[Informal Poll] Using the Cayman Foundation to invest in financials assets at scale

As a way to reduce the USDC exposure in the medium term, we can explore using the Cayman RWA Foundation we are setting up as a way to invest in public securities. This could enable us to reduce the USDC exposure.

It should be noted that this doesn’t solve the regulation risk as the assets will be held in the US (or at least under the US jurisdiction).

The plan would be to test the framework with 1M DAI and scale if the community is confident. We are in the view that the 1M investment would be great even if we don’t pursue scale as a way to test the structure before onboarding RWA (i.e. SolarX).

Should we prioritize the investments in “safe” securities through the Cayman RWA Foundation?
  • yes
  • no
  • abstain

0 voters

Here is the list of investment strategies that we can have. I provide a link to an ETF description when possible. It’s only illustrative.

  • The safest idea is to invest in treasuries bills (< 3 months), this would be cash equivalents. No duration risk, no credit risk but no yield at all (if any after structure fees).

  • Taking on some duration risk (~8 years) we can go to Treasury Bonds to get around 1.2%. The duration risk is the impact on the price of a fluctuation of the interest rates. We can decide to mark it at face value it’s still a problem if we have to sell it for any reason. If we make the assumption that DAI demand will not go down significantly in the future, this is safe. Otherwise, it’s not.

  • Adding a bit of credit risk we can go to short-term investment-grade bonds. This is around 0.8% for a 2.5 year duration risk.

  • Finally, we can also get 4% from Circle or other counterparties. @Growth-Core-Unit is working on that. There is obviously more credit risk here.

What kind of investment do you want to pursue?
  • t-bills
  • t-bonds
  • short-term investment-grade bonds
  • Circle investment account

0 voters

Moreover, if we want to do it right, we need a PSM-like structure where the price is not fixed. The vault will mint DAI and add it to the surplus buffer when the price goes up and do the opposite when the price of the assets is going down. With those kinds of assets, the price shouldn’t change too much but still.

This could delay significantly the implementation. Alternatively, we can use MIP21 with 0% SF and figure out a way to fill the SB with the profit at some point in the future. Using the current MIP21, it would be hard to depreciate the investment.

Do we need a PSM-like module for variable price from the start?
  • yes
  • no
  • abstain

0 voters

3 Likes

I’d like to see the RWA Foundation have a lot more in the way of legal handcuffs before using it for anything. It reads like it can transact in any business it wants and has a lot of discretion.

I am 100% for moving into RWA more, but want to see/confirm:

  1. Those running the entity are fiduciaries
  2. The entity is mostly on autopilot and cannot move funds/make material decisions on its own in any way/shape/form without direction from the DAO
  3. The investment money does not touch the entity itself, which does not need to actually handle it

So… like the idea but really dislike centralizing an investment program under a single entity that requires a lot of trust or direction

5 Likes

Why do we need a PSM-like module for non-USDC investments? I’m not really sure what that means when the price of the asset is not fixed.

If I understand correctly, the goal of these investments is not to iron out deviations of DAI from its peg but to basically grow DAI supply (which is great!). So it seems like they should therefore be in regular vaults with zero or near zero SF.

You are correct to say that PSM is probably not the good name even if in this case, it’s really to stabilize the price of DAI without using the USDC-PSM. To me the breakthrough of the PSM is that we own the asset inside the PSM vault. We assign it a constant value of $1 and have no way to do more currently.

In a sense, in this post we would own (quite indirectly) an investment that can increase or decrease in value. Actually a near 0% SF vault might be better legal-wise. It just fail to represent that the DAO might be entitled to more or less of the value (as price can fluctuate a bit and we have no overcollateralization).

Feel free to continue the discussion here. Item #2 is quite detailed there and it’s one item that needs community guidance. #1 is still worked on. #3 is not possible but I understand what you mean.

If you read the legal documentation provided you can see that the Foundation can do almost nothing without a DAO Resolution. We have asked for a provision to create a committee and authorized signers but nothing forces us to use it. It’s for Maker Governance to set the needle.

At this stage, it’s safe to assume that the directors will make no decision regarding our investments, and either you use a Governance process for everything, or you delegate to a committee or an authorized signer.

For this specific investment, it is possible that the investment part can be controlled directly by sending DAI from the vault to the crypto broker which sends it to the investment broker to invest following a mandate. To get the money back we can issue a DAO Resolution asking the directors of the Foundation to send an order to the broker to sell the investment and transfer the proceedings to the crypto-broker that sends it back to the vault. It can be an authorized signer that does the same thing (which is easier, cheaper, and faster). It’s Governance to decide, we have been asking the question.

1 Like

Sorry guys this entity is not decentralized

2 Likes

@Joseph_Quintilian maybe you can elaborate as when I highlighted centralization risk on 6S your comment was:

Are you saying:

  • That the proposed Cayman Foundation is strictly less decentralized than the Cayman Entity from 6S. In which case, I would point you to the Ogier memo. In our view, this structure is at the service of the DAO and the DAO Resolution construct is quite powerful.
  • Some non-reputable servicers will have too much power (i.e. authorized signers). As said previously, nothing forces MakerDAO to have them and it is quite significant that MakerDAO is in control of deciding who they are and what they can do. Again, strictly better in our view.
  • You think a Delaware Trust is an essential piece that is not present here. There is a tension between having big trustees and having them make decisions. If your point is that the Delaware Trustees are way more secured that Cayman Trustees (Crestbridge for instance), it would be nice to elaborate. Both those will unlikely take all decisions and will rely on third parties for decision making. In our construct, this third party can be the DAO which seems a win to us in terms of decentralization.

Happy to have a discussion here. I have no problem changing everything. We are providing quite a lot of updates on the work so we can get constructive feedback and adjust.

@PaperImperium @Tosh9.0

3 Likes

Seb,

  1. I am not attacking you. Frankly I am tired of your freshness every time. What is your problem?
  2. All I am saying there is a huge difference having between having makerdao running one big entity compared to 250 different entities.
  3. If this one entity gets too big it puts the project at risk.
  4. Plus it’s a huge attack vector.
2 Likes

@Joseph_Quintilian this is the problem. You can’t write a seven-word negative reply and then be upset when people ask you to clarify. Even assuming that the person you’re talking to (ie Seb) knows what you’re referring to (which it doesn’t look like he does.) No one else in the conversation does.

If you want to engage, then do so in a way in which people can actually engage with you. Your initial post adds nothing to the conversation, and your second post attacks Seb for actually seeking clarification on your issues.

3 Likes

Long and Seb I am NOT attacking you both. I said that in my second post. If we are not decentralized we have a huge attack vector. I am all for seb creating a entity and putting through governance. BUT it can not be apart of Makerdao, or other entities

I know that. I don’t feel attacked. You are not attacking me, I understand.

Part of my job is to try to make the interactions on this forum as effective as possible. I’ve observed in multiple instances that very short messages expressing some negative opinion about something do not encourage positive discourse.

Please try to make responses that add to the discussion in a positive way.

That’s a good remark and which is why MIP58 is called RWA Foundations with a s. It was discussed here. And that’s indeed a point on which the community should have a discussion. We don’t have the total cost structure, but I would say around $50k/year with the last data I have. But really this can change.

And yeah, there should be many jurisdictions, not just one. This is why we try to have partners with a wide geographical presence.

2 Likes

Sure, always happy to provide additional color and thoughts if they can be helpful.

With recent pronouncements from the SEC on “decentralized money market funds,” and Chairman Gensler’s ever-increasing aggressiveness towards DeFi, I’m concerned that the the individuals involved in the RWA “Investment” Foundation may be seen to be offering unlicensed investment advice to the DAO [Note: the provision of investment advice is a heavily regulated activity]. Granted, I would need to think more about it and talk to friends of mine in the brokerage space, but my visceral reaction is that this entity, especially if it is buying clear securities, may bring additional negative attention to our project at a time when the regulatory winds seem to be picking up in the US and beyond.

The centralization risk Joe mentioned goes more to the activity the RWA Foundation will engage in rather than its corporate structure. If the RWA Foundation actually does in fact offer IA, it will be relatively simple for the appropriate authorities to identify and contact the individuals running it. Just my two Dai and stay safe out there.

