[CF-DROP] MIP6 Application: ConsolFreight DROP: Tokenized Freight Shipping Invoices

[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?

The asset originator, ConsolFreight, is represented by Ernesto Vila (@EAV, [email protected], CEO at ConsolFreight) and Alejandro Gutierrez (@AleG, [email protected], CSO at ConsolFreight).

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

About ConsolFreight

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.

About Centrifuge

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:

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.

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.

13 Likes

Hey @spin! I am a fan of Centrifuge and have been for a while (remember watching an early presentation in Cape Town a few years back). I think you’ll find it difficult to source people against adding more real world collateral to the protocol, and your work with the Foundation to date speaks volumes.

My first question here has to do with the state of freight in the current global climate. I am by no means an expert, but from what little I do know, it’s not a happy time to be in this particular industry. Has this affected your risk calculations? How do you adjust for unexpected global events like Covid that literally wipe the bottom out the market?

This goes to a more technical question:

But TIN only insures this up to 10%, right? Could one consider that 10% buffer something like the LR of a crypto-asset? I appreciate that real world assets are not generally as volatile as crypto, but is 10% really enough to cover the possibilities of liquidations in the current climate? Seems like there wouldn’t be many parties willing to play keeper here, and that the assumption that it would be largely unnecessary is one that needs to be looked at very closely.

3 Likes

Hi @andytudhope,

Definitely supply chains have been disrupted by COVID affecting the logistics industry. Despite this fact, logistics are part of the first respondents to the crisis by transporting essential material, from medical supply & equipment (as the case of the hand sanitizers shipment we are using for the pilot) to the food supply industry that will be one of the first ones to be reactivated due to the low levels of food supply at distribution centers. In a short period time, the shock of the COVID-19 has affected every single industry, and logistics is considered an essential element to maintaining a healthy lockdown as well as the start up of the economy.

One way we have managed to minimize risk is moving most of the transactions to a prepaid basis, therefore the need of reverse factoring at the moment. Additionally, Freight Forwarders protect the collection of their services through the document of title exchange (Bill of Lading) that is often issued by them.

2 Likes

Thanks for the kind words! Let me try to answer your two questions:

The freight industry (pretty much like any other industry) has taken a big hit definitely. But I think we can all be very happy that it wasn’t completely obliterated: in this situation where personal travel has been severely restricted, cargo still needs to move as freely as possible (otherwise our supermarkets would get shockingly empty.

One important thing though is that financing invoices that have already been spent is a much less risky proposition than say venture capital or growth funding where the company borrowing money is planning on using the company’s growing revenue to repay. Invoice financing is on revenue that has happened already. There is of course a risk that the borrower goes bankrupt before paying back the debt. The maturity periods of these loans are generally less than 120 days. This means that the risk model you are building needs to evaluate the risk of default within the next 120 days not over a period of years which helps.

The TIN ratio is there to insure losses up to that percentage, you are right. The ratio chosen needs to be enough for the DROP investors to feel comfortable with the residual risk (a loss that is >10%).

We’ve put 10% as a proposal. I think it’s a good starting point and something that I believe the risk team definitely should have a say. Let me give you an example though: ConsolFreight is going live with a 270k DAI pool with 10% coming from TIN investors. The borrowers are 4 different freight forwarders that have each contracts with dozens of companies. The average invoice size is ~5000$ so you are looking at more than 50 invoices. With this distribution a single invoice being a complete default would not lead anywhere close to the than 10% threshold. Not even a single buyer would trigger losses that surpass 10% of losses.

So with only 10% in TIN we can already cover for a lot of the typical default scenarios and mitigate the risk of a buyer going bankrupt. There are still risks that can cause more losses: the collapse of an entire industry, a political system, systemic fraud, etc. As long as you ensure that:

Default risk < (stability fee - savings rate)

Adding a collateral type will still be a net positive for the MKR holders and statistically should be profitable collateral type.

