the significance of RWA for the DeFi world from MakerDAO’s perspective. MakerDAO, a decentralized autonomous organization (DAO), manages the Maker protocol on Ethereum, offering the first decentralized stablecoin, DAI (akin to a digital dollar on Ethereum), and a series of derivative financial systems. Since its launch in 2017, DAI has consistently maintained its peg to the dollar.

The DeFi Summer of 2021 saw numerous unsustainable yield products in DeFi, leading to a massive crypto market crash and contagion of credit defaults spreading across the ecosystem. While native crypto assets are key components and long-term value differentiators for DeFi, current real-world demands don’t match long-term development value.

Due to the high volatility of the crypto market, reliance on a single collateral asset can lead to significant liquidations. For a large lending protocol like MakerDAO, a key consideration is the stability of collateral value. Previously, MakerDAO’s collateral included unstable cryptocurrencies, which posed risks to lending and severely limited MakerDAO’s growth potential.

Therefore, MakerDAO and DeFi urgently need a more stable base layer of collateral to support the widespread adoption of the stablecoin DAI in the crypto world, building a sustainable, scalable path.

（Centrifuge & Maker: A Partner’s View of Real-World Assets）

RWA, as one of MakerDAO’s most important topics, is continually discussed and validated by the community and seen as a crucial solution. MakerDAO’s Endgame plan, released in May 2022, emphasizes incorporating RWA as collateral as a key part of building a decentralized stablecoin.

Benefits of RWA include:

(1) Increasing market risk and asset usage transparency.

(2) Providing composability for DeFi.

(3) Improving accessibility for underbanked and underserved populations.

(4) Capturing value from larger, more stable traditional financial markets.

For MakerDAO, RWA possesses two crucial attributes—stability and scalability. Further, DAI can expand its usage by anchoring to non-crypto volatile, stable-yielding, scalable assets, especially in the current market environment with low crypto yields and high treasury bond yields. Capturing value through RWA enables MakerDAO to continue expanding and growing during bear markets, preparing for the next bull cycle.

Most importantly, RWA can help MakerDAO achieve its grand vision: enabling a credit-neutral, decentralized channel to add utility to people’s daily lives and businesses’ development needs. This is realized through an open, community-driven, programmable, decentralized protocol, creating a new open DeFi financial market.

However, tokenizing real-world assets is not straightforward and involves challenges in new product architecture, financial, legal compliance, and technical risks, as well as unknown unknowns.

2. Capturing Off-Chain Real World Assets in DeFi

After acknowledging the need for DeFi to capture real-world assets, it is essential to establish a governance system and legal framework suitable for on-chain protocols or DAO organizations. Some might argue that this is unnecessary, as one could simply purchase tokenized U.S. Treasury Bonds issued by third parties, which is more time and effort efficient.

For instance, the highly successful on-chain fund project Solv Protocol introduced two RWA (Real World Asset) funds in its V3 version. Managed by Solv RWA, it currently oversees assets totaling 2 million USD in TVL. Qualified users who have passed KYC/AML can deposit stablecoins to enjoy the returns of U.S. Treasury Bonds. The underlying assets of this RWA fund are tokenized U.S. Treasury Bonds provided by Red Cedar Digital. Ltd.

(Solv V3’s Milestone Achieved: The First Ever RWA Fund Launch)

For projects with smaller capital sizes and manageable/acceptable risks, purchasing third-party tokenized U.S. Treasury Bonds is feasible. However, several issues still need consideration:

(1) How do we ensure the trading counterparty (Red Cedar Digital. Ltd.) won’t go bankrupt or abscond, reminiscent of the once-thriving FTX?

(2) Further, in the event of the counterparty’s bankruptcy, how can an entity without legal personhood, such as an on-chain protocol, participate in asset liquidation/restructuring as a creditor in court?

Although building a governance system and legal framework for a DeFi project might be costly, it serves as a hedge against risks. Nonetheless, this should not deter us from exploring and studying successful RWA cases in the market to make informed decisions for ourselves.

