One of DeFi's oldest lending protocols, MakerDAO, has recently decided to allocate $500 million of its pool of collateral to corporate and US treasury bonds. This marks the first time a decentralized entity has approved a "real-world" allocation of this magnitude, which is especially noteworthy given that it would benefit a government-issued asset.MakerDAO has long been known as the Decentralized Autonomous Organization (DAO) that created DAI, the fourth-largest <a href="https://www.builder.news/earn/ways-to-optimize-profits-with-stablecoins-in-a-bearish-market-LglWW" alt="Ways to optimize profits with Stablecoins in a bearish market" title="Ways to optimize profits with Stablecoins in a bearish market" target="_blank" rel="" class="">stablecoin</a> by market size and a key component of the DeFi ecosystem. DAI is an overcollateralized stablecoin, which means MakerDAO is holding a sizable surplus of funds that were used to issue DAI.Recently, this excess capital has been a problem owing to concerns about the USDC sanctions, which account for more than 50% of the collateral supporting DAI, as well as declining DeFi returns. The MakerDAO entity's third quarter was its least lucrative in more than two years, which has forced the company to consider alternative uses for its $9 billion treasury.&nbsp; The motivations for choosing to invest in US Treasury bonds will be covered in more detail in this article.<h2>The yield options for MakerDAO</h2>Starting with the most obvious explanation for MakerDAO's $500 million allocation: increasing bond rates. Bond rates have increased by more than 200 bps so far this year due to the macroeconomic context of monetary tightening. This is in marked contradiction to the DeFi yields' rapid decline. That lending rates on&nbsp; Aave for USDC have decreased from 2.3% to 0.6% in the previous 15 months is an example of this trend.<img src="https://cdn.builder.news/news/11ed551d19ecf27ca8e6023f659fee92.jpg" alt="USDC v US Treasury yields" title="USDC v US Treasury yields" width="600" height="279">Source: CNBCDue to the use of USDC as collateral for more than 50% of DAI, MakerDAO has a significant amount of USDC on its balance sheet. From a financial perspective, this means that MakerDAO is in possession of a competitor's stablecoin valued at almost $4.5 billion. The problem with this is that, although Circle, the issuer of USDC, has approximately $43.5 billion in higher-earning US Treasury bonds, as seen in their attestation report below, MakerDAO has retained low-yielding USDC on its balance sheet. MakerDAO effectively disintermediates Circle by changing $500 million of their USDC collateral to US Treasuries so that they may begin receiving a return on these bonds themselves.<img src="https://cdn.builder.news/news/11ed551d19ecfa54a8e6023f659fee92.jpg" alt="US Treasury securities owned" title="US Treasury securities owned" width="600" height="583">Source: CircleInstitutions are also aware of MakerDAO's recent yield struggles, as seen by the recent spate of bids made to the DAO. If the DAO transfers $1.6B in USDC from its vault into Coinbase's institutional, it will get a 1.5% payment from Coinbase. Gemini, the Winklevoss twins' cryptocurrency exchange, offered to reimburse Maker 1.25% on deposits of the exchange's GUSD stablecoin in late September. Due to the greater yield being offered, it appears that these offerings have been sidelined in favor of treasuries.With this increased yield, DAI will become a more <a href="https://www.builder.news/crypto-insights/types-of-stablecoins-and-their-role-VEnZL" alt="3 Types Of Stablecoins And The 3 Reasons Why We Still Need Them" title="3 Types Of Stablecoins And The 3 Reasons Why We Still Need Them" target="_blank" rel="" class="">competitive stablecoin</a> when compared to USDT, USDC, and BUSD, which all use their own yield-earning methods. This brings us to competitiveness, which is the second most important factor in the choice to invest in Treasury bonds.<h2>Competitiveness</h2>The declining use of DAI on both CEXes and DEXes has been one of the most obvious themes in the stablecoin landscape over the last year. When comparing the market share of BTC/ETH volume to the top 3 stablecoins, DAI has never been genuinely competitive on centralized platforms and is hardly noticeable.The plain reality is that DAI, mostly because of its scalability concerns, simply cannot compete with the strongest stablecoins in its current condition. DAI is overcollateralized, thus, for example, a user would need to deposit $150 ETH in order to borrow $100 DAI. Overcollateralization impedes growth since it will always need more money to meet demand. The bigger stablecoins are all 1:1 USD collateralized, which means their capital cost of expansion is much lower than DAI. As a result, centralized markets have embraced BUSD, USDT, and USDC widely. The market share of DAI, on the other hand, has decreased from highs of almost 1% all the downward to 0.02% on the last days of September.It might be argued that the use of DAI on DEXs is a more serious warning flag for the future of the technology. When comparing DAI's volume to that of USDC, its major rival on decentralized exchanges, DAI's market share has been utterly dismantled over the past two years, presently making up barely 5% of USDC's volume. DAI's usage on decentralized exchanges, as a decentralized stablecoin, is perhaps more significant for its intended use, and its rapidly declining market share is a huge cautionary sign for the usefulness of DAI.DAI appears to be losing every battle from a competitive perspective. Many people attribute this to its failure to occupy a niche in its current form. DAI is advertised as a decentralized stablecoin, yet this is not the case given that more than half of the collateral is held in centralized stablecoins. Due to its overcollateralized scaling model, it is unable to compete with the largest centralized stablecoins. DAI has to change course and truly commit to decentralization as a better option.