A perspective of an off-chain senior position lender

As outlined in the post “Implementation Updates for Real World Assets - MIP21 & MIP13c3-SP4 for 6s Capital”, I have been engaged in the Maker community for a while. Starting in early 2019, the continuous question I had in my head was… How can this credit facility be leveraged for net lease commercial real estate deals?

18 months later, here we are…

MakerDAO is about embark on an entirely new and exciting path

While “Real World Assets” is now a catchphrase that is used quite often, at the beginning of 2020, many thought this was going to be 5+ years away, maybe never. We are tracking to prove that timeframe wrong by a large margin, help stabilize the peg, and massively de-risk the Maker project all in one bang.

A Different Perspective

As feedback for the community, we must keep in mind the different mindset of a senior position lender. To put it simply, off-chain senior position lenders are a different breed of investor, not better or worse, just different. It is just a different way of thinking. Growth and upside are for the borrowers and those that take risk. Principal protection is everything for a senior lender.

It is quite important to understand this mentality to help the DAO adapt to help bring more off-chain lenders to the DAI market as the Maker Protocol evolves.

Debt Investors operate by capturing value while mitigating risk (as much as possible). They are risk-averse and always want someone else to take the risk (on everything) and then have someone else pay for the legal work to not take risk!

Everyone can win, but the lender mentality is such that it is great if the borrower thrives & wins, (we all want that), but in the same breath “hope for the best and plan for the worst”. The Lender must plan for borrowers to fail horrifically and then as much as possible, NOT losing the lender a dime.

Arguably the most important, senior position lenders thrive when dealing in reality and with certainty. The entire framework for how lenders make decisions is governed and driven around awareness and certainty of outcomes (good or bad) and then mitigating the risks associated for both. This is the embedded thinking with every lender.

“Risk… the other guy’s problem.”

(Now, to bring it back to MakerDAO’s current opportunity, put yourself in 6s’ shoes to get another view of why this RWA process within Maker Governance is so counter to the core ethos of a lender.)

Engagement with the DAO

While there is always the risk associated with Governance Polls and Executive Votes, it is the process to get to that final Executive Vote that causes “friction”. More than the process, it is the certainty to a timeframe to get to that final Yes or No, especially with an off-chain lender. Having ambiguity in the sequence is just against the grain of a lender which causes understandable frustrations (especially when viewed from the lens of a lender).

Stakeholders

Unlike on-chain collateral which may have thousands or millions of vaults for that given collateral type, here we are down to one per LendCo. Historically, when the DAO would implement things it did so for the benefit of the community as its stakeholders were limited to MKR holders.

Now the equation is being flipped around. Off-chain lenders are spending significant capital to prepare for Maker credit facilities to clear governance, form associated legal structures, engaged with attorneys, align the interests of investors (and subscribe accordingly), and getting service vendors lined-up.

At the same time, preparing the pipeline of operational lending deal-flow to support everything mentioned above and the core operations of LendCo (most of which have timeframes that expire and can result in money lost) all of which have even more stakeholders.

It is a monumental challenge in multi-tasking and being the conductor in a large orchestra to get this over the line.

Being the focal point for off-chain stakeholders mixed with ambiguity and uncertainty of timing is a “challenging experience”.

Less theorical and a practical real example for 6s right now for the first round of deals… title, appraisals, and closing documents need to be ordered and prepared to allow for the contemplated closing between Lender and Borrowers. As the Lender, I am tapping the brakes (temporarily) on ordering these required checklist items, as the timeframe is unclear. I very much want to do these closings if the opportunity for them is still there in the future.

Feedback

After this is all said and done, as a process improvement recommendation to the community to prepare for the next LendCo will be to provide a clear concise process and timeframe for each step.

In the coming years, the DAO will need 20+ LendCOs to get DAI to the stability levels that will allow for true global geometric expansion. To do that, the community will need others to step forward as well as folks that are new to the community. The process doesn’t and shouldn’t be “easy” (important); however, it should be clear and allow for participants (emphasis on the lender’s mentality) to plan based on known timeframes for each step. Outcomes don’t have to be certain, but the timeframes should be (within reason).

I do however fully understand and appreciate the first iterations for RWA lenders will take time to run its course to implementation.

As a participant in this community, I am concerned that the community might be missing out without modifiying how it provides guidance to external lending stakeholders. The process will most certainly evolve with time but the context matters about how it is perceived by external parties.

Real World Assets are coming…

As a community, we can make this a reality. As written above, in doing so we will help stabilize the peg and massively de-risk the Maker project all in one bang.

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This touches on a point that I was trying to raise in my DoI this past summer.

Which is: how can MakerDAO attract LendCos (RWA) if there is so much uncertainty in the transaction.(in this case the uncertainty being timelime) Sometimes it is the Maker Foundation BizDev team that tries to attract LendCos. Which brings me to my most important point: The Maker Foundation cannot bring on new LendCo’s as effectively as wed like because they cannot speak on behalf of governance. What very often may happen is a LendCo will ask a question to Maker Foundation and the Foundation will reply: “you have to ask Governance”. However Governance is not properly equipped to deal with such specifics. The end result is that LendCo decides not to use Maker because the Foundation told them to ask Governance and Governance had no answer. (Most MKR voters wont share their reasnoning publicly)

This is case for many particulars of Vaults and the timeline is one example.

Tbh Im not sure exactly how to solve this but Matthew I think youre on the right track by pushing for an answer in this regard. I also think that as time goes on there will be more clarity from the track record. We should establish sell-side domain teams that are formerly recognized and therefore can always get an answer to questions.

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This is such a good post Matt. With all the craziness that happens in DeFi, at times I tend to forget what you wrote up ^^ there–about the risk-adverse nature of senior lenders. This is a good reminder of reality–the Makers and Takers who are currently in control of RWA.

This is an excellent point Akiva–from speaking to Matt, we are going to need hundreds/thousands of LendCos and I don’t know who/how we’ll attract the talent and point them in this direction.

It is also an expensive and time-consuming venture–which makes me think that we’ll need experience & liquid RE Developers, RE hard-money lenders, Brokers, etc., pursue and create LendCos. I guess in order to attract that talent, word has to get out that Maker has a lending facility available. All in all I am truly excited about the future of RWA–it can and will go beyond bricks and mortar

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Perhaps a bit off-topic but I wanted to showcase a little of Wilmington Trust and the recent exposure they’ve been attracting–here’s an op-ed written via CNBC (not an easy task) about their outlook on equities in Emerging Markets: