[CF-DROP] MIP6 Application: ConsolFreight DROP: Tokenized Freight Shipping Invoices
This is a MIP6 Proposal for the addition of ConsolFreight’s tokenized freight invoices to MCD by ConsolFreight supported by Centrifuge. ConsolFreight is originating and administering the asset collateralization using Centrifuge’s Tinlake Protocol. This is the continuation of a joint pilot together with the Maker Foundation beginning of April where we tokenized and financed freight invoices.
Due to the unique nature of the ConsolFreight collateral we deviate slightly from the MIP6 structure and split this application into two sections, starting with an introduction to the collateral itself and then a description of the technical details and financial mechanisms. Centrifuge provides the Tinlake Protocol–a platform to provide real-world assets to Maker and we expect that multiple assets will follow. This is one of two applications we are posting today and propose for the first iteration of the governance cycle.
1. Who is the interested party for this collateral application?
Centrifuge is providing the technology and framework for bringing real-world assets to MCD. The main contact on Tinlake for the application is Lucas Vogelsang (@spin, [email protected]) of Centrifuge as well as Lea Schmitt (@_LS, [email protected]).
2. Provide a brief high-level overview of the project, with a focus on the applying collateral token
We will start with a brief summary of ConsolFreigt, the Asset Originator, and follow with a more technical description of the Tinlake Protocol, the technology Centrifuge has built and how they interact with Maker later. The asset type we are proposing for inclusion in MCD is slightly different to the majority of collateral applications: the Asset Originators will be using MCD directly as a line of credit to originate new loans against freight invoices (invoice factoring and reverse factoring). This means they will add large amounts of debt likely using up the assigned debt ceiling for the collateral type while paying an attractive stability fee: the yield on the collateral is projected to be around 6%. For comparison, BAT sees less than 500k of Dai minted, less than 0.2% of the BAT market cap.
ConsolFreight is a SaaS freight forwarding technology provider that advances working capital finance to freight forwarders’ operations (e.g. air, ocean, rail, road, multi-modal, etc.) and collects from shippers (e.g. supermarkets, hospitals, office supplies, etc.). The founding team combines 50+ years of experience running successful freight forwarding businesses in the U.S., Latin America, and Europe.
These assets have the following characteristics:
- Asset Details: Collateral Freight Forwarding Invoices
- Average Invoice Size: $5,000
- Maturity: 30 & 45 day invoices
- Historic Invoice Default Rate: <1%
- Advance Rate: 85-95%
- Interest Rate charged to Freight Forwarders: 15%
- Types of Advances: Factoring & Reverse Factoring
- Customer Monthly Sales Volume: $500,000 - $2,000,000
The following describes an exemplary use case:
A distributor in the US placed an order to a US Wholesaler of 10 Million units of 8.4 FL oz of hand sanitizers. The product is manufactured in Mexico to be delivered to their Indiana distribution center, over the course of 12 weeks with a volume of about 15 trailers per week.
The wholesaler hired a Freight Forwarder to provide the logistics for the 210 X 53’ Trailers needed to deliver the product and to perform the customs clearance in both Mexico and the US. The contract totals to $1.7M in freight fees. The majority of that is going to subcontracted trucking companies, customs brokers and insurance providers that complete the task.
The terms between the Freight Forwarder and the Wholesaler are 30 days net from invoice date, while the payment to the shippers have shorter payment periods. This means the Freight Forwarder will be required to factor the invoices to the US Wholesaler in order to have liquidity to fulfill his obligations with the subcontractors in its supply chain.
By doing reverse factoring, the Freight Forwarder is able to discount his invoices, receive early payments and settle all obligations to all service providers, while waiting 30 days for the invoices to the Wholesaler to reach maturity and collect the final payment.
