In August 2022, the MakerDAO DeFi protocol agreed to lend Societe Generale Forge (SG Forge) up to $30 million. Yesterday SG Forge drew down the first $7 million DAI stablecoins as part of the loan.
The evolution of the DAI stablecoin
MakerDAO is known for DAI, the (over)collaterilized dollar stablecoin backed by various cryptocurrencies. It was primarily backed by Ether in the past, but now pure cryptocurrencies such as wrapped Bitcoin and Ether make up around 15% of the DAI issued. Instead, the majority of DAI is issued against other stablecoins, particularly USDC, but also Paxos Dollar (PUSD) and Gemini Dollar (GUSD).
But a growing proportion of DAI is minted against real world assets, which is where SG Forge comes in. US-based Huntingdon Valley Bank drew down a $100m loan in August and September 2022. About $665 million of DAI is backed by real world assets, most of which are in a $500m bespoke liquid bond portfolio using a special purpose vehicle.
The Societe Generale stablecoin loan and token collateral
In the SG Forge case, the real world asset backing is (up to) €40 million of a security token (OFH token) issued by Société Générale SFH in May 2020, which is a covered bond backed by real estate debt. Societe General was the investor.
The purpose of the borrowing is to refinance the covered bond. Hence the borrowed DAI will be converted to dollars, and Societe Generale Forge will loan the money to Societe Generale. But the conversion to dollars has not yet happened as the 7 million DAI is still sitting in the wallet.
One natural question is how does a DeFi protocol transact with real world assets? For starters, there’s a discussion and vote by the DeFi community.
In this case, France’s DIIS Group is MakerDAO’s agent and security agent. So MakerDAO has a legal agreement with DIIS Group in which DIIS Group (on behalf of MakerDAO) entered into a loan contract with SG Forge and takes control of the collateral, the OFH tokens.
Meanwhile, SG Forge has been one of the most bleeding edge institutional operators in the blockchain space. It issued a €100m tokenized bond on the Ethereum back in 2019, followed by the €40m OFH token being refinanced here, which was settled using a (pilot) central bank digital currency from the Banque de France. When the European Investment Bank issued its €100m Ethereum-based bond, it used SG Forge’s infrastructure.