4 Likes

Our standard oracle and keeper infrastructure for is based on secondary market trading and mark-to-market pricing. Using a centralized non-market based pricing oracle provided by a counterparty seems very risky. Would Maker as a whole, or possibly just the risk team, be able to open the books on the underlying invoices to make a judgement on credit risk ourselves?

Asserting custody of the underlying off-chain asset also presents potential issues. For all collateral types approved to date, Maker has been in possession of the underlying. This is not the case for the DROP tokens, as invoices are owned by the SPV. What is the connection between the DROP (and TIN) tokens and the SPV, considering that the US and Delaware do not permit bearer shares/bonds?

In traditional debt funds the NAV Model and valuation of the portfolio is agreed upon by the lenders and the fund manager and specified in the legal contract and this is the prevalent way that people price these assets today. This model is based on different data sources mostly focused on the individual credit risk and asset value of the loans in the portfolio. The best bet would be to base the price of DROP on similar calculations.

There are two ways we can bring the price of DROP on chain:

  1. We can have an oracle provide a price for DROP directly: that oracle could determine the price based on the value of the underlying collateral and look at that information off chain. This means oracle providers have to agree on how price the individual loans and calculate the price of DROP off chain and push it on chain.

  2. However irregardless of the need for a price oracle for DROP, Tinlake needs an NFT price oracle to determine the amount of money to advance to the borrowers. And the same information is the basis on which DROP tokens can be priced on chain when lenders supply DAI to the Tinlake contracts the NAV model used to determine how many new DROP to mint and when DROP is redeemed the NAV calculation is used to determine how much DAI to return. To provide this information for the Tinlake contracts we are working on setting up oracles that can provide the individual credit risk, asset value and provenance data (was the asset correctly assigned to the SPV and do the lenders have a recourse on the collateral). This is then fed into an on-chain implementation of the NAV model giving everyone a maximum amount of transparency on chain and a NAV model that can’t be tampered with.

We are open to going with either model and want to work on that with the oracles team when the onboarding process begins. There are a lot of parameters to set when determining pricing of these assets and we expect to be working with the Maker community on determining what these models should look like and will take the Risk team’s recommendations into account when deploying it.

We are working on a series of posts that explains how we are building these models that we started writing together with experts in the traditional finance world. The first post can be found here and we’ll post the follow up soon.

As for the question whether a token can be used to represent an interest in a company (a security), we have been working together with the asset originators to ensure they do. There are several security tokens frameworks and deployments (e.g. Harbor, RealT) that solve the problem of ensuring a legal recourse on an ERC20 token. This is an area where hopefully a legal memo can be procured by the Maker community specifically around these assets in MCD.

2 Likes

In the united states, you have to be subordinate on the receivables under UCC form 1, none of this is like that, so you are basically doing unsecured debt: you are not actually registering with the Secretary of State at the sate level (its not federally regulated, you have to file state by state to do this.

Not hating on competition , full disclosure I am the founder of FreightTrust.com, the issue of doing this is who is ultimately the importer of record or consignee and how the freight transportation was purchased (either through a broker, 3pl, owner operator, etc, makes a difference in the USA at least).

We are about to start bringing actual dry bulk commodities on-chain, maybe even some industrial chemicals. I dont think our model would work for MCD though, we had spoken to the team back in the summer, so interested where MCD goes with this.

medium.com/freighttrust for some information and our documentation is at freight-chain.github.io/obm

2 Likes

Forgive my ignorance but I see UCC-1 being applicable to personal property only? https://en.wikipedia.org/wiki/UCC-1_financing_statement
My assumption was that ConsolFreight would be something only freight companies would use, but I could of course be wrong. The world is of course larger than the US, but I imagine most countries have a varying set of rules for logistics.

