Just one note - I think you’re using “MKR” and “Maker Protocol” synonymously, which can be a bit confusing. You’re saying “The Maker Protocol would temporarily cease to exist”, not MKR, right?
MIP13c3-SP4 Declaration of Intent & Commercial Points - Off-Chain Asset Backed Lender to onboard Real World Assets as Collateral for a DAI loan
You are correct. The ERC-20 (MKR) would continue to exist for sure. The protocol would be temporarily cease operations.
I had to think about this really.
I think my point here is the details of the ES DAI redemption mechanics.
In a quick relaunch basically the new MCD could roll the loan. But what this means is that the borrower (LendCo offshore) would get new_DAI that would then be deposited into the old MCD which could be redeemed normally by DAI holders.
The problem is the case where MCD does NOT relaunch then basically what in my mind is required is a promissary token from (LendCo offshore) to redeem tokens with something of suitable value (USDC?). The issue here is that basically the debt becomes an impaired obligation for DAI holders trying to redeem for the claims on assets that by contract have to happen over time.
This is making me think that to borrow LendCo has to deposit some kind of Token to represent the $$ value owed so that DAI holders can redeem for ‘something’ even if they have to wait to redeem again.
I really want to hear someone from MCD development team comment on this.
My point here is that every borrower deposits something (collateral) that DAI holders can redeem for ‘immediately’ after a system shut down. Unless I am missing something I don’t see what DAI holders would be redeeming for. I also think even if you were to create a token that represents ‘debt owed’ that given the terms of the agreements this becomes an impaired asset for the DAI holders. (quite literally if MCD does not relaunch and the debt can’t be rolled into a new facility before redemptions start occuring there is nothing to redeem for).
In this structure, LendCo never wants to hold DAI. It will almost always sell it for USD to conduct operations. The only time it will have DAI is right before it pays down a vault balance.
Correct. LendCo can operate with a “gun to its head”, but it cannot operate with a demand payment structure to fire sale everything at the drop of a hat. No one will ever deploy capital that way. There are multiple edge cases here.
- If there is a liquidation
- If there is an emergency shutdown
- If both #1 & #2 happen at the same time and the system restarts
- Same as #3 but the system doesn’t restart
- As an operating business in the business of providing loans, if a liquidation is triggered, to maximize the proceeds of liquidation, a fire sale is NOT recommended for obvious reasons. It will take time to recover funds, and once recovered, the Trustee will cause those to be paid to MKR via the same mechanism that LendCo would use to pay down the vault.
- In an emergency shutdown, the Trustee has no clue it happened. LendCo from an operating perspective has no clue it happened. Only impact is that LendCo cannot cause new DAI to be minted. MKR holders gather, and relaunch and migrate the debt over to the new system. All the legal docs stay exactly the same. The debt outstanding didn’t change.
- LendCo winds down. The Trust holds the liquidated cash proceeds from the sale of LendCo assets in favor of the new launch of the Maker protocol (almost like updating a payment mailing address).
- Extreme edge case. I cannot see a scenario where the system doesn’t restart at all. This would imply all MKR token holders all throw up their hands and just walk away (and not one person decides to restart it). BUT if that where to happen, LendCo could not borrow any newly issued money. It would be able to continue its operations under the terms of the RCFA. When the RCFA would be paid back, all of the cash would sit with the Trust in favor of the beneficiaries until such time as a payment address could be determined.
I believe you’re overthinking #2…
All (former) Dai holders would have a token that represents a claim on the funds that will ultimately come in from the Trust. There will likely be market makers willing to bid on this token for a small discount. I imagine that Dai holders will just go to Uniswap or something to cash out to USDC if they don’t want to wait.
Wouldn’t that token then be considered a security and would not be able to be given to DAI holders during ES?
No idea - not a lawyer
But mechanically speaking, I think the Trust would just pay out USDC to this address at some point in the future. How is ES handed in your model btw? Maybe there can be some cross pollination…
Should a liquidation occur, the payment that the Trust sends would go to repay the vault.
The empowered Trustee used the Law and enforceable agreements to liquidate the assets of LendCo. There is no fractional ownership of the assets being sold / conveyed to token holders. All of the asset would be sold for cash. That cash is then sent to the beneficiaries of the Trust (MKR token holders).