Overview of Tinlake Smart Contracts
Centrifuge is building a full stack of tools to bring real-world assets into DeFi. Assets such as freight invoices, warehouse receipts or even real estate can be tokenized in the form of an NFT. Each NFT represents one unique real-world asset, a loan, with a unique default risk that is priced by an off-chain oracle. Centrifuge Tinlake is a set of smart contracts that handles the bundling of these individual loans and issues an interest bearing ERC20 token against the pool. Pooling these assets allows the Asset Originator to offer a more stable return (and risk) and offers a scalable more easily tradable fungible token to the lenders.
Tinlake has two different ERC20 tokens that lenders can buy: TIN and DROP. The TIN token is the junior tranche that takes any first losses and is primarily bought by the Asset Originator and other lenders that seek leveraged exposure to the portfolio. Tinlake is configured to require a minimum amount of investment in the TIN token and for Consolfreight the ratio will be set at 10%. Any losses that occur in a portfolio will first be covered by TIN token holders, that means as a DROP token holder you will only start seeing losses if they surpass 10% of the portfolio value. More information on how the two tranches work can be found here: https://developer.centrifuge.io/tinlake/overview/tranches/
The collateral we propose for inclusion is the DROP token. Tinlake has adapters that allow these end users to deposit DAI for DROP tokens but it also has an adapter that can interact with MCD directly. A Tinlake deployment manages a single vault. When new loans are originated, new DROP is minted and immediately deposited into the vault. Dai is drawn and given to the borrowers.
The Infrastructure beyond the Tinlake Contracts
Bringing real-world assets into DeFi in a secure way requires more than simply minting an ERC20 token and claiming it has some value. One important part is that we move as much information on-chain as possible, hence we start with individual NFTs and make loan data on the entire portfolio available.
In addition we have scalable protocol to share cryptographically signed and verifiable data off-chain. This allows the Asset Originator to share their loan information with different service providers such as financial auditors, credit scoring firms and others to provide pricing and risk input on these assets that are then used to calculate the asset value and brought on-chain as an oracle providing real time pricing data for each NFT.
Along with the necessary technical infrastructure to bring these assets into DeFi, the Asset Originator sets up a legal structure that provides the necessary support to ensure that anyone that owns a DROP token has a legal claim to the underlying assets. This is done with a legal structure very commonly used in the traditional financial system: The collateral for the individual loans are assigned to a legal entity, the “special purpose vehicle” and lenders get an ownership interest in the entire portfolio of this entity (with this entity the assets are in an a bankruptcy remote structure that is not influenced by the Asset Originators).
3. Provide a brief history of the project
ConsolFreight is a technology solutions provider founded in 2016 focusing on helping Freight Forwarders and consolidators to crack the digital gap, improve liquidity and working capital. The founders established the company as the response to the issues that they were experiencing in their own Freight Forwarding companies. ConsolFreight has developed a whole suite of products to help digitisation of Logistics operations; like e-Forwarder®, e-Hub and e-Connected.
ConsolFreight started as a digitization provider and is now able to offer the full suite of FreightTech products at no cost in order to help the thousands of small and medium Freight Forwarders to be competitive at a global scale. ConsolFreight is currently building out a lending product to be added to its platform in order to provide its 600+ users an alternative from market dominating players and platforms. Last year, Consolfreight was introduced to MakerDAO and started to envisage the potential use of crypto currency as a means to provide supply chain financing (freight invoicing and trade finance) to all the parties involved in International Trade (Buyers, Sellers, and Freight Forwarders) fast and at a competitive cost of capital. In April of 2020, ConsolFreight conducted a pilot with MakerDAO and Centrifuge to transform logistics access to liquidity through a DeFi solution.
ConsolFreight is often described as the place where FreightTech and FinTech meet. After raising seed funding in 2019; Consolfreight quickly ramped up operations and grew from 3 to 11 people (development, operations, sales and marketing). The company added operations in Barcelona and Dublin on top of Miami where the company was established.