2.1 Necessity of Legal Wrapping in DeFi

For RWA funds like MakerDAO, with billions of dollars in assets, considerations have been made from both the perspective of fund safety and legal personhood. Risks considered include:

• Counterparty risks. Consider bankruptcy/absconding scenarios where MakerDAO must ensure no third party (including fund managers/advisors) has direct control or access to move its substantial funds.
• Legal entity recognition. On-chain protocols or DAOs lack the legal capacity to hold assets, as they can’t perform the necessary KYC/AML customer identification, hindering legal ownership of off-chain assets. Similarly, they can’t own their intellectual property (IP).
• Bankruptcy liquidation qualification. In the event of default, bankruptcy, or liquidation of off-chain assets, the lack of legal personhood in on-chain protocols or DAOs prevents immediate interaction with real-world courts or liquidation institutions. Hence, it’s crucial to ensure MakerDAO has the capacity to exercise rights over off-chain assets through its governance system and legal framework.

（The DAO Legal Wrappers and why you need them）

2.2 Legal Wrapping in DeFi

Legal Wrapping (Legal Wrapper) is a legal framework or collective of legal entities specifically designed for on-chain protocols or DAOs, granting them recognized legal status in relevant jurisdictions. Its essence is to “wrap” or establish a legal framework around the on-chain protocol or DAO, facilitating real-world interactions and connecting them with traditional legal systems.

Legal wrapping does not absorb or replace the original functions; on-chain protocols or DAOs continue to operate on the blockchain. It merely transfers certain functions and responsibilities to the DAO’s legal entity, allowing it to receive legal protection, manage tax and regulatory obligations, sign contracts, own assets, make legal payments, and interact with the real world. The DAO and multisig wallets retain direct control over smart contracts, vaults, and any on-chain assets, providing funds to their legal entities only when necessary.

This approach allows the creation of a special-purpose legal entity for the on-chain protocol or DAO, specifically for capturing the value of off-chain assets from an RWA perspective.

2.3 Governance of Off-Chain Legal Entities in DeFi

Let’s further explain using the example of MakerDAO, which currently has the largest volume of Real-World Assets (RWA). The diagram above shows the structure of the Foundation + Special Purpose Vehicle (SPV) specifically set up for RWA projects according to the MakerDAO MIP58 proposal. This structure aims to capture the value of underlying RWA assets through governance control over the legal entity of the foundation.

Firstly, MakerDAO established the RWA Foundation #1 under the Foundation Company Law of the Cayman Islands 2017. This foundation provides a flexible governance framework for on-chain protocols or DAO organizations. Internally, as a legal entity, the foundation doesn’t require any registered capital or shareholders/members, making it an independent orphan entity with a single purpose. The foundation can also act like a trust, appointing MakerDAO or its members as beneficiaries. Moreover, it can achieve bankruptcy remoteness, ensuring that even if MakerDAO or the foundation ‘Go Dark’, it doesn’t affect each other. Externally, as a legal entity, it can:

1. Interact with off-chain entities, such as signing contracts and providing services.

2. Legally own off-chain assets/IP through KYC/AML.

3. Protect the limited liability of DAO members.

4. Execute a range of off-chain operations on behalf of the DAO as per its resolutions.

Secondly, the legal entity of the foundation can customize the governance system for MakerDAO through organizational documents like the Articles of Association and the Memorandum of Association. This includes restricting actions to only those decided by MakerDAO, appointing Supervisors and Directors with fiduciary duties designated by MakerDAO to govern according to the foundation’s organizational documents/powers granted (Power of Attorney), ensuring MakerDAO’s complete control over the governance of the legal entity.

Finally, as per MakerDAO’s resolutions, Foundation #1 acts as an independent orphan holding company, owning the equity interests of the SPV #1 legal entity. SPV #1 is established in the local jurisdiction based on the attributes of the off-chain assets and is funded by the foundation to capture these assets. For instance, if the off-chain asset is in the United States, a Delaware LLC can be established as the SPV to hold the asset, with funding coming from a loan agreement between Foundation #1 and MakerDAO.

Although we can also see the SPV + Trust governance system and legal structure in some other projects, the overall principles are:

1. Ensuring governance control of the on-chain protocol or DAO organization.

2. DAO organization/Tokenholders as beneficiaries.

3. The packaged legal entities can legally, effectively, and timely dispose of assets.

3. MakerDAO’s RWA Case Study

Since participating in the Solar X energy project financing, MakerDAO has progressively explored a DeFi-compatible RWA (Real World Assets) pathway. This approach involves legal structuring for DeFi (Foundation + SPV or Trust), enabling the capture of off-chain asset value with a versatile yet consistent transaction structure.

