[DMM] Proposal for Collateral Onboarding of DMM mTokens

1. Who is the interested party for this collateral application?

The DeFi Money Market Foundation (DMMF), consistenting of Gregory Keough, Derek Acree, Corey Caplan, Adam Knuckey, Matthew Finestone, and Zachary Rynes on the behalf of the DMM DAO.

2. Provide a brief high-level overview of the project, with a focus on the applying collateral token

The DeFi Money Market (DMM) Ecosystem is a protocol built on Ethereum that brings interest-generating real world assets on-chain into Ethereum in a transparent and trust-minimized manner enabling DeFi users to earn a stable uncorrelated yield (currently 6.25% APY). Users gain exposure to these assets by depositing their Ethereum digital assets (e.g. DAI USDC) into the DMM Ecosystem and receive back a corresponding mToken (e.g. mDAI mUSDC) representing a claim on their deposit (like Compound cTokens). A portion of these deposited funds are then used to purchase interest generating real-world assets and the rest is left in the contract for withdrawal liquidity.

Users can hold, transfer, and trade mTokens in any Ethereum wallet as tokens are fully ERC20 compliant. There is a blacklist, but there is no whitelist for mTokens. Users can redeem their mTokens to withdraw their share of the underlying digital asset that was originally deposited plus interest generated. mTokens are overcollateralized in terms of both the valuation of real-world assets (collateral worth ≥100% of mToken value) and in the interest streams those assets generate (generates more than 6.25% APY).

As such, mTokens are stable and predictable in value compared to cryptocurrencies such as ETH, making it an excellent addition to the MakerDAO credit system as an uncorrelated collateral option for users and the DMMF to mint DAI against real world assets. mTokens are currently overcollateralized with $8.5M in automobiles within the United States. More information can be found on-chain or on our Explorer page.

3. Provide a brief history of the project

The DeFi Money Market (DMM) was launched in March 2020 in partnership with Chainlink to bring real world assets into Ethereum’s DeFi ecosystem. DMM has also been backed by Billionaire Tim Draper’s Venture Studio who purchased a stake of the DMM DAO. Since release, over $245k worth of mTokens have been purchased on the Swap app with mTokens now supported on the Trust Wallet and Coinbase Wallet.

The DeFi Money Market is built to enable anyone to earn a stable yield on their digital assets in a permissionless and borderless manner, requiring nothing more than an internet connection and an Ethereum address. The DeFi Money Market Foundation (DMMF) is currently overseeing the DMM protocol, but ownership of the protocol, real world assets, and off-chain fiat holdings will be transferred to the DMM DAO which will be run and managed by a distributed group of DMG governance token holders. Decentralization of DMM is a continual work in progress, but we are working to ensure DMM is as transparent and trust-minimized as possible.

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.

Whitepaper

Github

Swap page

Explorer page

DMM Controller Contract:

0x4CB120Dd1D33C9A3De8Bc15620C7Cd43418d77E2

mDAI Token:

0x06301057D77D54B6e14c7FafFB11Ffc7Cab4eaa7

mUSDC Token:

0x3564ad35b9E95340E5Ace2D6251dbfC76098669B

Off-chain Assets Valuator:

0xAcE9112EfE78D9E5018fd12164D30366cA629Ab4

Underlying Token Valuator:

0x693AA8eAD81D2F88A45e870Fa7E25f84Ca93Ca4d

Blacklistable:

0x516d652E2f12876F5f0244aa661b1C262a2d96b1

DelayedOwner:

0x9E97Ee8631dA9e96bC36a6bF39d332C38d9834DD

5. Link any available audits of the project. Both procedural and smart contract focused audits.

DMM is currently undergoing a Smart Contract security audit which is being performed by the security firm SECBIT who previously audited Loopring, DDEX, and more. The audit process thus far has been positive with no critical issues found and the final report will be published publicly once complete.

6. Link to any active communities relating to your project.

Discord

Telegram

Twitter

7. How is the applying collateral type currently used?

mTokens (mDAI mUSDC) are currently being used by Ethereum users to earn 6.25% on their digital assets by gaining exposure to interest-generating real world assets. As mTokens are ERC20 compliant, they can be transferred using any regular Ethereum wallet. We are working with various DeFi protocols, aggregators, and portals so mTokens can be utilized by the most users. We believe adding mTokens as collateral in the MakerDAO credit system (Vaults) can boost the overall liquidity of DAI and help act as a peg stabilizer as these assets are uncorrelated to cryptocurrencies such as ETH and have minimal opportunity cost as mTokens are interest generating enabling users to get the most utility out of their deposited funds, namely stablecoins.

