MIP39c2-SP16: Adding Maker Portfolio Core Unit - MPCU-001

MIP39c2-SP16: Adding Maker Portfolio Core Unit - MPCU-001

Preamble

MIP39c2-SP#: 16
Author(s): PaperImperium
Contributors:
Status: RFC
Date Applied: 2021-06-28
Date Ratified:

Sentence Summary

Add a Maker Portfolio Core Unit to build a portfolio of publicly traded, real-world financial assets that the Maker Protocol can be exposed to with the primary goal of diversifying Maker’s dollar-equivalent reserves away from just the PSM.

Paragraph Summary

The Maker Portfolio Core Unit (MPCU) will be tasked with creating and onboarding partnered legal entities that can provide the Maker Protocol with exposure to securities of its choice as a means of diversifying our dollar-equivalent reserves collected by the PSM. The MPCU’s role is to find and implement legal, low-effort workarounds for Maker’s inability to join legal agreements or pass KYC requirements of counterparties. The MPCU’s primary goal is to be a way to drain/refill the PSM facility to minimize the risks of holding undiversified, zero-yielding proxies for dollars in the form of fiat-backed stablecoins (currency only USDC). Secondary goals are to provide regularly scheduled revenue to the protocol and generate goodwill while we integrate with the real-world financial markets.

Statement of Problem

Core to Maker’s success is its commitment to – and successful maintenance – of the fixed exchange rate of 1 DAI for 1 USD. Because this commitment is paired with the free flow of capital into and out of DAI, Maker has little direct control over the size of the DAI supply. When capital inflows are large because DAI is desired, the PSM is currently the main method of keeping the fixed rate of exchange at 1 USD per 1 DAI.

While this mechanically works very well, the PSM has shown an ability to accumulate enough of a dollar-proxy (currently USDC) that can present credit risks and negative PR. The Maker Portfolio Core Unit (MPCU) will facilitate the diversification of those holdings, so that when the PSM has excess liquidity or so much of a single asset as to present risks to the protocol, those holdings can be deployed into actual dollars instead of just on-chain proxies. Alternatively, if the PSM is in need of an additional liquidity buffer to defend the exchange rate, real-world dollars and dollar-equivalents can be wound down to refill the PSM.

Strategy

The MPCU will utilize simple legal structures to give Maker exposure to assets it would hold were it a legal entity.

Initially, this will take the form of creating charitable trusts, which will only be allowed to operate in a prescribed manner. These trusts will be a “captive” customer that Maker can create and establish rules for, ensuring that interests are aligned and minimal monitoring is required.

The initial approach is that for each lot of securities, a trust will be formed with a charity named as the beneficiary. That trust will be allowed to borrow from a vault created for a token only that trust will have, or some similar structure. The trust then takes the DAI, converts to USD on the open market, and proceeds to have a broker purchase securities for the trust. The stability fee for the vault will be less than the yield on the security, thereby leaving some profit for the trust, which will then be donated in full to a named charity, removing any tax liability. The trust will be able to pass KYC requirements to purchase securities through standard brokerages, but will not be required to KYC Maker in turn through the characterization of its financing through one of several possible methods (just as Nexo does not need to send Maker a 1099 or perform KYC).

Each trust will only purchase one batch of securities, and proceed to hold them to maturity, providing both Maker and the charity beneficiary with predicable, regularly scheduled income. It should also generate good PR and general goodwill through Maker’s charitable givings. Any subsequent desired exposure by Maker – even to the same securities – will likely be done through a new trust, as the instructions are unlikely to be alterable after its creation.

This strategy represents only the initial phase of the MPCU, and will evolve as new legal opportunities present themselves (such as this one in Nebraska) and as Maker grows confident it can invest in higher-yielding – but still very safe – securities.

The issuance and sale of DAI on the open market at scale should exert downward pressure on the peg, thereby indirectly transferring liquidity from the PSM to the securities purchased by Maker’s charitable trusts. Even if liquidity is not removed from the PSM, the use of these trusts should lower the amount of liquidity that would have otherwise entered the PSM.

It should be noted that this structure is unlikely meet the needs of the market being addressed by the RWF unit or the RWA Company, which require much more oversight and complexity to both monitor the collaterals, satisfy borrower demand, and minimize tax events for profit-seeking entities. The MPCU will only oversee investments directed at publicly traded securities, and will not include private securities in its mandate. There is no envisioned overlap between MPCU and RWF in terms of universe of investable assets.

