Definitions
A real-world asset (RWA) is defined as an item from the non-crypto world which is often connected to the crypto world by the means of a token representing a claim on the real-world asset, though the asset can be represented in other ways as well. The tokens can be fungible or not. It is assumed that the token liquidity is thin (< 5% of the market cap daily) and that market price can’t be used for liquidation. If the token is liquid and price reliable, it falls in the crypto-like collateral category (where the token can be refinanced by an overcollateralized Maker vault).
For real-world assets, the on-chain component (the Maker Vault) is only a small part of the overall scope. The SPV (Special Purpose Vehicle, i.e. a legal entity dedicated for investment) loans against a portion of the real-world assets, typically called Loan To Value or LTV in traditional banking parlance. Those loans can be structured in senior and junior tranches using the Centrifuge model, and Maker participates in part of the senior tranche. The junior tranche could be considered equity within the Centrifuge Tinlake pool, and then the Maker vault can have its own buffer or equity to secure the Maker position further.
In this sample structure, which was utilized for the New SIlver/Centrifuge deal, Maker has a triple-insulated position of high safety, providing multiple levels where signs of trouble can be signaled and acted upon. Real estate assets are slow moving in value, most of the time, but they are also slow to liquidate.
The diagram below shows the different elements just described and acts as potentially the most complex case to be defined. Not all elements are present in every RWA implementation.
Maker Vault
The Maker Vault is a regular vault that can accept the Vault Collateral tokens. Only some addresses can interact with the vault. There is only one vault per collateral type.
Special Purpose Vehicle (SPV)
An SPV is a legal entity dedicated to hold a certain type of asset. Its legal status as a separate company makes its obligations secure even if the parent company goes bankrupt.
Underlying Assets
An Underlying Asset is a valuable asset of traditional finance that can be used as collateral for derivatives. Examples: invoices, real-estate property.
In our case, we will always consider a portfolio of Underlying Assets.
Underlying Equity
The Underlying Asset is owned by a third party (not Maker or the Asset Originator). For instance, a freight forwarder owns a customer’s invoice. Another example is an entrepreneur holding a real-estate property or a piece of land.
Each Underlying Asset can be owned by a different party. While not required, having diversification in the owners of Underlying Assets is a good thing risk-wise.
SPV Asset / Underlying Loan
The Underlying Asset owner is also using borrowed money to finance the Underlying Asset. The loan is called an Underlying Loan by the Underlying Asset owner and an SPV Asset from the point of view of the SPV.
SPV Equity
The SPV Assets are financed at least by some SPV Equity. In the Centrifuge model, the TIN token is a representation of the SPV Equity.
SPV Non-Vault Debt
In addition to SPV Equity, the SPV Assets can be financed by debt. If the debt is non-Maker related, we call it SPV non-vault Debt.
In the Centrifuge model, the SPV non-vault Debt is represented by DROP token owned by other investors (i.e., not related to Maker).
Vault Collateral / SPV Vault Debt
In addition to SPV Equity and SPV non-vault Debt, the SPV Assets can be financed by issuing SPV Vault Debt, i.e. debt using a Maker Vault. This is also called Vault Collateral (from a Maker point of view)
Vault Equity
The counter-part of the Vault Collateral is the Vault Equity and Vault Debt. The Vault Equity can be 0 meaning that the Vault is just a bridge for Maker to invest in the SPV Debt instrument. In case there is an equity tranche, the Vault Debt is strictly more secure and less profitable than SPV Debt.
Vault Debt
The Vault Debt is the actual MakerDAO investment expressed in DAI. This is technically a debt derivative based on a representation of the Underlying Assets.
Formulas
For the metrics defined in the previous sections, we can define some formulas.
SPV CR (collateral ratio)
{SPV}_ {CR} = \Large \frac { SPV Assets} {SPV Debt}
Vault CR
{Vault}_ {CR} = \Large \frac{Vault Collateral} {Vault Debt}
Maker SPV Debt share
{Maker SPV Debt share} = \Large \frac{SPV Vault Debt} {{SPV Vault Debt} {+} {SPV NonVault Debt}}
Vault Underlying CR
{VaultUnderlying}_ {CR} =\Large \frac {{SPV Assets} \times {Maker SPV Debt share}} {Vault Debt}
Onboarding
The onboarding process is described in the RWA Collateral Onboarding Workflow but is summarized in the diagram below.
After a vault is open for the Asset Originator, the RWA team continues to monitor closely the utilization and check that it remains inside the negotiated covenants.
Monitoring
A sample of monitoring can be found here and is explained in the next paragraphs. The dashboard will not be public as it contains some information under NDA.
On the main sheet, there is a covenant section that takes the covenant section of the RWA Risk Assessment and allows tracking of covenant breaches, if any.
The second sheet is the detailed loan tape which details each Underlying Asset and provides the valuation method used by the Real-World Finance Core Unit. This is just a small sample (as an example, the New Silver sheet contains 68 columns).
Column G contains the valuation of the Underlying Loan. The formula is the following:
G=max(F3*(1-D31%),E3(1-50%))
The loan face value is deprecated by 1% for each day of late payment with a limit of 50% of the Underlying Asset valuation (assuming we would be able to sell the Underlying Asset with a 50% worst-case discount in case of liquidation). The formula depends on each collateral type.
The source document for this post can be found here.
The RWF team:
@SebVentures
@williamr
@Philinje
