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).
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.
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.