Full disclosure: I am not an attorney, but I don’t see any securities transactions here.
Emergency Shutdown behaves differently than liquidations so this does need special handling. In short, when emergency shutdown happens, the DAO will allow every DAI holder to convert their DAI to the underlying collateral.
We have been working on a solution (and thanks to @equivrel for sanity checking my proposal) that can address this that will work equally well for Centrifuge than for your proposal. @g_dip, you were right, there can definitely be cross pollination.
A simplified example:
10 DAI have been minted, 5 were minted with 1 ETH as collateral and 5 DAI were minted to your credit facility, @mrabino1 against $5 worth of real estate.
In ES this is what’s happening: Any user can
cash out their DAI for the underlying collateral. If you own one DAI you can go to the DAO and you will get 0.1 ETH (1/10th of the ETH collateral) and you’re supposed to get $0.1 from your credit facility. The problem is: how can a DAI holder get their $0.1 from the trustees or from a lending SPV? The normal method that is currently supported by
End (the smart contract that manages Emergency Shutdown) has a way that it can give you some of the collateral that was originally in the Vault.
For security tokens (like Centrifuge’s) or the assets you’re talking about that exist completley off-chain, there is either no such token or you might not be legally allowed to own it (because you’re not an accredited investor).
Without derailing this thread too much and taking it off topic, the answer lies in creating a specific contract that can trustlessly in a fully automated way can “give you the underlying collateral” which in that case most likely would either be just an equal amount of DAI or some other stablecoin. So you could get 0.1 DAI or 0.1 USDC for the fraction of your DAI that was backed by the real estate in your proposal. When I have a free moment I will write this down in a bit more detail and can show how this can work for both of our assets.
While I think it is important to consider the edge cases here I think this topic can and should be broken into parts.
I remembered that someone was working on a Emergency Shutdown report because I was working on an analysis but don’t know if there was such a report made. I think it would be prudent to examine what an ES means not just in face of new collateral types but as a general matter of course of evolution of the Maker system. The implications of a Maker ES covering the entire space/system, whether or not RWA’s are added is important, The whole topic of whether Maker should work to change the whole Emergency Shutdown mechanics into 'smart contract halting/maintenance approach’would be in order in another forum thread. A MIP13 proposal really isn’t the place for general ES considerations even though there are real issues to address with RWA’s.
In general I think this proposal is well thought out (even if somewhat complex in detail) and the Maker protocol desperately needs to grow asset classes, as well as DAI outstanding,.and RWA’s are great additions to do this. I really want to see these RWA’s move forward and while I want to see this I also realize more work to evolve the protocol is required.
I started work on doing an analysis of the ES as a possible attack vector on Maker as well as the entire DeFI system but never had time to finish a write-up and forum post opening up the subject for new discussion. I started with discussion on topics like using MKR seasoning to make it so no-one can just pop out 50K MKR to ES the system with a flash loan etc.
Here is a new general ES discussion thread.
I agree, ES is a non trivial topic and experimentation with RWA can be done without having the perfect solution. But the good news is that this is not a problem we can’t solve. And I’ve just wanted to outline my thoughts as to how above.
Hey @mrabino1, I’m just going to go through this and make notes as I pick them up. Hope it’s helpful.
The idea of this statement is to be a sort of summary of the actual declaration. I’d suggest phrasing it in the form: “Maker governance intends to…” In this case I’d suggest something like: “Maker governance intends to onboard off-chain asset backed lenders using the structure detailed in this Declaration.” I think this is what you intend us to vote on, but if I’ve misunderstood, please adjust to your intention.
Seems good. I would maybe try to reduce word-count, but fairly low-priority issue imo.
I would try to make better use of multi-level headers here. With something of this length, I’d even be tempted to include something akin to a table of contents. Or at least an introductory paragraph describing the major sections and their importance.
So there has maybe been some confusion here. You are writing this on behalf of MakerDAO itself, rather than on behalf of 6s. This declaration is something Maker Governance is declaring (if this proposal passes.)
