The decentralized finance ecosystem and traditional finance have come together in a first-of-its-kind collaboration. MakerDAO, a smart contract protocol built on Ethereum and the issuer of the DAI stablecoin, has formed a partnership with US-based Huntingdon Valley Bank for a credit facility.
In March, Huntingdon Valley Bank, a community bank based in suburban Philadelphia, formally made a collateral onboarding application, wherein they requested a $100 million loan from MakerDAO. The application was designed to increase the adoption of the project’s stablecoin DAI. (1 DAI = $1)
On 23 August, the deal was approved by the stablecoin issuer, which offered to lend 100M DAI to the bank, marking the first commercial loan agreement between a regulated US financial institution and a DeFi protocol.
Today is a defining moment to envision the potential of connecting decentralized finance and real-world finance.
Huntingdon Valley Bank and Maker pioneer the first commercial loan participation between a U.S. Regulated Financial Institution and a decentralized digital currency. pic.twitter.com/wajJYVJwwz
— Maker (@MakerDAO) August 23, 2022
The amount will be used by the bank to expand its existing business and tap new business opportunities. To secure the loan, the bank has provided its risk-weighted assets (RWA) as collateral instead of cryptocurrencies. MakerDAO has formed a trust, RWA Master Participation Trust, to oversee the deal with the bank.
Under the terms of the agreement, the bank can request additional loans over the next 12 months. Likewise, the deal would help MakerDAO to reverse some of the counterparty risks and generate yields from non-crypto avenues.
Recently, many traditional financial institutions have partnered with crypto platforms to tap potential market opportunities and the underlying blockchain technology. For instance, South Korean-based KEB Hana Bank tied up with The Sandbox to adopt various metaverse services and establish virtual bank branches.
FAQs
What is the MakerDAO lending system?
MakerDAO operates a decentralized lending platform allowing users to create DAI stablecoin by collateralizing assets like Ethereum in smart contracts.
What is the minimum collateralization ratio for MakerDAO?
The minimum collateralization ratio for MakerDAO is typically 150%, meaning users must lock in collateral worth 1.5 times the value of the borrowed DAI to maintain their loan.
What is the yield of MakerDAO?
MakerDAO has been offering an 8% stablecoin yield, which has garnered attention in the decentralized finance (DeFi) space due to its competitive returns.
How does DAI generate interest?
DAI generates interest through various DeFi protocols where users can lend or stake their DAI tokens. These platforms utilize DAI as part of liquidity pools or lending markets, earning interest for DAI holders