Below are several successful RWA projects by MakerDAO for reference, including New Silver Restructuring, BlockTower Credit, BlockTower Andremeda, Monetalis Clydesdale, and the transaction architecture provided by Centrifuge for Aave.

3.1 MakerDAO - New Silver Restructuring (Credit Asset RWA)

New Silver is likely MakerDAO’s first formal RWA project, established in 2021 with a debt ceiling of 20 million USD. The underlying assets are mortgage loans initiated by New Silver, financed through an issuer SPV (Special Purpose Vehicle) on the Centrifuge tokenization platform.

In November 2022, the community proposed an upgrade and restructuring of the 2021 New Silver project. This overhaul fully adopted the aforementioned Foundation + SPV transaction structure, exemplifying a textbook implementation.

In the New Silver Restructuring transaction structure, the main participants include:

• RWA Foundation, established in 2021, operated the previous HunTINgdon Valley Bank (HVB) project, and is governed by MakerDAO. The foundation’s Director is mandated to follow MakerDAO Resolutions for any decision-making or exercising of rights. Thus, MakerDAO achieves complete control through a governance system combining on-chain governance and off-chain governance by the foundation.
• NS DROP Ltd, a wholly-owned subsidiary of the RWA Foundation, is the executing entity for this transaction. It subscribes to DROP tokens issued by Centrifuge for financing and provides funds. As a representative of token holders (DROP/TIN), it exercises rights delegated by MakerDAO Resolutions and directs the trustee, Ankura Trust, to perform various asset operations according to the trust agreement.
• Ankura Trust ensures the independence of the issuer SPV’s assets and the safety of MakerDAO’s funds. According to the trust agreement between the issuer SPV and the trust company, the trust stipulates the collateralization of SPV’s credit assets and the pledging of SPV’s equity, ensuring the integrity of MakerDAO’s assets and timely, full disposal in case of default, thus safeguarding MakerDAO’s funds.

3.2 MakerDAO——BlockTower Credit (Credit Asset RWA)

BlockTower Credit is a credit asset tokenization project initiated by BlockTower Capital, implemented in November 2022. The total debt ceiling of the project is 150 million U.S. dollars, divided into four asset pools. As the originator of the assets, BlockTower Credit finances through its issuer SPV on the Centrifuge tokenization platform.

（BlockTower Credit - Commercial and Legal Risk Assessment - Part I）

The transaction structure of BlockTower Credit is similar to that of the New Silver Restructuring. We further break it down into two parts: one is the operation of the capital side, which is how to safely and compliantly transfer on-chain assets to off-chain while still retaining control under MakerDAO; the other is the operation of the asset side, which is how to tokenize off-chain assets and obtain funding from MakerDAO.

From MakerDAO’s DeFi perspective:

1. MakerDAO first controls the TACO Foundation through governance (The TACO Foundation, like the RWA Foundation, is controlled by MakerDAO’s governance);

2. Through a loan agreement signed between the TACO Foundation and Blocktower DROP SPV, MakerDAO’s DAI funds are provided, with DROP tokens as collateral;

3. These funds are used to subscribe to DROP tokens on the Centrifuge platform, issued by the issuer SPV holding Blocktower’s underlying assets.
   From the perspective of asset financing:

4. BlockTower Credit Partners, as the originator of assets, loads the credit assets into the issuer SPV through a “true sale”;

5. To ensure the independence of the issuer SPV assets and the security of MakerDAO funds, the issuer SPV will sign a trust agreement with Ankura Trust Company. The agreement stipulates the mortgage of SPV credit assets, the pledge of SPV’s equity, with the beneficiaries being DROP/TIN token holders (i.e., TACO Foundation), ensuring the integrity of MakerDAO’s assets and the timely and full disposal in case of default, providing security for MakerDAO funds;

6. The issuer SPV then issues two types of tokens, DROP and TIN, through the Centrifuge asset tokenization platform, with DROP being the senior token, subscribed by TACO through the above channels; TIN tokens, as subordinate tokens, are subscribed by BlockTower Credit Partners.