8. Does one organization bear legal responsibility for the collateral? What jurisdiction does that organization reside in?

Currently the DeFi Money Market Foundation (DMMF) holds and owns the contractual rights to the underlying collateral (real world assets) through a first lien, senior-secured position meaning it is above all other rights and has first priority in the event of lack of payment. The DMMF was established and has an office in the United Arab Emirates in cooperation with the UAE government’s Dubai International Financial Centre (DIFC). The DIFC is home to an internationally recognized, independent regulator and a proven judicial system with an English common law framework being the leading financial hub for the Middle East, Africa, and South Asia regions.

However, ownership of the protocol, its real world assets, and fiat currency reserves will be transferred from the DMMF to the DMM DAO which will substantially reduce any single points of failure.

The beginning process to the decentralization of governance, starts with a transitional DAO acting as custodian, essentially the role the DMMF’s core team fulfilled in the ecosystem at implementation. This initial transition will remove central points of control and help ensure that the protocol is unable to be captured or censored, while also moving control of the treasury from the core team members to a DAO. Functionally, this will look like multiple independent teams financed by revenue from the DAO to maintain critical functions for the ecosystem’s protocol. The DMM DAO will be established after the transitional DAO, and while the structure is to be determined, the core team’s initial view is to develop a representative democracy. The ultimate goal is to decentralize control of the DMM Ecosystem and its collateral as much as possible.

9. Where does exchange for the asset occur?

Wrapping and unwrapping of mTokens occurs on the DMM Swap app, but we are working with 1inch.exchange to get listed and enable any token <-> mToken swapping capability. The underlying digital assets that can be wrapped in mTokens or redeemed from mTokens like DAI and USDC are already highly liquid in DeFi applications and exchanges. The redeeming process is subject to the digital asset liquidity available in the mTokens contract (portion not sold for real world assets), but secondary markets can be created on various decentralized exchanges to fuel extra liquidity as needed. An easy way to bootstrap this is with uniswap v2 pools, e.g. DAI/mDAI and USDC/mUSDC pairings.

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 a legal opinion or memoranda 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.

We do not have any regulatory registrations for mTokens at this time.

12. (Optional) List any possible oracle data sources for the proposed Collateral type.

A simple oracle to use would be the exchange rate built into each mToken that relays how much underlying digital assets each mToken can be redeemed for. For example mDAI can be redeemed for DAI, mUSDC to USDC, and then the stablecoins can either be assumed to be $1 in value or can be priced by using a price feed such as Chainlink’s DAI/USD reference network. In summary, valuation can be calculated by multiplying the built-in exchange rate in the mToken contract by how many mTokens are used as collateral and then multiplied by either a static value 1 or by the Chainlink/Maker price feeds for DAI/USD and USDC/USD.

13. (Optional) List any parties interested in taking part in liquidations for the proposed Collateral type.

This is a function that the DMM Foundation could help perform and bootstrap, but a distributed set of liquidators would be the ideal solution.

Liquidations of mTokens have the interesting property that the liquidator can redeem their received mTokens for the underlying digital asset (DAI for mDAI, USDC for mUSDC) given that there is enough reserve liquidity of digital assets that haven’t been withdrawn.

Initially the reserve ratio for withdraw liquidity is currently set at 50%, but is currently residing at 100% as to grow liquidity. If there is too little liquidity in the mToken’s digital asset reserve (due to user withdraws), liquidators can then either trade their mTokens on secondary markets or redeem their mTokens at a later date when the liquidity has returned due to either user deposits or the Foundation (eventually DMM DAO) liquidating a portion of the real world assets to purchase back the underlying digital asset and deposit it into the mToken contract.

We’re excited to work with the Maker community as we believe adding DMM’s mTokens would be a mutually beneficial relationship for both projects. If you have any questions, feel free to comment below or contact us directly. Thank you!

3 Likes

Hi DMMF Team,

Thank you for submitting this proposal!

