September 17, 2020
Blair Bingham
Thought Leadership

The Melding of CeFi and DeFi: ArCoin’s Path to Becoming MKR Collateral

The Fund, and it’s digital security, ArCoin, is the first closed end interval fund registered under the 40 Act offering digital shares. Upon the creation of the Fund and ArCoin, we knew that applying to be a collateral option for MakerDAO was one of the first use cases we wanted to pursue.

For those not familiar with MakerDAO, it is a decentralized organization built on the Ethereum blockchain. Just recently, Arca Labs submitted a Collateral Onboarding Application (MIP6) with the aim of receiving approval for ArCoin to be used as collateral when creating DAI in the MakerDAO ecosystem. DAI, issued by MakerDAO, is a decentralized, crypto-collateralized stablecoin that aims to maintain a dollar peg to USD. Maker’s smart contract manages the borrowing and lending of DAI. A user of Maker will deposit an approved digital asset to borrow DAI, which aims to keep a peg of approximately one dollar. A user can then use this DAI as a medium of exchange within the larger digital asset ecosystem. Under our proposal, a user would deposit ArCoin to borrow DAI, which would be held by MKR’s smart contract until the borrowed DAI was repaid and ArCoin returned to its holder.

Given the relatively historical low volatility of U.S. Treasuries, we believe that ArCoin could be a lending tool offering less volatility when compared to most digital assets.


MKR APPLICATION PROCESS

With our application submitted, the Arca team prepared for Maker’s Collateral Onboarding Meeting, where we would present our proposal to the community and respond to any questions. While preparing for the call, we soon found ourselves exploring uncharted territory for our digital security: what is the value of adding a relatively centralized digital asset into a decentralized protocol?

ArCoin’s underlying assets, U.S. Treasuries, are referred to as “real-world assets,” making ArCoin a more familiar financial instrument. However, in creating ArCoin through the use of blockchain technology, our digital security has capabilities that traditional securities do not. ArCoin can be transferred peer-to-peer, offering the potential of reduced costs due to the removal of intermediaries. Through our Fund structure, the underlying U.S. Treasuries remain much the same, but ArCoin (digital securities) have changed the attributes of these securities. This structure allows for personal ownership (in a wallet of the tokenholder’s choice) and peer-to-peer transfer of an asset previously restricted by the norms of the United States’ financial system. These features, enabled by blockchain, work to expand the capabilities and ownership rights of individual investors over their assets. This transfer of power from established institutions to single investors is a key element in decentralization.



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