On the priority of real world assets: Where do we stand?

The Maker community very clearly indicated that real world assets should be prioritized over other assets in the signal request (forum thread) of September 10th. This was a clear instruction to the Maker Domain Teams to prioritize this work.

I’m very happy to say that with the Real World Asset Working group led by @SebVentures we have had the first two risk assessments come out for 6S and New Silver. And the risk work for our second asset originator that submitted a MIP, ConsolFreight is due shortly.

Centrifuge has outlined in MIP13-SP5 its readiness to do any necessary work to help speed up this process. We have recruited former Maker core smart contracts developers to help with writing the spell and auditing the integration. And we are preparing to get ready for New Silver to mint their first DAI this year.

However it seems like the Collateral Status Index by which other domain teams are prioritizing their work still does not reflect that MKR voters indicated a clear preference for RWA over other assets. Working with several Maker Mandated Actors we have gotten inconsistent feedback on whether the status index is what is used to prioritize RWAs as well or not. Several have said, and the RWA-Working Group had its separate priority. But we don’t see enough progress on the smart contracts and oracle teams.

What else can MKR holders & Centrifuge do to make sure these assets get prioritized?

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FWIW, Centrifuge RWA like New Silver are expected to quickly use up all of the debt ceiling that they are allocated, meaning that they have a strong effect on increasing DAI supply and impacting the peg, yet it seems they are ranked at “Medium” in those categories. I am also not sure why “Impact on peg” and “DAI supply” are separate categories there: seeing as the market price of DAI is determined by supply and demand I would expect those two things to be one and the same.

In any case, I agree with @spin that the community has signaled decisively that RWA should be prioritised over other assets in the short-term, and that the domain teams should take this into account when prioritising their work.

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I would also add that the collateral index was with an emphasis on solving the peg. The PSM is solving that. But the collateral index doesn’t highlight something great of RWA, diversification of risk. All the crypto world is correlated, but RWA have almost no correlation.

As discussed here, diversification is really what drives MKR reward/risk ratio.

There is also something that is lost forever by delaying RWA: experience. If we want to scale RWA to be significant, we need a lot of experience.

There is also a staffing issue. If we want RWA we need a team to work on it. If we delay (depends by how much), maybe we need to reduce the workforce.

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We ranked them medium on DAI supply and peg impact since every one of Drop tokens had low estimated supply, at least initially. I do agree that long term these assets should have larger effect and maybe we should already assume that in the ranking itself.

In any case, the community has given high priority to RWA and this table shouldn’t be the one limiting us. This was the view of @Risk-Core-Unit and that is why we weren’t distracted by these ranks and released two RWA assessments already and another one coming shortly.

But you all also have to understand past month and next few weeks are pretty hectic for domain teams. I am not sure when was the last time when we had so many things released in a short time.

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I don’t want to get too much into hair splitting but let’s compare New Silver to one of the right now higher ranked collateral types on the sheet:

UNI-V2-WBTC-ETH has a total liquidity on Uniswap of $220M.

If we assume that Maker is able to capture a very aggressive 10% of the total supply of these tokens, that’s still only $22M collateral.

WBTC has currently a collateralization ratio of 240%. That means from 10% which is $22M of the UNI WBTC-ETH pool we can get at the same collateralization ratio we can get 10M in DAI minted.

New Silver originates ~$20M in loans per year and wants got get a $5M debt ceiling to start out with. But they intends to scale up the Maker originated portion of their portfolio to at least as much working with the community to ensure that this is done safely and they deliver on the portfolio they promised.

The key difference as @equivrel mentioned:

So we know that by onboarding NS, we can generate 5M DAI quickly and with certainty. Shouldn’t this qualify as “Impact on Peg” and “Dai Supply” as high?

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As much as I love and prob own most of the UNI-V2 Pairs–I don’t see why ALL of them have to have a higher priority score over RWA and both SIXS and NS-DROP. But, okay I get it–but how does tBTC get higher priority than any of the RWAs?
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And yes, I know, I know, the Teams are neck deep in work–but I highly doubt much will change if we Add some of these Tokens over RWA.

As an Example, I would have been the first one to Bet that GUSD was going to hit the DC within 1 week. Yet, its a ghost town. No help to the protocol, or DAI.

As a community, we need to support the next chapter: RWA. The less we as a community participate, the longer RWAs become a Summer 2021 event–which would be demoralizing to many who have put in a lot of work into making this a reality.

Is there any way we can guarantee that RWAs will be on Daistats.com by January 11, 2021?

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I think what’s naturally happening here is a drift toward what is easier to accomplish. The unwavering amount of community support doesn’t change the fact that with the experience of the teams, on boarding new crypto assets is much easier than jump starting RWA. Perhaps it is an issue of incentives not being aligned? Is there a way we could economically prioritize a faster launch of RWA? I’ve no developer, but it’s pretty clear to me that if I were I’d be more willing to take on a faster easier project to get myself paid, even if I believe in the RWA model more. Are there obtainable bounties we could post to encourage our labor force to shift gears?