So for example, instead of phrasing this as:
It should be phrased something like this:
“Maker Governance declares the intention to engage with 6s as an off-chain asset backed lender with the aim of adding a new collateral type and the new roles required to support this collateral type as detailed later in this proposal.”
In this way, when the proposal is voted on, MKR Holders either agree to ratify the proposal and confirm the declaration as written, or reject it.
I appreciate that this is maybe super clear to someone who is more up to speed in the finance or business world. Can you describe what this means in practice in laymans terms? What is the loaned capital used for? Buying real-estate and constructing buildings to specifications provided by tenants?
Is this still part of the high-level overview? It seems like a fairly drastic context switch. After this it seems to dive into the role of the Maker Representative. I don’t think this is wrong necessarily, but I do think the flow of this document is off at this point. Changing topic without having an additional header is bad imo, and makes it confusing to follow.
Can this section just be combined with the ‘high-level overview of the project’?
It’s at this stage I’m realising you’re following the questions in the MIP6 application form. In some ways this is good, because it means this declaration includes the required information. On the other hand, that format really wasn’t designed to fit into a proposal.
I think if it were me, I would post the answers to the MIP6 questions in a separate document and then reference that document in this declaration of intent.
I would probably aim to follow this structure with the attached term sheet documents as well. Provide them as supporting materials, but don’t include them directly in the text of this declaration.
Again, I would maybe provide this as supporting material, but not directly inline.
I think I’m going to stop there for the time being, for two reasons:
- It’s late and I’m sleepy.
- The way this is structured makes it hard work to follow.
Regarding content, I’m having trouble engaging with it given the current structure and my general unfamiliarity with the concepts involved. I’d be happy to take another look once the structure has been cleaned up a bit.
Neat proposal. I am personally bullish on experimentation using all sorts of legal structures in order to get RWAs into the Maker collateral pool. Some questions though:
What’s the Trust Company and Administrator that you’re proposing to use for this? Seems like a crucial point to address as MakerDAO obviously needs to be able to evaluate its rights in case something should go awry and one or several of these borrowers cannot repay.
Could you please share a copy of the proposed a) Security Agreement between Lendco and the Trust, and b) the Operating Agreement for Lendco?
a. Given that the token that you’re proposing to deposit as collateral has no redemption rights, voting rights, or economic value I think its particularly important to better understand specifically what you mean when you say that “all” of Lendco’s rights will be irrevocably assigned to the Trust. Where if I understand correctly, legal beneficiary of the trust will technically be a MakerDAO representative will the the sole beneficiary of the Trust (do I have that right?). It might be nice to see some legal analysis on how this works, but I dont think this is a strict requirement provided that we can grok the Trust documents, Security Agreements.
b. I think we need to see the operating agreement to better understand the balance of rights between the financing that the DAO will provide and the preferred equity that you’re proposing to raise. It might be nice to hear from and get the perspective of some of LendCo’s proposed or current preferred equity investors.
It kind of seems like a pretty precarious time for anyone to be investing in commercial real estate (see e.g. https://www.ft.com/content/e4b2302b-76c5-494a-8560-e6d24de9358f?list=intlhomepage) and while I don’t doubt that rising there is opportunity we definitely need to know more specifics about who, and where the borrowers you’re proposing to provide financing to. This list is nice but I think we need many more details about these projects.
To be clear you haven’t closed on any of these projects yet? We may want to kind of see you close on a few deals first to so that we can kind of familiarize ourselves with this process with some real world demonstrations of this model. Like when you say “no speculative project risk” it kind of makes me a bit suspicious bc commercial real estate financing def seems risk af presently, and you’re proposal uses a lot of technical terms of art like “shovel ready” etc that we just generally dont understand. On some level, it feels a bit like you’re asking us to play VC on a collateral types that are difficult for this community to reason about compared to say shitcoins, where ( I think ) the failure modes are pretty well understood. Here, its a bit murkier as its not directly in our wheelhouse.
Who is conducting these appraisals and can we please see the appraisal documentation for these two proposed deals?
Having a really hard time understanding specifically what you mean here. Could you please give us the ELI5? Like in one sentence, assume these borrowers go bankrupt or like rioters destroy the property they are proposing to build and they cant repay Lendco, could you presumably inflate the valuation of one of the loans that Lendco provides even though the property/lease/etc is worthless? Maybe if we could start with the worst case and if you could describe how you could fuck over the DAO by leaning on these “Gap Collateral Rights” that would be super helpful.
