Société Générale – Forge has just completed its first stablecoin transaction on decentralised finance. The French bank’s innovation arm used its vault on MakerDAO to withdraw $7 million in DAI. We explain it all.
Society General is doing DeFi
It’s a big first for decentralised finance (DeFi). Societe Generale – Forge, the French bank’s cryptocurrency arm, has used its vault on MakerDAO to borrow $7 million in stablecoin DAI.
The information was confirmed this morning by Sebastien Derivaux, in charge of “Asset-Liability Management” at MakerDAO:
Another milestone in DeFi@SocieteGenerale Forge casually taking a $7M loan from @MakerDAO while pledging a AAA covered bond as collateral. Actually a cross-currency repo as the collateral is in € and the loan in $ ($DAI). https://t.co/2WPzdI1P6X pic.twitter.com/mPVp9z75vn
– Sebastien Derivaux (@SebVentures) January 12, 2023
It is true that an entity from the traditional banking world appropriating the innovations of decentralised finance (DeFi) – two worlds that are supposed to function independently – may seem paradoxical. However, that is what is happening: Société Générale – Forge has completed its first DeFi transaction via MakerDAO.
To put this into context, on July 16, the MakerDAO community voted to make history with Société Générale – Forge. This involved the creation of a Real World Assets (RWA) vault allowing SG – Forge to borrow up to $30 million in stablecoin DAI.
In return, collateral is provided by OHFs, tokenised on the Ethereum blockchain (ETH). These are $40 million worth of covered bonds backed by French real estate loans and rated AAA, the highest rating.
A rather unusual loan…
In the world of decentralised finance, a traditional loan is relatively simple to understand. In order to borrow $1,000, you typically need to deposit $2,000 of cryptocurrency as collateral. If this collateral drops in value to below $1,000, then the protocol liquidates your position.
The Société Générale – Forge loan is quite different. The OHF tokens as collateral are backed by real estate, which is not a liquid market. Thus, the liquidation procedure (in case the loan is under-collateralised) is not automatic but manual.
As planned since the creation of this safe, a trusted third party will be responsible for checking daily that the bond meets the collateral requirements. If it does not, then SG-Forge will have five business days to provide additional collateral or face liquidation.
.. and not everyone is happy about it
However, this has some observers worried that the DAI stablecoin is now backed by real estate. In the face of the current widespread recession, they do not welcome a blurring of the line between the traditional world and decentralised finance, which increases the risk of a systemic crisis.
In concrete terms, MakerDAO aims to increase the capitalisation of its stablecoin DAI, which is synonymous with adoption in a context where the USDT is losing ground. The collaboration with SG – Forge is seen by some as part of this ambition, but it represents an excessive risk in relation to the rewards.
In reality, as explained above: the position is monitored daily and yesterday’s borrowing represents only 0.1% of the DAI’s capitalisation. In other words, it is nothing compared to the impact that such a historic collaboration has on the reputation of Maker DAO and its stablecoin.