The primary focus of the MPCU is to reduce risks associated with undiversified reserves holdings, with secondary focus on yield, and tertiary focus on charitable contributions

Unit Structure

This team will initially include a single individual (the facilitator). No further full or part-time employees are currently planned. Legal and accounting expertise will be outsourced to full-time practitioners. This CU will not handle invested funds or control investment decisions, as that would centralize too much control over large sums of money.

Core Unit Mandate

Identify Investments

The MPCU will identify publicly traded securities that are appropriate, profitable, and possible for Maker to finance. This largely requires reading financial statements, reports, and research relevant to the universe of investable assets (publicly traded securities). Promising collateral will be recommended through the collateral onboarding process, including asking for a standard assessment from the Risk CU. A general summary of risks will also be presented by MPCU at each onboarding proposal, but it is important that a party unconnected to onboarding a collateral provides an assessment to the MakerDAO community.

Initiate Investments

The MPCU will ensure that the appropriate structure is used for charitable trusts, including but not limited to ironclad instructions on the trust’s purchase and borrowing, naming the charity or charities requested by MakerDAO, aiding the corporate trustee with choosing a custodian for financial assets, and generally making sure documents are drafted and the trust established so that it can buy and hold the desired investment. This is expected to be fairly inexpensive, routine, and outsourced to professional legal experts and managed by professional trustees.

Monitor and Report

The MPCU will provide regular updates to MakerDAO on the status of charitable trusts over their expected lifetime. MPCU will also periodically confirm that the appropriate collateral asset is still held in the trust’s account. General data and statistics will also be provided whenever possible, so that MakerDAO can track the revenues, TVL, and charitable giving of the charitable trusts it establishes.

Related Documents

MIP40c3-SP22: Modify Maker Portfolio Core Unit Budget
MIP41c4-SP17: Facilitator Onboarding, Maker Portfolio Core Unit

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Absolutely enormous tip of the hat at @omahalawyer who had the initial insight to investigate the many species of charitable trusts. The ball rolled quickly once that piece of the puzzle was solved.

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You might want to add what jurisdictions you are thinking about?

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Is there additional discussion about this structure somewhere else that I can read up on? If not, I have the following questions:

  1. What exactly forces the trust to return the borrowed DAI to the vault at the end? Similarly, during the time DAI is outstanding, the collateral in the vault is a special token created by the trust so why is it worth anything?

  2. What prevents Maker from setting the stability fee to essentially capture all the value and leave zero profits that go to charity? If that happened, would this raise any legal eyebrows?

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The trust documents are legally binding. The idea is to make it simple with the trust authorized to borrow once, make a one-time purchase, and spend the rest of its life collecting the coupon and repaying the loan. The trust will bear its own administrative expenses, and the remainder will be given to the designated charity.

Each transaction is envisioned as a separate trust, so we never have to fiddle with SFs and each trust is isolated from the other for simplicity (different maturities, rates, etc).

For now, South Dakota in the United States.

Well, the trust will be instructed to pay whatever we set initially, so if we ask for more, the trust can’t pay it. It will be tightly bounded on what it can do and should have no incentive to deviate. The instructions will not be alterable for the most part, once set in motion. It’s strictly a borrow-buy-repay mechanical process. That of course means the initial structure is only suitable to fixed-maturity (so we know when to wind down the trust), ultra-safe (so no liquidations), publicly traded (so price is easily monitored for those who care) assets.

It is possible further legal innovations will allow for more flexible arrangements. But there’s $21T in Treasuries and many, many billions in AAA-rated bonds out there. So there’s plenty to work with.

I have to admit I feel super uncomfortable putting any of the assets from the protocol into anything offchain. There is no single person I would give this carte blanche.

Given the drama we recently saw around the Centrifuge-RWA topic this makes even less sense to me.

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Just curious. Is this a CU application made of only one member?

For now. It would not manage the trusts, merely form them and report to the DAO. So there’s not a lot of stuff for other people to do.

The main purpose of the CU is to actually be the grantor to make the trusts and hire lawyers to draft the trust documents. Once established, the CU would do nothing more than monitor the trusts, though anyone should be able to do that as well.