I have other nitpicky things re the actual amount of money you’re requesting (which seems high given the speculative nature of this project in terms of both the assets and the “consumability” of this collateral type), and the general inspection rights that you’re proposing to the DAO but these kind of seem ancillary to the questions above.
(Re inspection rights: have you considered making this MakerDAO representative a unit holder in LendCo LLC? Like some extreme de minimus amount simply to preserve the statutory inspection rights in DE. You could easily imagine any distributions paid out to this minority unit holder would be pledged to some charity like the free software foundation etc etc.)
Good questions. Many of your questions / comments may need a follow-up call (or a call from your attorney to mine). Let me start to address below.
We are engaged with several Trustee attorneys at this point to get their recommendation. Wilmington Trust would be an ideal candidate. One has not been selected yet.
The borrowers engage with LendCo. If a borrower cannot repay, LendCo will foreclose on them. The primary time the Trust is used is when a liquidation event is triggered by MKR governance.
Legal drafts will be posted soon. Regarding the operating agreement, I need to get guidance from counsel. We need to find a way to get you / the community comfortable with the contents. That said, I am not running a public securities offering (and the operating agreement represents that security). I would be happy to have your attorney speak to mine to get the substance. Let me get back with you / the community on this point.
In the same context that LendCo would receive borrowed funds from the Trust (which it received from the Maker protocol), the Trust should only every provide a loan when it knows that it has some protection for providing that loan. In this case, the revolving credit facility agreement and the “cut through agreement” are the agreements that give the Trust comfort / assurances as to what the funds can be used for, the terms, etc… So table the “cut through agreement” for a moment and go one layer down… LendCo will then only loan money to a BorrowCo when it consummates a transaction whereby LendCo sends money for a simultaneous close where by LendCo receives clean title to a senior lien w/ a promissory note, loan documents, assignments, assurances from the principals of BorrowCo etc.
This part is exceptionally important. LendCo has to hope for the best and always plan for the worst. LendCo has to always make the assumption that every loan will default. This means LendCo might have to take over a project that for whatever reason didn’t get completed. Of course, all of the agreements that are executed in exchange for LendCo’s capital are to ensure and mitigate every conceivable risk from that happening. But in the worst case, if LendCo has to foreclose on the project and sue to the principals of BorrowCo to recover funds, it will. All of those “rights” and enforcements are in the deal book for that one loan (LendCo gets those rights in exchange for capital). Going back up a level, the “cut through agreement” allows the Trust (in the event of a liquidation) to push LendCo to the side and have the same ability as LendCo to step in the shoes of LendCo and foreclose on all of the borrowers. The important take away here is that for a Lender (LendCo). The Loans are the assets of the company. Those loans must be enforceable. And ALL of the rights that LendCo receives from each BorrowCo are unconditionally and irrevocably assigned to the Trust. It is the only way the Trust can cause a foreclosure on LendCo’s assets EVEN IF LendCo files bankruptcy. LendCo is powerless to stop the Trust’s rights.
Summary: LendCo has a gun to its head from the Trust. And LendCo puts a gun to the head of each of the BorrowCos (and their principals) to perform. Everyone is incentivized to repay the loans.
No. The Maker rep is a person / entity. The beneficiaries of the Trust should be Maker Token holders (or its successor in the event of an ES and relaunch).
Note: The Trust Company will require us to use their “form” for the Statutory Trust agreement. Until a Trust company is selected, it is impossible to provide the live version. However, a Statutory Trust is driven by statute. So there shouldn’t be massive changes. The key components that will be unique will be A.) the beneficiary (above) and B.) The Liquidation trigger which is caused by MKR governance. (Fundamentally where to look on the blockchain to see if Vault has been triggered / cured / liquidated, etc.). The rest of the Statutory Trust should follow their form.
As I wrote above, I am happy to also get on a conference call with you / your attorney to provide additional clarity.
Important. I am not aiming to raise any equity from the community. I am not running a public offering. I am only looking for a revolver (debt) under terms.