As far as I understand RWA are tokens. Sort of fake token.

To provide a bit of context, I had a call last evening to onboard new RWA. Those were already constructed pools between 10M and 200M of assets to refinance using a Maker vault. That could use both Centrifuge and a Trust.

Now while I’m more than happy to work with small Debt Ceiling in the experimental framework that Maker Gov have decided, I don’t see how we can onboard 100M tomorrow without having much more experience.

@ElProgreso RWA don’t make sense for the short term. There was also a DAI generation factor. We can hope that 100M+ of UNI token will be in our vault, but we know that New Silver will use the 5M facility. We are comparing hope with facts. RWA are also penalized because there two more risk columns. It’s really a strategic decision for Maker. It’s not about generating 50M DAI in the short term. It’s about extending the playground of Maker to the Real World.

@alexis 6S token is a pure fake token to make the vault work. NS-DROP and CF-DROP are securities. Really two different beasts here.

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I think this is a key point: there are tons of high quality assets that bring stability fees and massive DAI supply out there in the real world. But convincing them when MakerDAOs track record is absolutely nothing on paper in the last two years doesn’t help. There are a few people crazy enough to still push on for this, 6S, New Silver, ConsolFreight, Seb, myself included. Most of the borrowers are encouraged by the progress we’ve made in recent weeks but still think waiting for someone else to do it first is the safer and easier thing to and betting on this already.

Having 10M in DAI generated from RWA will open the flood-gates and prove that Maker can be a competitive lender. It will bring a whole new group of assets and the DAO will be able to go from struggling to bring RWAs onboard to having a choice and picking the best assets.

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It looks like we will have the first 5-10m DAI from RWA by the end of the year, or early 2021. It is truly exciting to think at the growth opportunities in 2021/2022.

A question that scares me is: are we ready for an exponential growth in RWA onboarding in 2021/2022?

The DAO is objectively growing and developing quickly (just compare to the status 1 year ago) but I am scared with real-world businesses/RWA’s entering in contact with MakerDAO at this stage, where we are still basically just a bit more than an experiment run on a forum.

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Very good question. I have no idea how it will work out. The best thing we can do is to learn at full speed and avoid death. Let’s walk, then run, then fly.

Having worked for bank and insurance companies, I have no worry that we can do better. We will make mistakes as well that’s for sure.

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This was added to tomorrow’s agenda of the Governance and Risk meeting. I am looking forward to discussing this further on the call. Please do join!

RWA Collateral Priority

The prioritization spreadsheet does not seem to accurately reflect the priority of RWAs and perhaps should be revisited. It would be great to get feedback from the domain teams on this and come up with how we could use it better to reflect the focus on RWA as MKR holders voted to see prioritized.

Proposing Centrifuge’s Spell to onboard New Silver

We know that the resources of the smart contracts domain team are stretched thin. To help with that, Centrifuge has been working on a spell with along with tests against mainnet. I am happy to share a first draft with the community here:

The spell deploys the a new collateral type. Using dapp --rpc we can then deploy this spell against the mainnet deployment of New Silver and Maker and test different scenarios. This takes the state of all relevant Maker contracts live on Ethereum Mainnet and allows us to test these changes against them in an environment that behaves identically to mainnet. With this we are able to show how New Silver will be able to borrow their first loans with DAI minted backed by NS DROP tokens and test other scenarios.

We are expanding coverage of the tests still but the following key test cases are already present:

  • Generating DAI from New Silver Loans! :partying_face:
  • Repaying DAI
  • MIP22 style soft liquidation & hard liquidation and getting liquidated through a liquidation spell by Maker Governance
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I don’t see what this spell proves.
I am more than happy to let the contract team taking more time to check the overall contract orchestration especially as you are the first with this type of contract.

And I personally don’t think it is at the other side to check the contracts.
Here Maker takes the risk not centrifuge.
And for Maker it is a big risk.

But I appreciate that you have also checked on your side to decrease the risk.

To address your concerns, we are not proposing to push this spell through without audit but have been working on this in constant contact with the smart contracts domain team. In addition, our team has made tiny contributions to the core codebase of Maker and tools around it, I personally contributed to Chai (a fungible token that locks your Dai into the DSR) and we have worked on this goal as part of the Maker community for more than two years.

In addition, Martin Lundfall (MrChico, 5th largest contributor to the DSS codebase: https://github.com/makerdao/dss/graphs/contributors) who has been developing the spell & adapter with us is one of the core contributors to the MakerDAO smart contracts design & develop this together with us. We will have an independent review done by other people experienced with the Maker codebase. Ultimately, the smart contracts domain team will of course review and write an assessment of the changes we’re proposing.