3.3 MakerDAO——BlockTower Andromeda (U.S. Treasury RWA)

BlockTower Andromeda is one of the largest RWA projects of MakerDAO, with a debt ceiling of 1.28 billion U.S. dollars and current assets exceeding 1 billion U.S. dollars. This is a U.S. Treasury RWA project initiated by BlockTower Capital and executed through the TACO Foundation, aiming to diversify treasury funds by investing in off-chain U.S. Treasuries.

In the project structure of BlockTower Andromeda, the main participants include:

The TACO Cayman Foundation, established in 2022, operated the previous BlockTower S3/S4 credit asset RWA project with a maximum asset management scale of 150 million U.S. dollars. Like the RWA Foundation, this foundation is controlled by MakerDAO governance. According to Article 4.16 of the foundation’s Articles of Association, the foundation Director needs to make any resolution or exercise any rights based on MakerDAO Resolutions.

BlockTower Capital, as the investment advisor for this project, signs an investment advisory contract with the TACO Foundation, responsible for managing the funds of various accounts of the TACO Foundation and making investment decisions; Coinbase and Galaxy Digital as fund transfer service providers; Celadon Financial Group as the broker, executing investment decisions made by the investment advisor; Wedbush Securities Inc. as the custodian of funds; Ankura Trust as the payment agent.

In this structure, MakerDAO primarily uses the TACO Foundation as a legal entity to perform related matters of off-chain investment and separates traditional financial investment decisions and asset custody to achieve risk control compliance.

Compared to the BlockTower Credit project, the commonality is: at the DAO governance level, both use the MakerDAO on-chain governance + foundation off-chain governance system to ensure MakerDAO’s complete control at the legal entity governance level.

The difference lies in the level of capturing the value of underlying assets: Andromeda directly invests in U.S. Treasury assets through fund transfer, investment advisor, investment brokerage, fund custody, and payment agent, realized in the form of the TACO Foundation; whereas the BlockTower S3/S4 project, due to the different underlying assets, incorporates the foundation and SPV structure, with the SPV specifically capturing the underlying assets tokenized through the Centrifuge platform.

3.4 MakerDAO — Monetalis Clydesdale (U.S. Treasury RWA)

Despite the success of several projects by Blocktower within MakerDAO, concerns were raised about the concentration of transaction counterparts. For instance, Blocktower played multiple significant roles in these projects, such as investment advisor and asset initiator.

To address this, the Monetalis Clydesdale project, initiated by Allan Pedersen, the founder of Monetalis, aimed to explore a safer RWA (Real-World Asset) pathway. Proposed in January 2022 and executed in October 2022, the project started with a debt ceiling of $500 million, which was increased to $1.25 billion in May 2023. The funds were invested in U.S. Treasury ETFs.

The trading structure of Monetalis Clydesdale crucially involved the handling of funds, specifically the secure and compliant conversion of on-chain assets to off-chain, while still under MakerDAO’s control:

1. Establishment of a property trust: A BVI trust company named JAL was formed, setting up the James Asset Trust through a Declaration of Trust. JAL, as the trustee, held DAI/ETF trust assets provided by MakerDAO, with MKR token holders of MakerDAO as beneficiaries. Control over the trustee was exercised through the trust governance document, directing the purchase and disposition of trust assets.

2. Governance control by MakerDAO: According to the Declaration of Trust, the trustee JAL must act according to the MakerDAO Resolution. Any action required the transaction manager’s approval and consent to the MakerDAO Resolution. JAL was prohibited from any action unrelated to the MakerDAO Resolution.

3. Establishment of an equity trust: After establishing governance control over JAL’s trust property by MakerDAO, the equity of trustee JAL was established as the trust property in the James Asset Share Trust. SHRM Trustees (BVI) Limited served as the trustee, with Belvaux Management Ltd as enforcer and MKR token holders of MakerDAO as beneficiaries.

This structure allowed MakerDAO to control both the trust property corresponding to the provided DAI assets and the equity of trustee JAL. Every operation required MakerDAO Resolution verification, with funds moving without third-party control (MakerDAO Vault - JAL trust property custody account - Sygnum Bank custody account).

