Paxos Courts MakerDAO With Paying Yield for Holding Up to $1.5B USDP Stablecoin

The proposal by Paxos is part of MakerDAO’s effort to generate income on its $7 billion digital asset reserve.

AccessTimeIconJan 19, 2023 at 11:23 p.m. UTC
Updated Jan 20, 2023 at 3:17 p.m. UTC
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Stablecoin issuer Paxos proposed paying a steady fee to decentralized finance giant MakerDAO for holding up to $1.5 billion of Pax USD (USDP) stablecoin among its reserves.

According to a proposal posted in Maker’s governance forum on Thursday, Paxos solicited MakerDAO to increase the maximum amount, also known as a debt ceiling, of USDP to $1.5 billion from the current $450 million in Peg Stability Module reserve system that backs the value of Maker’s DAI stablecoin.

In exchange, Paxos would pay a daily “marketing fee” anchored to 45% of the Effective Federal Funds Rate (EFFR), which stood at an annual 4.3% at the time of publication. Paxos would only pay the fee if the debt ceiling is at $1.5 billion or higher on any given day. The maximum threshold would increase to $2 billion of USDP in 2024, per the proposal.

Paxos estimated that the facility would generate some $29 million of extra income annually for Maker if used at full capacity. The MakerDAO community will first discuss the proposal then put it to a vote.

USDP is a dollar-pegged stablecoin one-to-one backed by cash and cash-equivalent U.S. government debt instruments, according to independent attestations. Both Paxos and USDP are regulated by the New York Department of Financial Services (NYDFS), the state’s leading financial regulatory agency. Effectively, Paxos would pass a part of the revenue earned on the government bonds backing USDP to Maker.

The proposal is part of MakerDAO’s twin effort to reduce its heavy reliance on Circle’s USDC stablecoin while boosting the protocol’s income by investing in government bonds and different investment strategies to generate steady yield on a $7 billion pile of digital assets in its reserve. The so-called “Endgame Plan” was penned by Maker founder Rune Christensen and ratified in a vote in October.

In November, the MakerDAO community approved a hike in DAI’s reward rate to an annual 1%, redistributing a part of the new-found income from yields among token holders.

Paxos' proposal came after a dramatic voting where the MakerDAO community ultimately favored to keep Gemini USD (GUSD) stablecoin as part of a reserve asset for DAI.

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Krisztian  Sandor

Krisztian Sandor is a reporter on the U.S. markets team focusing on stablecoins and institutional investment. He holds BTC and ETH.


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