That said, fundamentally, there are two classes of equity and then debt. In terms of liquidation preference, the debt always gets paid back first. Thus the revolver (from the Trust) would be in first position, meaning any liquidated proceeds would pay the DAI loan first. then the preferred equity investors. and last, any money that is left over goes to the common equity.
As I wrote above, I am happy to also get on a conference call with you / your attorney to provide additional clarity.
This one specific area of commercial real estate (credit tenant leases) specific to those that have “recession resistant” tenants is not only doing decent during COVID-19, it is expanding rapidly. The triple-net lease space (or Ground Lease) is a unique area of commercial real-estate. If were intending to build movie theaters or high rise office towers, this would have exposure (and I don’t like exposure. I am always looking for how to de-risk the transaction). Important aspect is that we are not providing capital to the tenants. As a lender, LendCo lends money to developers that build the locations pursuant to an already executed lease (critical, as the tenant significantly de-risks the transaction). Thus the tenant is on the hook to pay rent once the location is built. Thus prior to close, we must also have a general contractor committed to build the location (along with GC mgmt oversight). The developer has his / her profit locked in the project and doesn’t make a dime of profit until he / she divests the project. The developer (aka BorrowCo) is well motivated having taken the development risk & construction risk to then divest the project. In doing so, they repay LendCo. LendCo can then repay DAI.
The Tenant selection is an essential component to the mix. I bring up movie theaters for no other reason than the tenants outlined above have been intentionally selected, as they fit the narrative of recession-resistant / amazon-resistant. (critical)
As outlined, the scope of operations of LendCo is initially agreed between the community and LendCo. After which the community may amend the operations of LendCo by ratifying a LendCo request. The proposed scope is constrained to no development risk with pre-defined tenants (known and researchable credit pricing) with known lease structures. No development risk means, that LendCo will not close on a transaction unless it has clean title to a senior lien on the underlying real-estate / an assignment of an enforceable credit tenant lease / an assignment of the engineering work / an assignment of the arch work / an assignment of the General Contractor (and commitment to build the location) / developer must have all of the permits & insurance / developer must have a GC engaged to do the work / the list goes one… but there are underwriting requirements that LendCo will follow before a dime of LendCo money is released for a given project.
Stepping back: Banks provide capital (loans) for these projects across the country today. This is not new as they are secured senior lenders. Typically the borrower needs to raise corresponding equity (30% typically) to marry to the bank’s 70%. We are abstracting the equity raise from the borrower to LendCo such that it can then provide a 100% Loan-to-Cost to a willing borrower. In that case, the borrower just doesn’t need to raise equity. The objective is to have the equity consolidated at the core (LendCo) so we can scale operations.
Summary: The objective is to have the risk profile for LendCo’s revolver, e.g. Maker, be the SAME as a bank.
I have be directly involved in 11 of them on the borrowing side ($~35MM). No defaults. Some still under construction. More closing soon. 6s Capital is being setup to be a lender for an upcoming pipeline of transactions with a portfolio of pre-approved tenants.
See comment above. LendCo does not take speculative risk. Developers take speculative risk. LendCo is the senior lender during construction / refinance. LendCo only closes on deals that been de-risked from developmental perspective.
Not related to VC risk at all. No speculative risk. Credit and construction risk. Both will be mitigated to the maximum extent possible. LendCo will have the senior lien on a portfolio of projects, thus we are then de-risking further by removing geographic risks, etc.
At some point, LendCo starts to look like a bank, but it is not one.
It is industry practice that all loans require an independent appraisal that are certified (such appraisal is always ordered by the lender, not the borrower). LendCo never does the appraisal. Typically groups like BBG (https://bbgres.com/our-services/valuation/) would be used. LendCo will contract with a firm (like BBG) to generate an independent appraisal. I am happy to share the historic appraisals (and the needed updates) with the Maker Representative(s) prior to any contemplated closing. Every loan that LendCo ever does must be well documented and packaged to show to an auditor during our annual audit of LendCo financial statements as well as Maker Rep inspection. That appraisal must be in that package. It provides one of the core metrics to base a Loan-to-Value constraint calculation.