This structure achieved several goals for MakerDAO:

• Reduced or no counterparty risk

• Seamless on-chain and off-chain governance architecture

• Trust protection, enabling MKR token holders to promptly address default remedies and liquidation risks of underlying assets

• Clear, fixed purposes for funds, eliminating misappropriation risks

Subsequently, JAL’s asset investment was relatively straightforward: converting DAI to USD through Coinbase and handling fund custody and ETF trading through Sygnum Bank.

3.5 Centrifuge — RWA Roadmap (U.S. Treasury RWA)

Centrifuge, having been involved in several of MakerDAO’s earlier RWA credit asset projects like New Silver Restructuring and BlockTower Credit, focuses here on the Centrifuge Prime service. This service is designed to help crypto capital/DeFi protocols/DAO treasuries capture the yield value of real-world assets, such as risk-free returns from U.S. Treasuries.

For example, in August 2023, the Aave community proposed investing stablecoins from the Aave treasury in RWA assets through collaboration with Centrifuge, aiming for a 5% risk-free return based on U.S. Treasury RWAs.

（POP: Anemoy Liquid Treasury Fund 1）

Centrifuge Prime service involves two main steps:

1.Legal Wrapping for on-chain DeFi protocols: For example, establishing a specific legal entity for Aave, a Cayman Foundation. This entity would replace the unlimited liability of DAO members and serve as an independent entity for capturing RWA value, governed and controlled by the Aave community, bridging DeFi and traditional finance.

1. Establishing the Anemoy Liquid Treasury Fund 1 asset pool: Differing from traditional asset pools with underlying credit assets, this pool’s underlying asset is U.S. Treasuries.

（Anemoy Liquid Treasury Fund 1）

The Anemoy LTF, a fund registered in BVI, is tokenized through the Centrifuge protocol.

Aave’s treasury funds are then invested in the corresponding Centrifuge asset pool, receiving fund token vouchers. The Centrifuge asset pool distributes Aave’s invested assets to the Anemoy LTF fund, which then handles U.S. Treasury investments, enabling on-chain realization of U.S. Treasury returns.

Similarly, Centrifuge aided the stablecoin project Frax Finance in capturing off-chain asset returns with a $20 million investment through this method.

4. The combination of RWA and DeFi does not require permission

We have seen that most of the RWA projects on the market, including the projects covered in this article, are only for a single/limited funding party, or only for qualified investors, and retail investors cannot participate. This is because due to regulatory compliance and local Securities Law requirements, if retail investors participate, they will face the same issuance costs as an IPO. Therefore, not all RWA platforms will be open to all users after putting assets on the chain.

In our previous research report “RWA Ten Thousand Words Research Report: Dismantling the current implementation path of RWA and exploring the development logic of future RWA-Fi”, we can still see that some projects can create a license-free retail investor by combining with DeFi. Paths to participate.

For example, the DeFi lending path of Ondo Finance & Flux Financ, Matrixdock & T protocal uses restricted Tokens required by qualified investors as collateral to set up a DeFi lending pool. Retail investors can deposit stable coins into the DeFi lending pool and obtain income from lending rates. . In addition, there are interest-bearing stablecoin paths of Ondo & USDY, MatrixDock & USDV, which use restricted Tokens required by qualified investors as collateral to issue stablecoins, and retail investors can deposit stablecoins in exchange for interest-bearing stablecoins.

The composability of DeFi is self-evident. We have also seen Pendle connect RWA assets to realize interest rate swaps before. We are also actively exploring the combination of RWA and DeFi, and are currently building a U.S. debt RWA platform to explore the infinite possibilities of RWA.

5. Conclusion

At present, the projects seen in the market can be called version 1.0 of Real World Assets (RWA). These projects mainly address the financing needs of off-chain assets (whether through Security Token Offering or collateralized lending) and the investment needs of on-chain funds. Capturing real-world assets that are low-risk, yield-stable, scalable, and independent of crypto volatility is the key.

RWA is also expected to evolve into more integrated versions with the real world, such as 2.0 and 3.0, in the near future. Prior to this, it’s essential to prepare for these developments.

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