Centrifuge has been working on enabling businesses to borrow money using their assets in DeFi since the project was founded in 2017. It was founded by a team of experienced entrepreneurs who at their previous company, Taulia, built supply chain finance products for over 120 of the Global 2000 companies focusing on financing assets in the global supply chain. Centrifuge has received $8.2M in VC funding from a list of experienced & reputable investors and its core mission is to change the rules of global commerce by bringing fairer financing options to business around the world. With Tinlake we are building the tools to make these assets liquid and truly DeFi native.
We have written about our vision for DeFi and how adding real-world assets to MCD can scale DeFi and diversity risk in response to the Black Thursday and what we do to minimize trust as we bring these assets live.
Centrifuge and the Maker Foundation have collaborated on helping asset originators prepare for bringing real-world assets into DeFi. Gustav Arentoft (Business Development @ MakerDAO) & Lucas, cofounder of Centrifuge, talked at EthCC on March 6th about another asset originator we are working with, ShuttleOne.
4. Link the whitepaper, documentation portals, and source code for the system(s) that interact with the proposed collateral, and all relevant Ethereum addresses. If the system is complex, schematic(s) are especially appreciated.
ConsolFreight’s mainnet deployment is scheduled for May 5th. A previous version went live on mainnet and is deployed under the following addresses:
Technical documentation about Tinlake can be found here:
- Github: https://github.com/centrifuge/tinlake
- Tinlake Documentation
- We hosted a community call where we invited a the Maker Community for a detailed walkthrough of the Tinlake smart contracts, Recording: here
5. Link any available audits of the project. Both procedural and smart contract focused audits.
Centrifuge has conducted several audits of its technology stack. The audits can be found here: https://github.com/centrifuge/security/tree/master/audits
6. Link to any active communities relating to your project.
- Team members actively participate in Maker Governance discussions in the Maker Forum and Community Calls [1, 2]
- ConsolFreight and Centrifuge on Twitter
- ConsolFreight’s Freight Forwarding Network, Forward Together.
- ConsolFreight’s blog, The Freight Business
- ConsolFreight on LinkedIn
7. How is the applying collateral type currently used?
Centrifuge Tinlake has been in development since early 2018. We did a first technical POC where a pre launch version of MCD on Kovan was used to deposit an ERC20 token that was backed by an NFT in April 2018. Only a few months later we deployed the first version of Tinlake to Ethereum mainnet and worked with five different Asset Originators to facilitate loans in DeFi. In a joint effort with MakerDAO to develop a tool to bring real-world assets into MCD we financed four of those Asset Originators with funds provided by the Maker Foundation totaling a volume of 250,000 SAI. The Asset Originators included a residential bridge loan as well as a mortgage originator, a financing solution provider for music royalties and a logistics platform providing invoice factoring. This allowed us to gain first experience with the setup and iterate on the smart contract and risk architecture. The current version of Tinlake has been audited and tested with two running deployments.
ConsolFreight DROP tokens in DeFi:
April 2020:* The setup and smart contracts described herein have been tested prior to this collateral application. Together with the Maker Foundation ConsolFreight financed a single freight invoice (DAI 5,223) on April 1st via the ConsolFreight Tinlake pool. For this, we mocked the MCD system by financing the Tinlake smart contracts through funds provided by the Maker Foundation. Find the link to Etherscan here. For more info click here.
From May 2020 onwards: We plan to deploy a ConsolFreight Tinlake pool with an initial pool size of DAI 250,000 on May 5th with an initial set of lenders. ConsolFreight intends to slowly scale up demand by originating an additional 250k in assets over the first couple of months. The DROP token will generate 10% APY and the TIN token will represent 10% of the total asset pool. ConsolFreight and Centrifuge will equally purchase the TIN tokens to demonstrate their confidence in the asset pool and will be exposed to any initial losses.
Inclusion in MCD: Upon onboarding ConsolFreight intends to open up a Vault to use to grow the loan product it is offering to its shippers. This will generate a consistent and uncorrelated supply of DAI to the Maker system backed by a revolving pool of invoices. ConsolFreight estimates that it has an additional demand of capital of around $5M.