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This CU would not manage or hold any of the money. It would only serve as the grantor to form the trusts and put some small token amount of money in it to get it started.

The trusts will pay their own administrative expenses, be administered by corporate trustees, and adhere to the trust documents. The structure will be very simple – the trust can borrow once, make a one-time purchase of securities, and spend the rest of its life repaying the loan and disbursing any remainder to the designated charity of each trust. So there is little incentive or opportunity for anything to happen, as each trust is just a big pile of bonds that are held to maturity. It would not be allowed to even sell the bonds.

Thanks! And sorry, one more thing.

Why is the RWF CU not able to take on these kinds of projects in addition to what they’re doing now? I understand these require a lot less active management but the fact that it’s off-chain assets, requires lots of legal oversight and faces possible regulatory hurdles seems to still place it largely in line with their activities. So why aren’t we adding you (and maybe @omahalawyer) to the RWF CU employees instead of creating a new CU?

It’s a different structure. It also doesn’t work for serving the needs of external borrowers that themselves want to see a profit and need to be monitored closely because they can’t be as tightly bound by terms. So there’s no overlap that I foresee.

RWF: external borrowers, illiquid assets or direct lending, alternative structures with more intensive legal requirements
MPCU: workaround to Maker investing on its own behalf, publicly traded and monitored assets, simple structure

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Ok, thank you for the answer. Now, I understand you are passionate about Maker but I am concerned that despite “not being too much work” and you seem to work full time in a company already (thus will be limited in how much time you can devote), the requested salary is 180k… + high other costs like travel.

Now it’s possible that you meant 180k for including contractors you mentioned. Please correct me if I am wrong.

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I would quit my current job.

The $180k is based on $15k/month, which is what the facilitator for RWF draws. The plan is to onboard $1T in 5 years, so similar amount of assets. It also covers any MKR, so no vesting would be requested.

Travel may be unnecessary. I don’t know yet. If so, it will be removed. Note also that if DAI piles up in the CU, no further funds will be requested at the next budget.

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I don’t know all what @PaperImperium has in store, but the ideas we discussed involved newly minted DAI and not from PSM, if that’s what you meant. Talking out of school - just my idea - what Nebraska adopting the UCC Article 12 draft (will be law around 9/10/21) is it recognizes most crypto as a specific intangible asset that can be transferred and can be used as collateral and how one could perfect a security interest on it (by filing or control/possession). What I had suggested to Paper is we could have a structure set up for charities that the charity sets up an LLC governed by Nebraska law with an operating agreement form we provide that as part of its terms states the member interest is represented by a token we create. The token’s terms are mint X amount of DAI with a below market SF of only .99 or 1.0%. The operating agreement explicitly provides that the LLC can only obtain a loan by depositing the LLC member interest token into a designated vault, invest through certain brokers designated in high-end bonds, pay the interest to the charity net of the broker’s fees, and pay Maker’s SF. Seems like a massive PR opportunity.

If by chance something goes haywire with those highgrade bond investments the member token could be kicked and sold much like the liquidations protocol right now, where the final aspect is a bid-down of portion of the token and the auction winner owns or partially owns an LLC with bonds. The charity isn’t hurt, it got whatever it got along the way.

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Ok, if it’s full time then it’s more reasonable. Thanks for the response.

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Personally, I do not agree with entities or things that pretend to break the rules of the game, that can be dangerous and even more so if we are talking about a country like the United States.

Although your idea is very good, the ideal is not to risk and tarnish the name of the protocol.

Can you elaborate? The trust would split all income between Maker and a charity. Without the trust, the charity would receive nothing from us. Is there a different part you were referring to?

Thanks!

@PaperImperium The complexity here is that DAI needs to be backed by something in the event of emergency shutdown. If the protocol is shutdown, would any DAI Holder be able to redeem their DAI for a share of the underlying securities?

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At the moment, probably not, though the stream of payments would continue on its schedule.

Note that we don’t have instant settlement now with other RWA, though. So this seems a surmountable concern.

Answering your question as to me, ethical rules for attorneys and contractual terms with my law partners prevent me from ever having a paid role in Maker world; I cannot be a member of this proposed CU or any other presently.

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