Following the signal request to prioritize RWA (which will most likely be accepted on chain). The RWA Working Group have work on a model to onboard RWA, called the Centrifuge model because most of the work comes from Centrifuge with minor changes and clarifications. Centrifuge MIPs remain the truth regarding Centrifuge proposals.
Do you agree on the following model to implement RWA?
Please notice that it may not be the only model and it may not be the perfect model. If the community approve this model, it will be worked more formally with all domain teams. If the community doesn’t like this model, it might delay significantly the RWA onboarding (there are other proposals like MIP13c3-SP4 Declaration of Intent & Commercial Points - Off-Chain Asset Backed Lender to onboard Real World Assets as Collateral for a DAI loan that will be pursued in parallel in any case).
- yes, I agree on this model
- no, I disagree with this model
This model was designed with the following assumptions:
- Speed of implementation
- No legal entity needed (a separate thread will be created)
- The DAI hedging issue is fixed (see this thread)
- Risk assessment will have it’s own thread. It’s mainly the process here.
Generic Centrifuge Model
The generic Centrifuge model provides an overview on how to use real world secured loans as collateral in a Maker vault to generate DAI. It is not limited to Centrifuge assets and doesn’t have to be used by all Centrifuge assets. All parameters here are only illustrative.
SPV - Special Purpose Vehicle
The SPV holds the loan made to real world actors (business) secured by real world assets (invoices, properties, …). For our purpose let’s pretend the SPV has a target of $10M loans splitted between separate 100 loans. Those loans have an interest rate of 10%. The SPV only holds assets, it doesn’t have an operating business.
To finance those loans, the SPV has a junior tranche (equity), TIN token on the blockchain, provided by the asset originator or other investors. For this example the junior tranche is $2M. The remaining needed capital is obtained by emitting debt in the form of DROP token for $8M. The DROP token accrues interest (capitalized) of 7% per year (DROP value is 100 at launch, 107 one year after, 114.49 after two years, …).
Investors can subscribe for DROP tokens on the Centrifuge website after a KYC process with a minimum amount of $10k. They can ask for redemption any time.
Deposit and minting is limited to one whitelisted address, the SPV.
Liquidation ratio is 100% on the DROP that sits in the vault. The stability fees (SF) of the vault will be the same as the DROP token. So if DROP equals 100 DAI, the SPV can mint 100 DAI. After a year the vault debt will be 107 DAI and the DROP value will be 107 DAI.
Actual liquidations will be triggered on a negative risk domain team analysis on covenants defined during the onboarding process.
For instance, the SPV NAV (Net Asset Value) will have to stay above 110% of DROP amount. Also, no underlying borrower should represent more than 5% of the SPV assets.
MakerDAO governance will vote for a Target Debt Ceiling (DC) of 10M DAI. The risk team will set the initial DC at 1M (that would be the actual DC in the smart contract).
At any time, the SPV can put some DROP tokens in the vault and mint DAI up to the debt ceiling (DC).
As specified, the vault has a target DC of 10M allowed by MakerDAO governance. Nevertheless, the risk team has set the actual DC at 1M. At any time, the SPV can ask the risk team to increase the DC. This will trigger a covenant breach analysis. If the result is good the risk team will use its mandate to increase the actual DC in the next executive vote (after a forum notification to MakerDAO governance). The DC is still limited by the target DC approved by MakerDAO governance.
At any time the SPV can redeem locked DROP tokens with DAI. The risk team might decrease the actual DC (again, forum notice then bundled in the next executive). That would lead to a covenant breach analysis before raising the DC again.
If during any risk assessment the covenants are not satisfied (at specified events and every month/quarter), the risk domain will trigger a liquidation event. Liquidation would follow MIP22 which is asking for redemptions (using future cash flows of the underlying loans as loans have a short maturity).
MakerDAO should also be able to trigger a redemption demand (to avoid being stuck in perpetuity). This would set the DC to 0 and liquidate with a 6-12 months notice. This should be done only for strategic reasons or if the overall environment is changing.
Legal Contract enforcement
Maker doesn’t have any legally binding contract with the SPV. Nevertheless, other co-investors in DROP tokens have legally binding agreements with the SPV. Some of those coinvestors will be Maker representatives who will enforce the contract (possibly with Maker contributing to legal expenses) if the SPV doesn’t comply with the contract.