1 Like

Hi @sambacha,

First of all thanks and congrats for founding freightTrust!
Centrifuge Tinlake is doing a securitization of the collateral and we have a legal process that goes with it. We are working on improving this and publishing the legal paperwork together with OpenLaw. The issue you mention is also less relevant for us because a lot of it is cross border transactions and not US domestic. UCC filings would have to be blanket to make sense in our scenario but the funds we are advancing to freight forwarders at this point would be too small that a borrower would would sign it. We are looking into ways we can finance all invoices a freight forwarder has but for that we will need to be able to originate a lot more. At this point it would be feasible to start using UCC liens to add a safeguard.

1 Like

Hi All,

Much thanks for submitting this application. From my vantage point, and as I have previously stated (re: Decentraland/MANA), it seems to me that some projects have left information out of their applications that the DAO needs to understand before we onboard collateral. In particular, I’ve noticed a lack of legal and regulatory info and analysis.

Here, for instance, why are no materials provided and a question goes unanswered when asked about the legal or regulatory positioning of ConsolFreight DROP (look at question nos. 10 and 11). Anyway, I realize that this is the first time for all of us to go through this MIP, so I’ll give you the benefit of the doubt and classify it as an oversight. Happens to everybody.

That said, in the interest of time, I had some thoughts on matters relevant to Consulfreight and other similar “off-chain” asset projects that MKR holders should consider. Can @aleG or @spin please lend a hand when you have the chance?

Several application excerpts caught my eye. I tried to highlight the specific parts that were the most noteworthy:

“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).”

“In April of 2020, ConsolFreight conducted a pilot with MakerDAO and Centrifuge to transform logistics access to liquidity through a Defi Solution.”

“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).”

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.

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.

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.

First of all, the above description of the DROP mechanics describes what most people around the world would understand as a debt security, or rather a transferable instrument representing a legal claim against the future disbursements of an entity’s proceeds in satisfaction of a debt. The security status of DROP is further raised by the uncertain cash flows into the SPV, following Vault liquidation, from the originator and Tinlake “rebalancing”. @AleG’s comment above acknowledges that this process is a “securitization.” This presents a whole host of issues for MKR holders – not least of which are the implications of forced transfers pursuant to government action. Have ConsolFreight or Centrifuge undertaken any securities law analysis of DROP and/or obtained legal counsel regarding its status, including a legal memo reflecting such analysis that can be shared with MKR holders?

@AleG’s comment above references a “legal process” in relation to “securitization” but there is no detail provided in the application or the comment. What is that legal process composed of? Has ConsolFreight or Centrifuge retained legal counsel to advise on, conduct, design this legal process? Did OpenLaw provide you with this legal advice?

Next, while not fully explained or stated, it appears that potential DROP buyers (addressed below) purchase DROP exclusively through the MCD liquidation/auction process. I have only a lay understanding of this, but most jurisdictions generally require a regulated intermediary to conduct sales of securities. Certainly, in the US, one has to generally sell securities through an SEC-registered broker-dealer. MakerDAO is not such a regulated entity and, as far as I can tell, there is no provision for a broker-dealer in your plan to administer auctions. Has ConsolFreight or Centrifuge analyzed this issue? If so, what do the applicants propose as a solution to this? Is there some reason this is immaterial? What is it?

Were the pilots you all conducted with the Maker Foundation, MakerDAO or both? Please note that the Foundation and the DAO are separate concerns. Also, it’s stated that Centrifuge and MakerDAO “develop a tool to bring real-world assets into MCD” – aside from Centrifuge’s public blog posts and the answer to the above question, what did the Maker Foundation or MakerDAO do to develop Tinlake, if anything?

If the pilots were directly funded by the Foundation (and not a Vault) and that was seemingly the Foundation’s only role in the Pilot, were you still able to test DROP deposits, auctions and DROP holder redemptions (on Kovan at least)?

Who owns the SPV? Is it a Consolfreight or Centrifuge controlled parent? Please name the directors, members, shareholders and management of the SPV’s parent.

Will you disclose the names of each ultimate beneficial owner of the SPV’s parent?

