[INFORMAL POLL] Should Real World Asset Originators (AO) Stake MKR?

BACKGROUND

The recent forum discussion pertaining to the Proposal to Reform Maker’s RWF CU has brought some interesting thoughts and debates including but not limited to:

  1. Splitting the RWF CU into two (2) entities @PaperImperium
  2. Framework of basic expectations by MakerDAO ( ex. standardised agreement) @christiancdpetersen
  3. Adopt traditional banks structured frameworks across various “lines of defence” to underwrite and manage credit risk. @luca_pro
  4. More decentralization and creation of more RWA CU @SebVentures
  5. MakerDAO needs to ask itself if it wants to be a defi protocol or a bank @jameskmccall
    6.And any other good observations by others (please read the Post for more colour)

MOTIVATION

This informal poll/discussion is based on an interesting strategy being applied currently by up and coming RWA lender Goldfinch and brought up by @prankstr25

And by @brettlyons

Goldfinch whitepaper states:

image

Proposed (Informal) that Asset Originators (AO) be Required to Stake MKR

All AOs provides a leverage up to a maximum total that is calculated as the leverage ratio multiplied by the total value of MKR staked. For example, if the AO Stakes $1M worth of MKR, then MakerDAO provides a 4.0X leverage ratio. Hence, Maker allocates up to $4M total leverage. This can be adjusted higher with creditworthiness/repayment history.

The Staked MKR serves as collateral against potential defaults. When an AO defaults, the MKR staked is sent to the flapper as a surplus auction.

AO Creditworthiness = rewards?

To reward AOs for staking MKR, Brett Lyons ask if we reward AOs with favorable terms, such as 10 BPs?

INFORMAL POLL

Should MakerDAO Require Real World Asset Originators to Stake MKR?
  • Yes
  • No
  • Abstain

0 voters

Upon AO Default – Staked MKR Should be Sent to the Flapper
  • Yes
  • No
  • I have a better idea–see my comments below
  • Abstain

0 voters

What is a good starting point for the AOs MKR Staked Leverage Ratio?
  • 2x
  • 3x
  • 4x
  • 5x to 10x
  • My suggestion is written below
  • Dumb idea this can be gamed
  • Abstain

0 voters

Asset Originator Rewards For Establishing Excellent Creditworthiness
  • 10bp
  • 25bp
  • More, see my comment below
  • Dude this can be gamed
  • Abstain

0 voters

Please ADD any ideas, or suggestions regarding Staking MKR. Or, if you think this is plain silly :slight_smile: either way your comments and ideas are priceless when building and shaping the growth of MakerDAO :heart:

Will let it run till September 17, 2021. TY in advance for your participation.

4 Likes

My initial idea was for AOs to just own MKR, and experience potential downside in case of losses related or unrelated to that specific AO. I’m not opposed to the idea of staking as described here, however, this may potentially lead to AO suffering multiple losses, since everyone (at least we are) already have junior capital in the first loss position. However if designed properly, this may work to everyone’s benefit.

I’ll abstain since this could directly effect New Silver.

1 Like

You were probably thinking that AOs would stake MKR before receiving DAI. However, I think it is better imagine it in the reverse order.

AOs want to convert illiquid assets into cash. Your idea, with reverse temporal order, is that the AO locks some assets (e.g., a car), receives DAI, and buys & stakes MKR. Arguably, this is an illiquid asset swap. AO and Maker swapped some car for some MKR, reducing the net amount of DAI received by the AO. If the AO defaults (e.g., car is stolen) and the staked MKR is forfeit then the loss to Maker is reduced only because the amount of DAI received by the AO was less than it would have been. The fact that MKR was staked seems irrelevant.

2 Likes

Yes, I should have included another Poll asking if AOs should have “skin in the game” via MKR token ownership.

Right. TY for the input.

Well, the competition is coming–with heavy hitters backing it–AOs like New Silver will have more choices–eventually. And somehow if we don’t get this right, Maker can get left behind…

image

It’s good to brainstorm ideas. :cloud_with_lightning_and_rain:

3 Likes

I like the idea of skin in the game. The devil is in the details as to how we can encourage asset originators to borrow from MakerDAO, have downside exposure to MKR, and mitigate the barrier to entry for new asset originators from onboarding new collateral. All this while trying to outcompete AAVE, Compound, TrueFi.

2 Likes

@ElProgreso If we are to take this approach do you think it would be logical to extend it to institutional vault owners such as Nexo?

Note I think we probably shouldn’t do this but interested in your thoughts

1 Like

Maybe to start we don’t require Institutional Vault owners to own MKR, but for a credit limit increase they must have a certain percentage. Or we give an interest rate discount for owning a large amount of MKR and staking it.

1 Like

This sounds a lot like being a credit union. Just for those wondering what this would look like in practice.

Thanks @ElProgreso for the post !

In my opinion, “requiring” staking on the part of AOs could unfavorably affect business growth in an area where it is most needed. While some may see this as an opportunity, many could see it as another complication in a process which is already much more obtuse than the alternatives.

However, I think integrating MKR staking as a measure of creditworthiness and providing adequate incentives to parties doing so is a great idea. As mentioned, this is a great way to further decentralization and alignment between involved actors. We just have to think about a solid implementation.