I’m the last person to propose anything risky just to rush things. This would be very short sighted for what we all want to achieve: making Maker safer with diversified collateral and growing the supply of DAI.

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Really loved hearing what you had to say on the call today, even if we were a little pressed for time. Given the discussion today, are there any next steps community members (such as myself, plenty of passion not nearly as much technical know-how) could undertake to help continue the march toward this unique opportunity?

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From a Community Pleb’s point of View:

As Community member @juan pointed out during today’s G&R call–there are two subjects to consider here–the first is how Community Member @NikKunkel first priority is protecting MAKER. Totally love that–so, thank you Nik, Marc, and the rest of the Oracle Team. The second is the community has spoken about helping Centrifuge prioritizing RWA (I believe that’s what you said Juan)

IMO–as a community, we should give Centrifuge & New Silver the benefit of the doubt and provide the 5M DC. I truly believe they both have good intentions, 5M Dai is not something any of us can retire with(ok maybe in El Salvador we could)–and honestly, I want to believe New Silver has bigger fish to fry. At worst–would starting with 2.5M DAI help us move forward?

Let’s not forget that there was a successful Pilot conducted by the Foundation. And in the future, when we as a Governance community have to raise the RWA DC to $50M, $100M, $300M, $500M, $1B–we can explore RE analytic tools that will help us monitor the value of RE collaterals.

However, these traditional RE Tools won’t help us avoid financial ruin. What will? A TRUST with a personal guarantee? An Audit Firm working on behalf of the community with 30 years of experience? ETH & MKR mooning so we avoid financial ruin? I don’t have the answers.

At the end of the day we all have a passion to help replace the traditional banking system. And we can all agree that in order to accomplish such, we are going to have to take on Risk. But at the same token, it is in the best interest and our priority as Nik is doing–to protect Maker. IMO.

ON the other hand–once we get the ball rolling with Centrifuge, and reach the DC–should we the community ask these “LendCo’s” to create a TRUST with a personal guarantee? Like 6S capital. Would the Community provide a 50M DC without a Trust in place? Who’s responsibility is it to ask New Silver & others/future RWAs to Create a Trust?

So many questions–so little time.

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If I summarize the discussion, there was 2 separated topics.

Oracle Work: @NikKunkel pointed out that having Centrifuge setting the price of DROP is not good. I fully agree and the Risk team made the same decision regarding the underlying asset valuation (not saying that Centrifuge is not giving the good price, we just want to control our own destiny). A temporary fix suggested by @NikKunkel is to use a DSValue (not sure the name). Basically, Maker Gov update the price manually. We can have the DROP price with a simple formula from Tinlake pool (like this one). Basically DROP start at 1 DAI and increase slowly (up to the DROP APR rate on the page). @spin agreed to that. Risk can take the duty to trigger an gov poll/executive each 2 weeks. Problem solved (even if we need to find a better solution for the long term). I want to add that it’s a credit facility. The Centrifuge SPV can use it or not (they can issue DROP to other investors). Our interest are aligned (as we want the business in order to generate fees). The issue was solved in 30s which shows how we will crush the traditional finance :slight_smile:

Prioritization framework: Here the issue is that governance put a signal request to prioritize RWA that had strong participation. On the other hand we had a Collateral Prioritization sheet in which RWA are penalized. What should be done was left to interpretation. I think the signal request took precedence on the spreadsheet (that is far from perfect anyway) but other can think otherwise. Some have decided that RWA are a priority but only one RWA. At the end of the day, it’s an coordination issue. For me, the more logical choice would have been CF-DROP (which is the only one we didn’t published yet …) mainly because it’s already live and they are just waiting on us. 6S is way easier from an oracle and SC point of view (as almost everything is off chain), but is harder from a risk perspective (higher DC, concentration risk, moe legal stuff, …).

I really think it would have made sense to do both NS/CF-DROP and 6S before a lot of other things. We could have done better (and me first in line). Hopefully, we are smart and we will progress.

As a philosopher said: “To infinity… and beyond!” at full steam

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Before the call I thought that the Trust model was better (but less on-chain). But I now disagree. For 6S we are trusting respectable trustees (but as you can see in the risk assessment, respectability and human behaviour is always tricky. For Centrifuge assets, the Trust is played by Centrifuge and more specifically the smart contract (that I didn’t read) at least for the issue discussed during the meeting. Who do you trust more? I never saw a smart contract take retirement in El Salvador.

And remember we are already trusting Circle to have USD in their bank account (and the banks therefore) and BitGo to custody BTC.

0% risk doesn’t exist. Diversification, risk control and due diligence is the key.

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Yes I personally have full trust and faith in Lucas and Centrifuge. 100% agree. They mean well.

Crossing 42nd Street on a busy day is a hazard and a Risk. Hence, I am pretty Sure BITGO and CIRCLE consortium have a Trust in place. And yes retiring in El Salvador is not recommended. :upside_down_face: