MIP13c3-SP4 Declaration of Intent & Commercial Points - Maker Governance Intends to Utilize an Off-Chain Asset Backed Lender to onboard Real World Assets as Collateral for a DAI loan
Preamble
MIP13c3-SP#: 4
Author(s): Matthew V Rabinowitz (@mrabino1 or [email protected])
Contributors: n/a
Status: Accepted
Date Proposed: 2020-09-01
Date Ratified: 2020-10-27
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Declaration Statement: Maker Governance Intends to Utilize an Off-Chain Asset Backed Lender to onboard Real World Assets into the Maker Protocol to borrow DAI and deploy in the âReal Worldâ.
Declaration to Replace: n/a
Specification
Context and Motivation
As the MKR protocol evolves and new collateral is added to the collateral portfolio, there is a direct need to diversify away from on-chain crypto assets and bring in uncorrelated âReal World Assetsâ (especially collateral that is backed with credit quality). Furthermore, in addition to bringing stability, an economically motivated independent real world party and sound legal structure will add liquidity to the DAI ecosystem helping to tame the DAI price and use market forces to pull it towards its reference currency, the US Dollar. In doing so, a series of legal structures will be used to secure protections for MakerDAO to allow the lending of DAI to LendCo (an off-chain asset backed lender). This DAI will be converted to USD, and the USD, along with equity that LendCo has and will continue to raise, will then be used by LendCo to provide secured loans to willing Borrowers (âBorrowCoâ).
Declaration
MakerDAO desires to engage 6s, as an off-chain asset backed lender, to cause the addition of a new collateral type (real world assets) along with new roles that would need to be filled from a person(s) / entity nominated by MKR holders. As an off-chain asset-backed lender, 6s would then engage the MKR community in a compliant way to execute a revolving credit facility loan agreement to help bring DAI loans to the âreal world,â complementing the business operations of 6s.
6s would then fundamentally put a revolving credit facility loan agreement inside a trust for the benefit of MakerDAO. As a result, MakerDAO will need to create a new role (or expand the roles of others) of a âMaker Representative(s)â as a person and/or legal entity that will be authorized to sign the legal documents necessary to set up the real world side of the transaction including, sponsoring the trust and engaging the regulated Trust Company that will serve as trustee of the trust.
Please see the rest of this document for all supporting documentation, reference links, and associated historical posts.
Supporting Materials
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Introduction to 6s
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How is this different?
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The Maker Representative
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The Legal Structure + Compliance
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Core Operative Documents
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Oracles
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Liquidations
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Capital Flow
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Real World Asset module
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Why is this important?
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Time Horizon
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Legal Structure Selection
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6s Capital LLC (â6sâ) / Maker Community (âMKRâ)
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Matthew Rabinowitzâs Bio
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Projects First in Line
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General Next Steps
Introduction to 6s
6s Capital LLC & 6s Capital Partners LLC (together â6sâ), Delaware USA, along with any future international tax optimized feeder structures
6s works with multiple commercial real estate developers throughout the United States. Those developers build buildings that include a long-term lease. 6s provides secured loans equal to 100% Loan-to-Cost for construction and the underlying real estate acquisition until completion. Those buildings are customized (build-to-suits) and ground leases for Credit Tenant Leases.
Specifically:
Real-Estate
âCommercial
-----Credit Tenant Lease
-------Single-Tenant Net Lease
Construction Time Lapse for an already-completed project - Sample
6s was born during the COVID-19 banking credit squeeze when its sister company, 6s Development LLC, had challenges with banks no longer wanting to provide credit. The principals of 6s Development LLC have been doing Credit Tenant Lease development for 15 years and have built well over a thousand locations. 6s Capital LLC aims to permanently replace and ensure a future is built on a financial foundation of rock, not sand. None of the locations built by 6s Development have defaulted.
How is this different?
MakerDAO as a credit facility fundamentally provides credit in exchange for risk-adjusted ability to foreclose on assets used as collateral. In this context, MakerDAO would be bringing on âReal World Assetsâ as collateral, and in doing so, how liquidations would be caused/triggered needs to be adopted for this context.
In the real world, a digital oracle to automate the decision of whether a âbreachâ has occurred that would then trigger a liquidation will not work. 6s and MKR governance* first must agree on the type of real world events that would trigger a liquidation of a loan to 6s. The most common would be a breach of a covenant by 6s. A digital oracle cannot walk into a court of law and file a breach of contract claim or a foreclosure claim against 6s. Only a âpersonâ with standing to sue in Court can do that. MakerDAO and 6s can agree on the obligations/requirements/covenants and memorialize those terms in a vote, but those same agreed terms must next be memorialized in a written credit facility agreement that is signed by a real âpersonâ to be enforced by law in the real world. (as opposed to purely numeric with a pricing oracle) or code.
Note: As MKR Governance itself cannot execute a legal document, MKR Governance will need to appoint and nominate one (or more) âMaker Representativesâ (natural persons or legal entity). The âMaker Representativesâ will first sign the written agreements necessary to execute the understanding between 6s and MakerDAO and will require approval by a vote of MakerDAO governance members. This same authorized Maker Representative will be expected to carry out duties assigned to it by MakerDAO itself. For example, one responsibility will be to set up the trust and hire the trustee, which will require signed physical written agreements. Another duty will be informing the trustee what MakerDAO expects the trustee to do. Another duty might be to review the reporting/reports from 6s or the trustee of the trust to attest to the community whether or not 6s remains in compliance with the revolving credit facility agreement. Other duties will be general real world administrative matters that cannot be decentralized or automated on a blockchain. This representative will be an indemnified role.
The Maker Representative
⢠Appointed by MakerDAO
⢠Given specific written authority by MakerDAO to take only particular actions approved by MakerDAO
⢠Sign real world legal documents on behalf of MakerDao as needed to carry out the will of MakerDao in the real world with respect to the DAI being lent and the approved real world collateral being received
⢠Represent the will and the rights of MakerDAO
⢠Sponsor the formation of the Trust for the benefit of MakerDAO
⢠Engage and instruct the Trust Company to be the Trustee of the Trust
⢠Instruct the Trustee to execute the revolving credit facility agreement and other documents between the trust and LendCo in accordance with the authority approved by MakerDAO
⢠Oversee movement for DAI from MakerDAO to the Trust (through a series of steps)
⢠Oversee exchange of DAI to USD
⢠Oversee Trustee actions
⢠Review reports from 6s and/or trust and attest to the revolving credit facility agreementâs compliance by 6s and compliance of the trust agreement by the trustee to the MKR community.
⢠If also a legal entity, the Maker Representative Entity (âMREâ) and the TFE could be the same. Further, it is the TFE that will provide the actual DAI to the Trust.
Pursuant to the terms of the revolving credit facility agreement, 6s and MKR governance would agree on a set of reporting requirements that 6s would be required to deliver to a Maker Representative quarterly (with some spot inspection rights). Should 6s be in breach of the agreement, and all cure periods have expired, the Maker Representative would report this information to MakerDAO. After that, MakerDAO would and should liquidate the vault and instruct the Maker Representative to notify the Trustee to commence real world liquidation on 6s loans (which would then wind-down the affairs of 6s and sell any remaining assets). All USD proceeds would then be delivered to the Trust to repay the loan of 6s; the trustee would convert the USD to DAI and return the DAI to MakerDAO.
The Legal Structure + Compliance
Compliance includes, but is not limited to:
- Annual audited financial statements of 6s
- Quarterly Independently reviewed financial statements
- List of all outstanding loans
- In construction
- Performing
- Non-performing
- Equity Requirement Reports per loan
The Maker Representativeâs role will be to report on compliance of 6s and execute the operative documents between 6s and MKR holders. However, MakerDAO could decide to assign other duties to the Maker Representative.
Further, and subject to MKR consent, a legal entity is also recommended to hold a Maker Representative role, which may also be the Tax Favorable Entity (âTFEâ), providing the DAI loan proceeds to the Trust, thus consolidating the two.
Subject to legal & tax requirements, verification, and MKR discussion, a Cayman Islands legal entity may be recommended.
- https://www.treasury.gov/resource-center/tax-policy/treaties/Documents/FINAL%20US%20-%20Cayman%20Islands%20-%20Cayman%20alternat.pdf
- Withholding exemptions to cross border interest payments. - Wagner Duys and Wood
Regardless of the jurisdiction, that Maker Representative Entity (âMREâ) would be the party authorized by MakerDAO to sponsor of the Trust and cause its formation and engagement with the Trustee, a regulated Trust Company. This Maker Representative Entity shall also serve as an administrative role (e.g., paying bills/questions about MKR governance, etc.). To clearly define the MRE role, MakerDAO should assign the MRE duties and approve them in the vote. Thus, all parties (6s, MakerDAO, the trustee, auditor, etc.) know precisely what the MRE can and cannot do on behalf of MakerDAO. Also, the trust agreement will include provisions stating that:
- Underlying trust agreement cannot be changed without a vote from MakerDAO community with notice of the vote delivered to the trustee
- Underlying trust agreement cannot cause a liquidation without getting direction from the MakerDAO from etherscan.io or vote.MakerDAO.com
- Underlying trust agreement allows that an MKR vote (vote.MakerDAO.com) can replace the MRE at its sole discretion and will notify the trustee of this change.
As contemplated, the Trust should have minimal taxation as the TFE / Maker Representative Entity would receive the taxable interest income.
After the final jurisdiction of the TFE is determined, someone / some group in the community, in collaboration with Matthew Rabinowitz and with local counsel, will form the entity (or cause it to be created). The TFE will explicitly not be run / owned / affiliated with LendCo or its officers.
Core Operative Documents
- Revolving credit facility agreement (between 6s and Trust for benefit of MakerDAO)
- Promissory note and security documents (between 6s and Trust for benefit of MakerDAO)
- Trust Agreement (between the sponsor, the Trust and the Trust Company, as trustee and with MakerDAO and trust beneficiary.)
As this structure may exist for decades, a Trustee is being engaged to follow the Trust Agreement in the event of a 6s breach or MKR liquidation of the vault. This ensures that the liquidation proceeds are held âin-trustâ in favor of the beneficiary of the Trust (which shall be the same smart contract as outlined above under how LendCo would repay its debt).
Diagram of Operative Documents and Flow
Oracles
No data feed Oracle for this collateral type. However, the revolving credit facility agreement will have data reporting requirements maintained to remain in compliance and keep MKR governance from liquidating the vault. The Maker Representative shall be the âtrustedâ interface between 6s, the trustee, and the MKR governance. Fundamentally, this reporting shall comprise an âanalog oracle.â The foregoing notwithstanding, the 6s team will actively communicate with the community in addition to the Maker Representative.
Further, a Technical MIP is being submitted for review. Please see the reference section at the bottom of this document.
Liquidations
The Trustee (a regulated Trust Company) will follow the Trust Agreement and the revolving credit facility agreement established for this transaction. If given a liquidation signal from MKR governance, it will liquidate all assets pursuant to the revolving credit facility agreement and the trust agreement for the benefit of the trust beneficiary and deliver proceeds to pay down the Vault balance.
Capital Flow
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Mint new DAI to TFE
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TFE lends DAI to Trust
- Send DAI to a U.S. broker-dealer FBO the trust (Ethereum address)
- Trustee instructs broker-dealer to exchange DAI for USD inside the trust account with the broker-dealer
- Trustee instructs broker-dealer to transfer USD to a bank account in the name of the trust
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Trust lends USD to LendCo (1*)
- Send to title company in escrow for a closing between LendCo and its borrower
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LendCo conduct lending operations and either repays the loans to the Trust or recycles the capital back into another approved scope transaction
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LendCo repays the Trust in USD (1*)
- Trustee wires USD to trustâs account with broker-dealer and instructions BD to exchange USD for DAI
- The Trust repays DAI to the TFE (Ethereum address)
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The TFE repays DAI to the vault
Real World Asset module
The below structure contemplates FIVE fundamental levers that MKR governance can control to influence LendCoâs behavior:
- Aggregate Debt Ceiling
- Risk Premium - Interest Rate
- Scope (may be modified by MKR governance ratification of a LendCo request)
- Equity Requirement per LendCo transaction (may be modified by MKR governance ratification of a LendCo request)
- Liquidation
Given the operational business needs of LendCo and the possible (if not likely) need to tweak parameters for the benefit of DAI stability, the frequency surrounding modifications should be on a weekly cycle with proper forum posts in advance.