Should we expect anyone who holds in an interest in the SPV to provide their identity in case of redemption? In other words, should a liquidation occur, and I win several DROP auctions with my keeper, will I be expected to identify myself in order to redeem my DROP for the underlying off-chain collateral (cash if you all are successful in selling the actual invoices)?

If the SPV cannot liquidate its assets to pay DROP holders, what’s next?

What happens if the SPV fails to hold the underlying collateral and is unable to redeem DROPs for the collateral or cash? What then? Who can keepers (or MKR holders, for that matter) pursue?

What is the relationship with OpenLaw? Are they providing legal counsel (as noted above, OpenLaw is not generally in the business of providing legal advice)? Or are they simply a technology provider?

How does the structure ensure that the SPV is bankruptcy remote? And remote to whose bankruptcy – the originator’s? Tinlake’s? Its own?

Do the SPVs have guarantors? Typically, with SPVs, although they are bankruptcy remote (if structured correctly), companies will establish a guarantor to ensure payment to creditors. Has Consolfreight and/or Centrifuge considered such a structure?

Will Consolfreight (or Centrifuge) guarantee redemptions or is it publicly going to disavow liability?

Will Consolfreight (or Centrifuge) provide legal insurance surrounding the SPV for its guarantees?

Do Consolfreight and Centrifuge envision other potential keepers for the Tinlake program aside from typical purchasers of distressed debt, i.e. hedge funds? Regardless, what happens if other entities do act as keepers? This suggests there may be some whitelisting/blacklisting for DROP keepers; is that so?

Are there ideal characteristics of a DROP keeper? What are they and why? Is that because it is implicitly understood that DROP would be a security and thus necessitate certain types of purchasers to avoid violation of the securities’ laws?

Please indicate whether ConsolFreight or Centrifuge have interacted with any regulatory agency regarding TinLake and/or DROP? If so, please state (a) the regulatory agency; (b) when those interactions occurred; and © the conclusion of those discussions.

The Tinlake organizational graphic and application response to question 9 suggest that both an operating memorandum and loan agreement will be executed by the Lender, presumably MakerDAO. Please correct me if I am wrong.

  1. 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.

The graphic from question 9 is a bit confusing, so can we run through a few things: the lender is MakerDAO; the SPV is the entity Consolfreight (or somebody) creates; the Asset Originator is Consolfreight; and the final borrower is the company that creates the invoices, right?

Where does the SPV’s parent sit? With this graph it looks like Centrifuge is the parent. That can’t be right, can it?

How are you going to have a loan agreement and an operating memorandum with MakerDAO – who can sign on behalf of “MakerDAO”? How can it be enforced by or against MakerDAO? Have you guys thought about these questions – they seem basic. And if there is no contract between the Lender – MakerDAO – and the other entities, how does your proposed arrangement work?

How dependent is the structure on off-chain legal agreements?

Back to the SPV, how will the system you describe ensure the preservation of SPV assets, and thereby value to DROP holders, i.e., by contract, bylaws, etc.?

Why have none of these issues been addressed in your application? I get the technological focus but Consolfreight and Centrifuge are trying to move MakerDAO into the regulated waters. If you want us to do that, we need details. Otherwise, we’re sailing blind into a potential squall (the lack of color on the SPV-Parent relationship is confusing enough without exploring the potential unregistered and non-brokered securities auctions and the concomitant issues).

There is likely more to unpack here and certainly responses to the above will generate more questions.

I hope these questions start to bring out data points and information that MKR holders require in order to thoroughly and thoughtfully assess ConsolFreight DROP’s inclusion as collateral in MakerDAO.

As I noticed some push back to my tone in the Decentraland/MANA application, so I would like to clarify that these questions are not meant to attack or temper the excitement of incorporating off-chain assets. Rather, I hope to elicit fulsome responses so we, the DAO, can better conduct the due diligence to ensure the Protocol’s success and perseverance into the future.