8. Does one organization bear legal responsibility for the collateral? What jurisdiction does that organization reside in?
ConsolFreight has incorporated ConsolFreight Pilot LLC, a Delaware (USA) limited liability company (the special purpose vehicle, “SPV”). This SPV has been formed to finance ConsolFreight’s assets.
This SPV structure creates a bankruptcy-remote entity whereby owners, debt holders or interested parties of this newly created SPV are left unaffected by the parent’s financial, operational and/or legal health.
We are collaborating with OpenLaw to open-source these contracts in order to make it accessible to other Asset Originators and use their infrastructure to allow public review of the signed contracts by anyone.
9. Where does exchange for the asset occur?
The SPV enters into a subscription agreement with lenders who are receiving DROP from the SPV in turn for providing DAI. The DROP token can be redeemed against the cash flows of the underlying collateral directly from the SPV by any DROP holder. This is ensured by the Tinlake smart contracts and the primary way for interacting with these tokens.
10. (Determined by Legal Domain Team) Has your project obtained any legal opinions or memoranda regarding the regulatory standing of the token or an explanation of the same from the perspective of any jurisdiction? If so, those materials should be provided for community review.
We do not have any materials we can provide at this time.
11. (Determined by Legal Domain Team) Describe whether there are any regulatory registrations for the token and provide related documentation (including an explanation of any past or existing interactions with any regulatory authorities, regardless of jurisdiction), if applicable.
12. (Optional) List any possible oracle data sources for the proposed Collateral type.
Determining the correct price of a real-world asset behaves differently from pricing Ethereum native collateral tokens. In order to adequately price a freight invoice several factors must be considered (please read our fundamentals of pricing real-world assets for additional information). Tinlake requires not just an accurate price of the overall pool but details on a loan by loan basis. As these form the basis as well for the DROP token, we will start outlining the pricing for those first:
In approving clients and determining a risk score, ConsolFreight utilizes a strict process and prudent thresholds with respect to:
- Length of business ownership
- Historical accounts receivable performance
- Full background checks along with financial and operational identity
- Customary checks for fraud, liens, incorporation documents, licenses and more
The risk score calculated from these inputs is used to determine advance and interest rates. The Tinlake contracts then use these per NFT values to control how much money borrowers can withdraw.
To determine the value of the entire portfolio (simplified the sum of the market value of all loan NFTs) is usually by doing a net-asset-value (NAV) calculation across the portfolio. Centrifuge is implementing the NAV model in smart contracts that can calculate this information based on individual pricing information in real time based on the NFT price information.
MCD can use the pricing models that Tinlake provides to assess the collateral value of the DROP token. Centrifuge will be providing more material on the oracles in the coming weeks as we work with the oracle domain team.
13. (Optional) List any parties interested in taking part in liquidations for the proposed Collateral type.
The way this collateral type is used varies from how standard vaults are opened: DROP tokens have a stable USD price and any small fluctuations in the loan portfolio performance should be covered by the insurance provided by the TIN tranche. This means that under normal operation, the Asset Originator would not see their Vault get liquidated. A liquidation would only occur if a large amount of defaults occur across the portfolio that the risk model did not calculate.
In case the Vault gets liquidated, the Tinlake contracts enforce a rebalancing of the pool to bring it back to its required collateralization ratio and will not allow issuing any new loans. Instead the Tinlake contracts are from this point on taking all of the cash flows generated by the borrowers and disbursing these to DROP token holders. Trade finance assets are usually short term assets and the instance of ConsolFreight the entire pool can be liquidated in <55 days (45 day term invoices + a grace period for late payments).
Overall this means keeper liquidations will be a much less common occurrence that only happen when the risk model worked out for a given collateral type did not perform. In the debt finance world there are companies that specialize in buying distressed loan portfolios that can be onboarded as keepers for MCD that would be ideal candidates for buying any DROP that MCD wants to liquidate before the underlying portfolio is liquidated.