Once the legal entities and legal contracts are in place, MKR Governance need only modify the five levers above to control / incentivize LendCo (regardless of how many BorrowCos are behind LendCo).
Why is this important?
This proposal for the community introduces a new market force to help stabilize the DAI ecosystem. Further, it is a natural counterbalance to helping push DAI to its reference currency, the US Dollar. By introducing an external economically incentivized third-party, further liquidity will be added using an approved âcapital sink.â
- It is critically important that any DAI that overflows into this structure for Real World Asset Backed Loans have the communityâs pre-approval for credit quality.
- A âcapital sinkâ or a âcapital batteryâ in this context means a known holding âpoolâ for capital that has been / can be deployed with the known credit in an approved structure.
By implementing legal structures that help secure the MakerDAO from the âhit by the bus scenarios,â the DAI ecosystem will have an overflow value for excess DAI (when above $1) and a mechanism for encouraging repayment below $1. In doing this, a needed dampening effect is created that will help smooth out the DAI price.
Graphical Objective
The above is achieved by using market forces and an economically motivated off-chain structure.
- Every time the market price is above 1, an economically motivated off-chain party should mint DAI to deploy off-chain. In reverse, when DAI is below 1, that same party should seek to repay the debt.
- When DAI is materially above 1, that party is well motivated to scale-up operations to deploy capital in-bulk.
- That capital could be held off-chain for weeks / months / years.
Time Horizon
This proposal does not have a time restriction on how long the DAI will be borrowed by the TFE / the Trust / LendCo (1*). Rather LendCo is economically incentivized to respond to market forces and deploy / repay capital accordingly. As such, if the market conditions continue, the overflow DAI may be deployed (and recycled) off-chain for months / years.
This size of the overflow / capital sink is constrained by:
- Community approved debt ceiling
- LendCo operations (scope)
- LendCo economics
Legal Structure Selection
The combination of a bankruptcy remote Trust + an Operating LLC (as a Lender, LendCo) is needed for a few essential reasons:
- MakerDAO is a collection of unknown people or legal entities. A legal construct is needed to give them standing in a Court of Law to enforce a contract. A Trust with MakerDAO as beneficiary meets this requirement.
- Legal precedence with a bankruptcy remote Trust
- If the trustee goes bankrupt, the assets of the trust will not become part of the bankruptcy estate of the trustee. The trust assets will always be separate and held for the beneficiary MarkerDAO. Industry familiarity with how to liquidate real-estate assets should a liquidation be triggered
- The Revolving Credit Facility Agreement is commonplace for most large companies to access inexpensive costs of capital from a bank. A bank does not need a Trust to foreclose on assets in the event of a breach / liquidation. For MKR, since those rights are held by an unknown group, a Trust (above) is needed
- Concentration of compliance and audit requirements to LendCo
- Individually, a Trust structure is not new. The Revolving Credit Facility Agreement is not new. Pushing them together with MakerDAO as the beneficiary with an MKR community defined scope is novel.
- As a result of the above, from the big picture LendCo can borrow DAI / USD (1*) in significant scale without increasing the cognitive load on the MKR community / Maker Representative.
- The independent accountants handle the scale of transactions while the auditors ensure the books are being kept in accordance with GAAP. The Maker Representative then needs to review the aggregate work done by everyone else to attest to the community that things are in compliance.
The ending structure for 6s looks like(2*):
(2*) as further described in the term sheet below.