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@Tosh9.0 Thanks for your remarks and detailed questions. I will go into a bit more detail below about some specific points you’ve brought up but I wanted to explain why we decided to leave the legal aspect of these tokens blank:

The asset originators set up a legal entity and have sold their first DROP token to investors in a legally compliant way. I will elaborate a bit on this in the answers below. We have been working on a legal framework that we believe to be compliant with regulations and that can be made compatible how MakerDAO works. However neither the team behind Centrifuge or the asset originators themselves can write a legal memo on how these assets work within MCD: There’s the issue of conflict of interest, the decision of what scope that we simply can’t decide for the DAO. We believe that this should be part of the work the “legal domain team” does.

I would also say that the MIP6 proposal was never intended to be a complete documentation pertaining everything necessary to know about the collateral. A lot of these questions will of course be addressed in the future as the domain teams work on the various topics and the executive vote is prepared.

The security status of DROP is further raised by the uncertain cash flows into the SPV, …

The sale of DROP token to the first investors that ConsolFreight was made in a way compliant with US securities law. These tokens should be considered a security. This means that DROP tokens were only sold to accredited US investors or non-US persons/entities.

Next, while not fully explained or stated, it appears that potential DROP buyers (addressed below) purchase DROP exclusively through the MCD liquidation/auction process. I have only a lay understanding of this, but most jurisdictions generally require a regulated intermediary to conduct sales of securities. Certainly, in the US, one has to generally sell securities through an SEC-registered broker-dealer. MakerDAO is not such a regulated entity and, as far as I can tell, there is no provision for a broker-dealer in your plan to administer auctions. Has ConsolFreight or Centrifuge analyzed this issue? If so, what do the applicants propose as a solution to this? Is there some reason this is immaterial? What is it?

Keepers will likely have to go through the same process as regular investors that buy DROP from the issuer (the SPV).

Were the pilots you all conducted with the Maker Foundation, MakerDAO or both? Please note that the Foundation and the DAO are separate concerns. Also, it’s stated that Centrifuge and MakerDAO “develop a tool to bring real-world assets into MCD” – aside from Centrifuge’s public blog posts and the answer to the above question, what did the Maker Foundation or MakerDAO do to develop Tinlake, if anything?

To clarify: The Maker Foundation contributed no code to any of these deployments. But the asset originators that we work with have been working with the Business Development Team at maker alongside with us to develop the non-technical aspects.

If the pilots were directly funded by the Foundation (and not a Vault) and that was seemingly the Foundation’s only role in the Pilot, were you still able to test DROP deposits, auctions and DROP holder redemptions (on Kovan at least)?

As mentioned above, the countparty was not an MCD vault but the Maker Foundation. The work we did was to help the asset originators to define a way to create their tokens, add collateral and prepare for the collateral onboarding process.

On the technical side, we have integrated Tinlake into MCD over a year ago before MCD was live but have since focused on other parts and will need to revisit a lot of this.

Who owns the SPV? Is it a Consolfreight or Centrifuge controlled parent? Please name the directors, members, shareholders and management of the SPV’s parent.

Will you disclose the names of each ultimate beneficial owner of the SPV’s parent?

Centrifuge does not have any ownership interest in the SPV (ConsolFreight Pilot LLC). I will let ConsolFreight share more on the structure.

Should we expect anyone who holds in an interest in the SPV to provide their identity in case of redemption? In other words, should a liquidation occur, and I win several DROP auctions with my keeper, will I be expected to identify myself in order to redeem my DROP for the underlying off-chain collateral (cash if you all are successful in selling the actual invoices)?

If the SPV cannot liquidate its assets to pay DROP holders, what’s next?

Under normal operation the Tinlake contracts will redeem your DROP for DAI. If the SPV were to fail to repay the DAI to the Tinlake contrats and the legal recourse would have to be taken, this can’t be done anonymously but instead you would have to use the legal system where revealing your identity is usually required.

What happens if the SPV fails to hold the underlying collateral and is unable to redeem DROPs for the collateral or cash? What then? Who can keepers (or MKR holders, for that matter) pursue?