I have a background in consumer lending and securitization so I have a few questions about your underlying product:

  • In your explorer, a value is listed for each underlying asset. It looks like this is the value of the loan, not the vehicle value. Is this correct?
  • What sort of loan to value ratios do you allow into your underlying loan portfolio? What sort of credit and income underwriting requirements? What is the weighted average interest rate, FICO, DTI, and LTV of the portfolio of underlying assets? If you can point me to any further resources where this information is available that would be appreciated.
  • Do you originate the loans yourself, or service and collect on the loans? If not your organization, how is this managed? How do you mitigate the risk of loan contracts being invalidated due to violations of US consumer lending regulations?
  • What concrete ownership rights or legal claims do mToken holders have on the underlying collateral pool (loans and liens)? Is there an SPV or trust structure in place to ensure that the Tokens are “bankruptcy remote” in the even that DMMF or DMM DAO became insolvent?
  • mTokens would clearly be considered securities by US authorities, yet you do not preform any KYC before directly offering tokens to users. How are you mitigating the risk of selling unregistered securities to US persons? Could you conceivably be forced to retroactively require KYC before permitting redemptions?
  • Auto loans are a fundamentally illiquid asset. How would you be able to meet large redemption requests on short notice if most of your funds are invested in loans?
4 Likes

My understanding of DMM in it’s current highly-centralized iteration:

  • DMM allegedly owns liens on used vehicles in the US (although proper proof has not been provided to the public)

  • Users purchase mTokens from a pre-minted amount owned by DMM using ETH, DAI or USDC

  • DMM converts the crypto to USD which is allegedly used solely to service the used car loans, and repurchases the crypto when the user/depositor wants to redeem their mTokens (supposedly on demand)

  • DMM manually purchases ETH options from Deribit to protect against volatility in ETH after they convert it to USD.

Among the areas of major concern that I would like to see DMM satisfactorily address before this application goes anywhere:

  • DMM has not provided proof that it actually owns the liens on the used cars. This is critical since it is supposedly the way that APY is being generated for users/depositors. There are scans of car titles posted on their website however all personal info is redacted and “DMM Foundation” is photoshopped on to each scan (example).

  • It has not been proven that 100% of user deposits are used to service the actual car loans. There is no transparency offered into the usage of the funds after they are converted to USD.

  • No additional info has been provided about these loans, including the creditworthiness of the lendees, if the loans are even being paid off, or DMM’s ability to repossess vehicles if loans go unpaid. It is highly likely that a large number of the loans are delinquent, but users have no idea how that may affect their ability to earn interest or get their ETH/DAI/USDC deposit back.

  • The conversion of ETH/DAI/USDC to USD and vice versa, as well as the purchasing of ETH options, are currently being done manually. This system has not been thoroughly tested and has a high likelihood of failing in periods of major volatility.

  • With its (alleged) direct connection & interaction with real-world assets, it seems highly likely that DMM will face regulatory issues in the very near future that could force major changes in the way that it is structured and the way that mTokens are sold/redeemed.

9 Likes

Thank you for the great questions everyone! I will compile these so our team can provide answers in a new document and provide an update here at a later time

1 Like

Oracle Team Collateral Onboarding Evaluation

V1.0.5
Author: Niklas Kunkel (Oracle Team)
Contributors:
Date: 05/14/20

Explanation of the Oracle Team Collateral Onboarding Methodology

Economic Impact

How much Dai can be expected to be generated against mDAI and mUSDC?

Concrete Data:
Token Contract Address:
mDAI - 0x06301057D77D54B6e14c7FafFB11Ffc7Cab4eaa7
mUSDC - 0x3564ad35b9E95340E5Ace2D6251dbfC76098669B

Circulating Token Supply:

  • 13,916.2556* mDAI
  • 136,084.893* mUSDC

Token Market Cap of Circulating Token Supply ( TMC ):

  • mDAI => 15,419.50
  • mUSDC => $138,886.40.

Total Number of Holders:

  • mDAI: 33
  • mUSDC: 22

Token Distribution:

  • mDAI: Top 5 holders hold 89.6% of Circulating Token Supply
  • mUSDC: Top 4 holders hold 90% of Circulating Token Supply

Avg Collateralization Ratio of Maker Protocol ( avgCR ): 361.38%

*this excludes:
DMM mDAI Token Contract
DMM mUSDC Token Contract

Assumptions:

  1. Assume a reasonable minimum collateralization ratio ( minCR ) based off empirical values in collateral portfolio. Since mDAI and mUSDC is likely to be at least as risky as ETH/BAT, let’s assume minCR = 150%. Note that the reason the risky isn’t on the same level as USDC with a minCR of 120% is that the issuer can withdraw the DAI and USDC deposited in the contract to purchase loans and as such there’s no guarantees there will be sufficient liquidity to redeem and mDAI/mUSDC into its DAI/USDC counterpart.