6s Capital LLC (â6sâ) / MakerDAO (âMKRâ)
Matthew Rabinowitzâs Bio
Matt is an execution driven business strategy and corporate finance professional with overall responsibility for 6s Capital LLC including managing the financial resources (banking, financing, equity capital) as well as the financial service providers (accounting, audit, insurance and tax). He has run point on strategic planning / business development / creating strategic alliances / contract negotiation / SPV implementations & management including assisting in the overall strategy, negotiations and contract support for the large (~10GW) renewable energy consortium including Boone Pickens, Fluor Corp. BNSF Railways, ABB, and Siemens. Thereafter, he assisted in the overall strategy, negotiations and contract support for two Life Settlement Trust Certificate bond offerings. He co-managed for two private placement debt arbitrage pooled investment funds. To achieve the best pricing on debt securities, he co-founded and ran back office operations for both an SEC Registered Investment Advisor and a subsequently acquired FINRA Broker/Dealer. He co-managed an oil & gas SPV to acquire an operating oil field asset which was subsequently divested. Finally, he co-founded a commercial real-estate development firm and designed its corporate structure. Matt earned a Master in Business Administration from the University of Texas at Dallas and a Bachelor of Science in Electrical Engineering from Texas Tech University.
Projects first in line
The 6s team has identified two projects that have already cleared underwriting for financing after the above structure is put in place. Neither project has any construction/development risks. The two projects are both Ground Leases and have been âhanded overâ to the tenant. The Lease for each project is in force with the credit tenant on the hook to make rental payments with a store opening or date specific (whichever occurs first). No LOI or commitment to fund has been executed.
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Transaction #1 Required Closing Proceeds: $3,700,000
- (Last Appraisal: $5,620,000)
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Transaction #2 Required Closing Proceeds: $5,200,000
- (Last Appraisal: $7,140,000)
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Both transactions will require refreshed appraisals prior to a possible closing.
Underlying Legal Documents
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Documents are still being drafted and should be posted in this thread prior to the deadline for the final executive vote.
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Note: The Trust Agreement will use the form provided by the selected corporate trustee. As one has not been finalized yet, we will provide a basic template; however, until a trustee is selected the âactualâ draft cannot be provided. That said, we are proposing a Delaware statutory trust which means most of the terms of the trust agreement will come directly form the Delaware Trust Statute.
General Next Steps
- Declaration of Intent (submitted)
- Community discussion / debate (RFC)
- Formal submission of proposals for Governance cycle
- Inclusion of polls for proposals
- Governance poll for proposals
- Executive vote for proposals (including the appointment of the Maker Representative(s)
- If this proposal is accepted along with MIP21,
- the initial debt ceiling would be voted on but would be conditionally set to zero following the Maker Representative report (below)
- 6s team then deploys the structure contemplated herein alongside with the Maker Representative
- If this proposal is accepted along with MIP21,
- Once the Maker Representative & 6s report to the community that all legal documents / entities are completely in place, a second executive vote would be held to implement the first debt ceiling as agreed in the first executive vote.
- With this final action, 6s would be able to borrow DAI pursuant the revolving credit facility agreement.
Relevant Links
- MIP21: Real World Assets - Off-Chain Asset Backed Lender
- How MakerDAO can be a competitive lender in the Credit Tenant Lease marketplace
- Adding Real World Assets (âRWAâ) as DAI collateral is a critical step for Maker to stabilize the peg... and in doing so, we change the world
- https://forum.makerdao.com/t/real-world-assets-ctl-document-roadmap-getting-started-v1/
- Translucent Finance - Off-chain lenders
- Economics behind Real World Assets ("RWA") - Part 1
- Economics behind Real World Assets (âRWAâ) - Part 2
- Delaware Code Online
- Real World Assets - Off-Chain Asset Backed Lender - FAQs - Google Docs
- FAQs based on commentary from the community
- CBRE - Q2 2020 Net Lease Investment
- 6s Capital - State of the Business
- [đ] Collateral Onboarding Call #8: Centrifuge + 6s Capital - Wednesday, September 16 17:00 UTC
- DoI - Off-chain Asset backed lender to onboard Real World Assets - Extended Q&A
Footnotes
1* - At present, it is unknown if the Trustee will require direct engagement to provide the loans from the Trust to LendCo to facilitate each closing or not. Further, it is unknown if the Trustee will allow the conversion of DAI to USD to be done at LendCo or if they will require that they do the conversion with an account that is in their name F/B/O the Trust. This Declaration of Intent is giving latitude for adjustment surrounding the flow of DAI / USD to meet the requirements of the Trust Company to be willing to serve as the Trustee of the Trust.