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This document summarizes the various agreements that bind together the various parties in a deal based on Centrifuge’s Tinlake asset pool platform, using New Silver as a model.
Any deal using Centrifuge as the tokenizing platform involves at a minimum five parties:
- Centrifuge (as a service provider to support the use of the decentralized permissionless Tinlake protocol)
- Asset Originator (AO)
- Special Purpose Vehicle (SPV)
- Senior Investors (DROP tokens)
- Junior Investors (TIN tokens)
Maker participates as a vault that houses DROP tokens and issues DAI as a loan against that collateral.
Centrifuge’s Core Agreements
Centrifuge has published its offering structure with links to its standard base agreements, here:
The page above summarizes the general intention of the legal approach, which aims to direct as much responsibility to the smart contracts of the Tinlake pool as possible, and to separate the Asset Originator from the Special Purpose Vehicle which manages the Tinlake pool.
The additional documents referenced from this page are:
- Operating Agreement - dictating the legal guidelines for operation of the SPV
- DROP Subscription Agreement - governing the sale of senior DROP tokens to investors, including the right of such investors
- TIN Subscription Agreement - governing the sale of junior TIN tokens to investors
- Incorporation documents (not linked) - documenting the incorporation of the SPV, referred to as the Series-LLC
- Executive Summary (not linked) - the pool-specific offering summary that is appended to the DROP and TIN Subscription Agreements as Annex A
These documents do not cover all of the agreements that are put in place between the Asset Originator, SPV and Centrifuge, as discussed next.
The Asset Originator plays several roles and has a special relationship with the SPV. In the case of New Silver, a legal agreement defining the assignment of collateral to the SPV was authored by New SIlver’s legal counsel. That document is called:
- COLLATERAL ASSIGNMENT OF MORTGAGE AND NOTE
This document defines the transfer of collateral and the security interest assigned to the SPV by New Silver and is the basis of the senior debt position transferred to the SPV and indirectly to the DROP investors. The SPV enables a bankruptcy-remote structure that provides the SPV with rights and authority to recover funds and in general act on its security interest in the case of the Asset Originator’s default.
It should be noted that the Tinlake Protocol Service Agreement referenced below specifies that the SPV owns the assets, and the Tinlake pool on the Tinlake protocol referenced above is operated by the SPV issuing loans to borrowers and DROP and TIN tokens to investors.
The Asset Originator also acts as the initial TIN investor, though in the case of New Silver, Centrifuge has also made an investment in TIN alongside New Silver. The size of the initial investment is mandated by a Maker covenant. Finally, the Asset Originator is the party offering new loans to borrowers, collecting payments and bringing assets and funds to the SPV and its Tinlake pool.
In addition, two other agreements are part of the overall framework:
- Tinlake Protocol Service Agreement
- Securitize License/sublicense Agreement
The Tinlake Protocol Service Agreement defines services Centrifuge shall provide to the Asset Originator to help the Asset Originator setup and operate its pool on Tinlake, give technical support, and resolve issues and errors. Centrifuge licenses from Securitize a platform for onboarding investors in a regulatory-compliant manner (including KYC/AML and accredited investor checks), and further sublicenses Securitize to the SPV.
All of the documents above, with the exception of the incorporation document, have been collected and reviewed by the Maker Risk Domain team. Legal review by legal professionals is recommended, and there is an intention to apply resources to enable this.
Below are the most significant points that the team has found in these documents. The reviewing team are not legal professionals and not allowed to express any legal opinion. It is a best effort only and we expect a legal team to provide a legal opinion in the future.
TIN/DROP ratio modifications
Description: Article 4.F of the DROP Subscription agreement indicates that the ratio of TIN/DROP token might be changed by the Issuer. A notice period is provided. It is likely that the Asset Originator will inform MakerDAO of any change, but nothing is defined in the contractual documents (and there is no contract between MakerDAO and New Silver).
Solution: The solution would be for a Maker Representative to subscribe to TIN or DROP. Therefore, there will be a notice as contractually defined. In any case, lowering the TIN ratio would at some point breach a covenant and could lead to liquidation.
Failure of the asset originator
Description: The SPV is managed by the Asset Originator. If the Asset Originator defaults, it can lead to a lack of management of the SPV and the servicing of the loans. This risk is somewhat mitigated as we do an annual due diligence on the Asset Originator’s financial condition. Still, the risk remains too high to scale safely.
Solution: As the asset value of the SPV approaches $5M (and most likely below), we plan to mandate the assignment of an Independent Manager that will take over the management of the assets if needed. Actual requested DC’s for the first Centrifuge-related projects are at or below this threshold. This would imply an updated operating agreement of the SPV and appointing an Independent Manager as already prepared in the operating agreement template.
Failure of Centrifuge
Description: The tokenization of the SPV “tranches” rely on the Tinlake system developed by Centrifuge. The system is decentralized and autonomous, but Centrifuge is providing technical support. Interruption of this support might lead to adverse events. This issue is already somewhat mitigated by annual due diligence on Centrifuge’s financial situation and the Tinlake Protocol Service Agreement forcing Centrifuge to provide these services.
Solution: One way of mitigating this issue even more would be to incorporate some of the operational knowledge to a third party (e.g. MakerDAO or the Centrifuge Community).
Description: Many documents detail the contractual obligations of each party. Those documents might use different wording for the same concepts. It is therefore difficult to have a proper analysis of the implications of each term. While the RWA team has not seen any major issue yet, having a legal domain team review would reduce significantly this risk.
Solution: A serious review of the whole documentation by a legal team should be launched as soon as possible and at least before increasing significantly the Debt Ceilings.