9 Likes

Understood, on the Caymans laws, our counsel has studied all the regulations and it should be fine. And if the risk you are describing is significant (offering unlicensed investment advice), our servicers will not accept to do it anyway (and Zedra, one we are looking after, is quite active in the investment space). Therefore, there is no identified problem related to this particular structure. But obviously, all US-based investments (and all US-dollar-based investments) can lead to troubles. Not by themselves but to attack MakerDAO. I wouldn’t say it’s different from holding USDC (possibly safer tho).

4 Likes

Well, so long as you all are thinking about these things and interacting with skilled advisors, that is good to know.

2 Likes

I think it’s very important that we pursue research (and eventually trials) in direct purchase of liquid securities: it can be viewed both as a diversification of the DAO’s purchases of stablecoins via the PSM and as a return-generating collateral in its own right. At the end of the day, purchasing debt securities is the same thing as originating loans from an abstract investment perspective, and purchasing securities directly has the following potential advantages:

  • liquidity: securities can be purchased or offloaded quickly either for reasons of risk outlook or monetary policy
  • operational simplicity: with the right relationships in place, purchasing and custodying a liquid security is much easier than lending via custom legal agreements
  • due diligence simplicity: we get pari passu treatment and equivalent protections with other investors in the same security, since the offering is regulated we can see an investment prospectus instead of conducting our own DD
  • credit risk diversification: it is much more practical to diversify credit risk by investing in a large portfolio of names (or in a fund/ETF/etc.) than to structure thousands of RWA lending deals.

There might be structuring implications that we don’t yet understand, however it seems likely that a lot of the RWF team’s research into lending structures could turn out to be applicable to custodying securities as well.

8 Likes

A few observations:

(1) Multiple real world touch points (whether trust, foundation or otherwise) has some merit. However, it is not clear to me that dispersion of entities alone will eliminate the attack vectors. In the event of an issue, it actually make things more challenging because each situation could be slightly different.

(2) Unlike most other assets, @SebVentures proposed assets list does not require much in the way of decision-making. An ETF or similar instrument is unlikely to require much in the way of administration, unlike loans.

(3) In terms of decision-making, we have flexibility to spell out exactly how and when we want Maker to have a decision. All we need to do is spell it out in the organizational documents of the entity … whether a foundation or a trust. If the organizational documents provide that “director or trustee shall do “XYZ” only pursuant to a DAO Resolution”, it seems that the most likely result is that the director or trustee will look to the DAO Resolution before taking “XYZ” action. And of course, because places like the Cayman Islands afford significant contractual flexibility, we can expand and contract as we feel appropriate for the particular circumstance.

The RWA Foundation proposal sets out a series of DAO Resolution examples. The list is not exhaustive. It can be added to or subtracted from… perhaps suggesting it is better to have multiple Foundations/Trusts that can be structured to suit the particular asset(s).

Finally, the centralization / decentralization discussion is about finding where along the spectrum between these book ends we are comfortable. Maybe it is one book-end over the other. But as a lawyer, I feel reasonably confident that there are lots of points in between that may be acceptable. We just need to find them.

2 Likes

This is something I remain frightened of. While I know the PSM is necessary, the direct custody of the assets is partially what makes it so dangerous to the system. My current line of thought is that the protocol should never be trying to interact with the “real world” in a way that provides direct ownership as we then become an easy and “victimless” target for seizure. For instance (and apologies if this is a stupid example), what would happen if the US sanctioned the Cayman Foundation? It seems to me like having a licensed lender with their own equity sitting in front of Maker’s position would limit the scope of an attack on the protocol, especially if Maker does not indirectly own those assets but has an independent third party following instructions to its benefit. I can definitely be convinced otherwise, but I’d throw all of this into the political considerations of RWA that are not being actively discussed.

10 Likes

I enjoy reading your commentary…keep asking great Q’s. Why not simply have RWA buy physical gold &OR silver and have it certified and custodied…rather than getting entangled into the very investments that crypto is supposed to disrupt.

PMs do not generate yield, but charge periodic storage and audit fees. Hence, PMs would be a continuously diminishing backing for DAI. Who would pay to top them up? It’s like a negative Dai savings rate.