  2. Market Cap Utilization ( MCU ), the amount of the TMC that can reasonably expect to be deposited in the Maker Protocol, is bounded by empirical values in collateral portfolio.
    Currently the lowest and highest MCU in the Maker Protocol are [0.73%, 3.73%]

Formulas:

Estimated Lower Economic Impact = TMC * MIN(MCU) / avgCR 
Estimated Lower Economic Impact  = $154,305.90 * .0073 / 3.6138 = 311.70 DAI

Estimated Upper Economic Impact = TMC * MAX(MCU) / minCR
Estimated Upper Economic Impact  = $154,305.90 * .0373 / 1.5 = 3,837.07 DAI

Due to the average of the estimated lower and upper economic impact, the Oracle Team is assigning DMM a Low Economic Impact label

Given the distribution of token holders relative to the total number of token holders, how many users with significant sums of the proposed collateral are we reasonably targeting with this integration?
~8 people (90th percentile)

Technical Complexity

Determine how complex integrating Oracles for this collateral type would be and how long it would take to implement such a solution.

Is a solution currently not possible because of a key missing component?
Coming up with a way to price mDAI and mUSDC would be exceedingly difficult as the Oracle Team could not identify and reputable exchanges trading significant volume of mDAI nor mUSDC.

Are there enough high quality data sources available to construct a reliable, resilient, and secure Oracle for the proposed collateral asset?
No, see above.

Can the current tooling support the types of data sources that are needed?
N/A

Can the current tooling support the types of data modeling that are needed?
N/A

Does adding these features interfere with ongoing or planned development of new tooling on the Oracle Team roadmap?
R&D to develop a secure and reliable data model given the lack of exchange liquidity would require significant resources which would detract from Oracle protocol development and other collateral onboarding applications.

What dependencies (both technical and system), risks, costs, and latency are added to the Oracle Protocol as a function of these added features?
High Oracle risk would be associated mDAI and mUSDC given the constraints mentioned above.

Does adding these features require work from other stakeholders such as the Smart Contracts Team(s)?
No.

How long would it take to design, implement, test, and deploy such a solution?
2 months to develop and test.

Given the complex nature of the mDAI and mUSDC integration the Oracle Team considers these a High Technical Complexity project.

Evaluation

The combination of Economic Impact mapped against the Technical Complexity of onboarding a new collateral type can paint a picture of whether an Oracle Team ought to accept, decline, or defer a collateral onboarding application.

Low Technical Complexity High Technical Complexity
Low Economic Impact maybe decline
High Economic Impact accept maybe

Low Economic Impact x High Technical Complexity => decline

Reccomendation

Considering this project is fairly new it’s not surprising that it hasn’t accumulated a critical mass of users yet. As it stands at the moment, the amount of Dai that could be generated from the inclusion of mDAI and mUSDC is extremely low, while the complexity of creating Oracles for tokens that haven’t gained much if any liquidity on exchanges is significant and comes with high risk of Oracle failure or manipulation.

The combination of extremely low economic impact and high technical complexity to implement an Oracle inclines the Oracle Team to decline the mDAI and mUSDC colalteral onboarding application.

4 Likes

Ahem, assuming you meant DMM here :slight_smile:

1 Like

why is CHZ mentioned here?

Apologies for the misnomer, I copy paste the template to get the formatting the same but I can assure you the numbers and descriptions are for mDAI and mUSDC. Have also expanded the description a bit to explain why the mDAI/mUSDC minCR can’t be treated like other stablecoins such as USDC.

4 Likes

Hi Zach

@ChrisBlec did a nice job summarizing the high level issues this token will have, especially on the ultimate ownership and liquidations/auctions issues. Has your team prepared its responses yet?

I’ll also note that I have written extensively about these issues for two other collateral on-boarding applications (Paperchain and Consulfreight). The community is seeing that these tokens are problematic if the real-world legal/regulatory questions aren’t answered correctly (like deciding on a means to white list auction participants). That said, I hope the teams do not interpret the push back as anti-security token. Far from it, I think those, in part, are vital to the system’s growth and ability to thrive. But we will shoot ourselves in the foot early if not done cautiously.