Are you describing what would happen in a default scenario? That would be the risk every DROP holder takes.

What is the relationship with OpenLaw? Are they providing legal counsel (as noted above, OpenLaw is not generally in the business of providing legal advice)? Or are they simply a technology provider?

OpenLaw has interesting technology to closely tie events on chain with legal contracts. They can for example attest that the borrower signed the appropriate agreement with the SPV on chain.

We believe OpenLaw would be an interesting partner to help MakerDAO to ensure the right agreements are in place.

How does the structure ensure that the SPV is bankruptcy remote? And remote to whose bankruptcy – the originator’s? Tinlake’s? Its own?

The bankruptcy remoteness you usually want in this scenario is shielding the assets from any other claims. The SPV is a legal entity that has no contractual obligations besides the loans it issues to borrowers and the DROP & TIN tokens.

If ConsolFreight’s operating company would be the counterparty to these loans then any claims such as salaries of the team, potential legal liabilities etc. could suddenly compete with the DROP & TIN holders claims.

Do Consolfreight and Centrifuge envision other potential keepers for the Tinlake program aside from typical purchasers of distressed debt, i.e. hedge funds? Regardless, what happens if other entities do act as keepers? This suggests there may be some whitelisting/blacklisting for DROP keepers; is that so?

Keepers will likely have to be whitelisted with the SPV to participate in auctions.

Are there ideal characteristics of a DROP keeper? What are they and why? Is that because it is implicitly understood that DROP would be a security and thus necessitate certain types of purchasers to avoid violation of the securities’ laws?

Yes, this is the assumption under which we operate on. To buy DROP token you need to be KYCed by the issuer and comply with local applicable law (which in the case of both our first two asset originators ConsolFreight and Paperchain is Delaware).

Our current assumption is the following: DROP is considered a security but only if held by a legal entity. A DAO or smart contract is not a legal entity and therefore as long as theser tokens are held in a Vault controlled by the SPV, the SPV is not actually issuing a security. Only when the Vault goes into liquidation and keepers want to bid on it will the SPV issue the security to the highest bidder. Therefore while keepers need to get KYCed, not every single DAI holder or entity interacting with MCD has to.

This is the basis that we propose for MakerDAO to pursue and investigate.

Where does the SPV’s parent sit? With this graph it looks like Centrifuge is the parent. That can’t be right, can it?

ConsolFreight LLC in Florida owns the ConsolFreight Pilot LLC.

Back to the SPV, how will the system you describe ensure the preservation of SPV assets, and thereby value to DROP holders, i.e., by contract, bylaws, etc.?

Yes, that is the operating agreement that is signed by the SPV and the asset originator (ConsolFreight).

Why have none of these issues been addressed in your application? I get the technological focus but Consolfreight and Centrifuge are trying to move MakerDAO into the regulated waters. If you want us to do that, we need details. Otherwise, we’re sailing blind into a potential squall (the lack of color on the SPV-Parent relationship is confusing enough without exploring the potential unregistered and non-brokered securities auctions and the concomitant issues).

I don’t think this was at all our intention. We have a few hundred pages of legal documents that we will be making public but just posting those alone will hardly allow an individual MKR holder to decide how to vote. All of these questions and many more should be addressed before finally onboarding the asset as collateral to MCD. That process will certainly take time and will need the involvement of experts (lawyers). The results will likely be legal opinions that have to be procured by MakerDAO that summarize the risks and mechanics of how these assets can be onboarded.

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Full disclosure. I worked with Centrifuge on its invoice valuation blogpost. For background, I was the head of consumer lending pricing at HSBC US and home equity pricing at Wells Fargo. Subsequent to this, I was a valuation senior manager at KPMG US, and now run the NYC valuation practice for CBIZ Valuation Group, part of the 7th largest accounting firm in the U.S. My partner and I, Ryan Medlin, have been following Dharma and Maker since the original whitepapers were floating around.