Two angles to view Gap collateral. 1.) If LendCo has a recent independent appraisal that says a given project is worth $10MM, but the Borrower only wants to borrow $2MM (e.g. they have 10 acres of land, but the project is only using 1 of them). If LendCo has the senior lien on the project and all of the land, the difference is value that LendCo can claim as Gap collateral. In this case that would be up to $8MM. 2.) If LendCo makes it a requirement for BorrowCo to put up additional collateral (eg… they are a new developer with a minimal track record), in addition to a personal guarantee, LendCo may require them to post addition collateral (if cash, via a control agreement, no appraisal is needed). In the case of real-estate, a recent independent appraisal would be needed.
To your comment on what are the things that could be done wrong, LendCo has discretion on constraints regarding its lending activities provided it doesn’t breach its equity requirements. However, changing the appraisal or ignoring the values would be a clear breach. LendCo would not survive an audit and most certainly not survive a Maker Rep inspection. MKR would then trigger a liquidation. There is a reason there is a gun to the head of LendCo. Further, there is a reason there is a gun to the head of BorrowCo. Put simply, economic incentives to perform and structure setup to protect the rights of the Lender (LendCo or the Trust). When everyone performs, everyone wins.
To get a large name-brand known Trust company, a $15MM start is on the extremely low-end of the scale. If we go any lower, we cannot get Trust companies to want to be in a Trustee role. Further, this structure is designed such that the legal enforceability regardless of scale still protects MKR. By having a strict operating scope and a controlled list of tenants, MKR governance has a clear idea of the risk profile of the end tenant. By legal enforceability opinions from BorrowCo on each loan, and LendCo having an equity “buffer” that comes AFTER the Trust, the objective is to always keep the Trust exceptionally well protected.
All of those inspection rights are contractually granted via and may be found in the Revolving Credit Facility Agreement
As outlined above, I am happy to get on a call and go over the above points and get your attorney in contact with mine to get additional comfort.
Thanks for getting back to me, let me chew on the above and get back to you with some follow up this week
Great work- can you comment some more on what S6’s motivation is here? Why is this worth the trouble for them? Are they MKR holders or are they having trouble getting financing through traditional routes? Just experimenting? Or do they see real profit potential here? Thanks
6s Capital is economically motivated. One of the more attractive aspects to the proposed structure is moving the control to MKR governance to allow for updates to scope, interest rate, equity requirements, and debt ceiling amounts without changing the legal contracts or the structure as a whole. Thus as 6s grows and adds a “new capital sink” that the MKR Governance approves, 6s can expand its model (with the associated compliance reporting staying virtually the same). Further, the time horizon (like other MKR vaults) doesn’t have a specific contemplated end date (except that the structure will terminate when the debt ceiling is zero and the amount outstanding is zero for more than a year). Thus, our interests are aligned with building a relationship that is built on rock for the long-haul.
Excellent point. With an initial debt ceiling of 15MM, the economics of setting this entire construct up have about a 10 year break-even. It is painfully expensive upfront. That said, from the perspective of 6s, this is a strategic investment to be first and to demonstrate to the community over time why an increased debt ceiling is both justified and helpful.
This proposal has now been moved to the Request for Comments (RFC) phase and will have a 1 month feedback period before being eligible for Formal Submission.
Updated a few section of the MIP based on community feedback.
Including general rephrasing to be from the DAO perspective as well as a Footnote on the conditional nature of the future possible requirements of the Trustee.
Term Sheet updates:
- Revolving Facility Pay-down requirements
- Interest Rate variable controlled by MKR governance (MKR Risk Adjustment)
- LendCo Bank Requirements
- Trust Agreement requirements
- Expanded Tenants list (requested by a real-estate developer)
In the past few weeks, I have had multiple calls with MKR holders, both large and small. A common theme has been the request for an extended Q&A session(s) and a step-by-step MIP walkthrough call in addition to the collateral on-boarding calls.
As real-world assets as collateral are becoming a priority to help with the peg, I am proposing two zoom conference calls next week (and more as needed) to allow anyone from the community to ask questions about any part of the contemplated structure in the MIP and the business of lending capital in the credit tenant lease space.
I propose starting these calls after MKR community call (Tuesday) and MKR governnace call (Thursday).