The Melding of CeFi and DeFi

Blair Bingham
Sep 17, 2020

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

The Fund, and its 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.

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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Statements in this communication may include forward-looking information and/or may be based on various assumptions. The forward-looking statements and other views or opinions expressed are those of the author, and are made as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated and there is no guarantee that any particular outcome will come to pass. The statements made herein are subject to change at any time. Arca disclaims any obligation to update or revise any statements or views expressed herein. Past performance is not a guarantee of future results and there can be no assurance that any future results will be realized. Some or all of the information provided herein may be or be based on statements of opinion. In addition, certain information provided herein may be based on third-party sources, which is believed to be accurate, but has not been independently verified. Arca and/or certain of its affiliates and/or clients may now, or in the future, hold a financial interest in investments that are the same as or substantially similar to the investments discussed in this commentary. No claims are made as to the profitability of such financial interests, now, in the past or in the future and Arca and/or its clients may sell such financial interests at any time. The information provided herein is not intended to be, nor should it be construed as an offer to sell or a solicitation of any offer to buy any securities, or a solicitation to provide investment advisory services.