We think of price as being the present value of an expected future benefit stream. In the context of debt, the interest is that benefit stream. The borrowers’ ability and willingness to pay set the expectation. If there is a default, the likelihood of recovery sets that portion of the value. Lastly, we want to know over what time frame does this all occur? Armed with those data points, and an understanding of how the market prices similar risks, an accurate value can be concluded.

Error in valuation is typical measured in variance to a mean (average) result. Variance is uncertainty. Uncertainty can be driven by a lack of understanding counter-party risk, the enforce-ability of the agreement underlying the transaction, and the models/assumptions used to arrive at a value. The greater the gap between the lender and party ultimately responsible for providing the benefit stream, the greater the system’s inherent uncertainty. Higher uncertainty, lower participation, lower value proposition to the ecosystem and higher opportunity for sophisticated outside parties to game the system.

So an ongoing goal upstream for the Maker community could be encouraging Centrifuge’s ability to reduce uncertainty, to maximize value and avoid borrowers gaming DeFI over mis-priced risk. Transparent remittance data, counter party performance in real time and other dashboards to improve predictability and reduce risk. Would love to see creativity here.

Another objective, just throwing it out there, may be to figure out how you increase the sophistication of Maker lenders through education/transparency, or how do you reduce the need for that sophistication by using trusted 3rd parties/dashboards/etc.?

-howard

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Two weeks ago but some of this is just now hitting social media and i wanted to contribute to the conversation any way that i can.
I have been involved with cryptocurrencies since 2015 and i’m very optimistic about the potential of blockchain technology.
That being said, i’m also Manager of Operations for a Motor Carrier/Logistics company specializing in the transportation of high value, critical pharmaceutical freight as well as Food and other consumer essential product that requires temperature control.

I will leave out my real name or the name of my company for obvious reasons but i will provide some background info :
I have been in Logistics for 15 years now.
I have worked with Dry Freight, Rail , Containers, Flat bed, Oversize & Overdimensional, Sprinter vans and Reefer.
There is virtually no commodity that i haven’t played a part in. From wood, paper ,plastic, to medicine, jet engines and high contrast MRI solutions.
I have worked with small shippers and customers all the way up to customers like Amazon, Wal-Mart , Costco - a number of Life Science/Pharmaceutical companies and even government contracts be it mail or supplies for correctional facilities and airforce bases around the country.

Not only do i facilitate the contracts between my carrier company and the Customer or other Broker/ 3PLs , i have extensive knowledge about the accounting/invoicing aspect both when working with a factoring company and doing our own invoicing.

I see massive potential with blockchain when it comes to immutable data pertaining to the integrity of the product. For example : undeniable proof that the freight was continuously kept at - 10 F

Usually if the product is extremely sensitive to temperature fluctuations, the shipper will place temp recorder(s) along with the freight. These are not always 100% reliable as they run on batteries and believe it or not, they die a lot more often than you would think.
The other option is requesting a temperature download. This is a scenario where the carrier is requested to have their reefer unit plugged into a computer via USB to and the software pulls data from the units memory.
This is also not 100% reliable , simply because i can receive this report from a ThermoKing and just edit the data with something as simple DocHub, or Photoshop. (not that i would :slight_smile: )

Blockchain could help in this sense because it would reduce very costly and time consuming claims disputes. That is of course, if the insurance companies providing coverage could see themselves benefiting from " TRUTH " and new Tech that could one day put them out of business.
Big IF in my humble opinion.

As far as this being introduced into any payment systems , i have to say that It will be nearly impossible to implement. At least not in the foreseeable future.
As an advocate of blockchain and its infinite potential , i simply have to be realistic and say that adoption still has such a long way to go. With transportation/supply chain being such a HUGE industry it is still embarrassingly, one of the most unregulated in this country.
My reasons for having this opinion are many and i have already put up a wall of text so if people are interested -
I am willing to answer any questions

Thank you and keep up the good work !

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