<h2>The compliant path</h2>For the first time in several years, the scenario of increasing bond rates and declining DeFi rates has led to cryptocurrency markets providing a lower premium than traditional finance. Why would a crypto-native organization keep stablecoins as opposed to treasuries, which are much more liquid and currently give superior returns?The simple answer is to favor decentralization; a project that uses stablecoins rather than US Treasury bonds shall be more durable and immune to government sanctions or regulatory measures. However, the current problem with DeFi is that it is extremely reliant on centralized stablecoins. According to Data Debrief, 76% of swaps on Uniswap, crypto's top decentralized exchange, include a centralized stablecoin. USDC, a centralized stablecoin, accounts for the vast bulk of DAI's $9 billion collateral pool.<img src="https://cdn.builder.news/news/11ed551d19ecff5fa8e6023f659fee92.jpg" alt="Dai generated by collateral" title="Dai generated by collateral" width="600" height="267">Source: MakerDAO whitepaperThis is why it's not always correct when people claim that MakerDAO's investing in US Treasury makes them much more centralized. DAI centralization is nothing new, and it has been a concern for as long as they have taken USDC as collateral. The change to treasuries makes MakerDAO more compliant, but not considerably more centralized.MakerDAO's investment in US Treasury makes it more compatible with US regulators since a project that is actively invested in US national assets will undoubtedly be seen more positively than one that has its investment elsewhere. Consider Tether: US regulators have been focusing on the USDT issuer recently, asking for backup reserves last week. The placement of Tether's reserves is a major role in their stubbornness with Tether. Tether's reserve transparency has long been questioned, and the majority of their holdings are non-US government assets, which raises a red flag signal for US regulators.In the short term, this approach to compliance makes sense. It enables Maker to shift away from USDC, which has been under fire since the Tornado Cash restrictions, and toward US-backed national assets, which alleviates some of the concerns about asset sanctions. However, this shift does not align with DAI's long-run decentralization, and it must be reinforced in the near future by a shift into more decentralized collaterals such as ETH. Otherwise, DAI will be just as centralized as its rivals.Rather than compliance, holding ETH or other decentralized asset is the sole road to resistance against regulation, as reserves should theoretically be outside the reach of any fines. This would imply that DAI would need to abandon its USD peg, as the 1:1 peg will not hold when utilizing a volatile asset like ETH for the most of collateral. DAI has had one of the most robust pegs recently due to its USDC support, but as we've seen, the stability of the peg has been at the expense of any growth. DAI has been trading at a steady discount since speculation of a potential free-floating peg gained traction during the last month.<h2>Conclusion</h2>The combination of greater yields, improved scalability, and regulatory appeasement makes this a sensible business decision for MakerDAO and DAI. When MakerDAO announced their investment in US Treasuries and bonds, the public's reaction was divided, with any negative comments focusing on the alleged increased centralization. What this perspective overlooks is DAI's inherent centralized character – a heavy reliance on USDC has kept DAI centralized even before this change. By directly investing in US government assets, MakerDAO is able to placate authorities. When you consider the possible sanction risk associated with USDC recently, switching from USDC to Treasuries is an excellent idea from a risk management standpoint as well.Overall, this is a wise short-term move for DAI. However, the expenditure does little to strengthen their decentralization at this time and should be part of a longer-term strategy to adhere to the decentralization ideal. If this is simply a buy to make DAI more competitive against other stablecoins.&nbsp; MakerDAO will ultimately come to a split in the road where they must pick between the compliant path and the decentralization option. To be long-term successful, DAI must fulfill the need of a decentralized stablecoin, which is desperately required in crypto at the present.<div class="pr-block-special">Disclaimer: This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.</div>

MakerDAO has invested $500 million in corporate and US Treasury bonds. Making the change will allow Maker to diversify its balance sheet and strengthen the stability of the stablecoin's backing.

MakerDAO: What does their new investment in US Treasury mean?