2 Likes

Love the brainstorming. On specifics I think this would need to be quite fleshed out (for instance I don’t get the mechanics of “When an AO defaults, the MKR staked is sent to the flapper as a surplus auction.”).

Economicaly is seems weird as you’d be requiring AOs to back their loans with an asset that is positively correlated with the health of Maker. So if things go south, that MKR may start to not look so good. Maybe have them stake MKR shorts? :stuck_out_tongue:

Also the Goldfinch examples uses staking not as loan protection but as spam protection / operational cover. So I think the purpose of this staking should come first. Is it economic protection (seems weird to me)? Or a “show of good faith”, where the AO is required to hold a nontrivial amount of MKR and display somewhat aligned incentives? Or a way to boost MKR demand? Or anti-spam ?

2 Likes

No, because its a different scenario–Nexo will be putting up a Crypto Collateral via an institutional Vault. Here, IMO we are trying to solve the prisoner’s dilemma game theory, a.k.a RWA borrowers paying back MakerDAO via a Trust Structure and perhaps simultaneously having “skin in the game”

Sir? Not sure I copy correctly :thinking:

For sure, and thank you for your thoughts and ideas–much appreciated. I think looking at the Goldfinch, you can kind of get an idea of how they’re thinking about having “Borrowers” stake the Goldfinch Governance Token as a signal to Liquidity Providers that the Borrower are serious, and provide the Governance Token to pay for the first “Auditor” approval. All-in-all interesting concept when it comes to showcasing “skin in the game”, by Goldfinch–IMO.

Ya–good point Swakya–as much as I would like to introduce another way of Burning MKR. it would be better to Hold the Stake MKR until the RWA Property is liquidated and Maker can recover its loan (or at least some of it). The idea of sending MKR to the flapper is based on a concept called Slashing in Proof of Stake Networks (soon on Eth 2.0). IF a Borrower defaults on a loan, the Staked MKR is then Owned by the Maker Treasury. Not sure if that makes sense.

Regardless I always appreciate your input Swakya!

Totally–If I understood it correctly the Goldfinch Governance Token can be staked by people like you and I as well–if we are adamant that the Borrower will pay back the loan–we can Stake on their behalf. And yes–IMO it is both an extra layer of protection and as you say, “show of good faith”.

The top economic protection will be the Trust set up on behalf of Maker (assuming we eventually figure-out which one works best for MakerDAO). Time will tell.

Regardless I always appreciate your input Swakya! TY Ser.

1 Like

@ElProgreso ,

The idea that Real World Asset Originators should stake MKR was first proposed during the onboarding of the very first Centrifuge assets.

It was a no-go:

  1. if AO stakes insignificant amount the stake will have no effect.
  2. if AO stakes substantial amount they basically don’t need the required capital
  3. their internal procedures might prevent them from holding any crypto

So while staking is a very interesting idea right now it is not workable. Or rather - it is not workable with AOs like we have now. If we could convince RW capital management companies to come to crypto it would be another matter entirely.

6 Likes

Right. I remember this post you created from over a year ago. But the concept you wrote in January 2020 is different from the concept here.

Here I am asking if AOs should have skin in the game by staking MKR in a Locked Contract. This concept works well for Staking Facilities who participate in a Proof of Stake consensus. It includes “slashing” for bad behavior and its currently being showcased in Ethereum’s Beacon chain.

But you already know that :slight_smile: And I don’t have all the right answers. TY for providing your 2 gwei Planet.

1 Like

I think staking of some asset would help, could be MKR or DAI, or USDC, or RAI, or ETH. If a loan originator model, could have where the originator needs to stake a bond in order to originate loans and this can be reduced overtime for positive performance. Just spitballing, but I do grow concerned that some of this is just seeing if spaghetti sticks to the wall and we won’t know for a few years if it was a good loan or not. my 2c

2 Likes

Maybe we could try it with small amounts just to test it?

1 Like

While I like this in theory, I don’t think it’s a practical approach. In order for Maker to attract high quality RWA borrowers, it needs to be competitive with existing lending relationships. Asking an originator to purchase and stake MKR is either going to be

(a) a large enough amount to represent a monetary deal breaker; i.e. it ruins their capital efficiency

(b) a conceptual hurdle with little monetary benefit to MakerDAO; i.e. it cannot get past their board/equity holders and/or scares them away from engaging while not even materially helping Maker’s bottom line

(c) both

In my opinion the best way to ensure RWA borrowers are aligned with the DAO is to maximize transparency in a mutually productive way.

9 Likes

It’s an interesting proposal but adding to what others already said is it adds unnecessary complexity into the system (and remember, you don’t just create system. You have to update it and maintain it).

1 Like

Can we also assume the same case for AOs that will need to create a Delaware Trust Structure? Sounds expensive–do you think it can also be a deal breaker?

For sure–creating a staking contract would incur more work for PE. Thanks for the input Doo!

1 Like

No, I don’t think so. Also my company sets this up for them, so it’s not a cost to them up front. Could we stake MKR for them too at the same price of the structure? Sure, but now we need to double our capitalization and Maker will get ~$50k of protection on a facility worth tens of millions.

3 Likes