Real-World Assets - Strategy for 2021

Following the successful onboarding (yet to be confirmed by actual interactions) of New Silver Series 2 DROP, it is now time to discuss the strategy regarding RWA onboarding for the rest of the year.

The situation

In January, I was suggesting a 300M exposure for the end of the year. This wasn’t challenged by the community. Obviously, 3 months were kind of lost since. From an RWF core unit perspective, we can onboard 2 collaterals per month starting in May. ConsolFreight is already done, HarborTrade Credit should land next week. People’s Company and FortunaFi are in good shape. Those are for Tinlake-based assets. For the trust-based ones, @mrabino1 is making big progress in shaping the trust solution. SolarX should be done in June (there is coordination needed between investors, lenders, land sellers, development contractors). SolidBlock and Reinno are in the starting blocks. There are also a lot of prospects in early stage (>500M deal flow). I’m not saying we will, nor should, invest in everything, but the demand is there and the capacity to handle those as well.

Currently, the path going forward discussed with the mandated actors is to onboard one RWA collateral per month starting in June (at least, could be more but no guarantees). There are, indeed, other priorities at the MakerDAO level. Each RWA is just a copy/paste of MIP21 (think Uniswap LPs) but yet that needs careful inspection. And there is only so much you can craft in an executive.

Defining the strategy

More important than those bandwidth considerations, is the strategy that Maker Governance wants to follow. I will propose some but I am not saying that there aren’t more.

Moving slowly

One path is to see what happens with those two first RWA onboarded. This asset class is new for MakerDAO, MIP21 and MIP22 are yet to be tested and all the legal infrastructure is also new in DeFi and would profit from time of inspection from the soon-to-be onboarded legal core unit and external counsels. This path is about ramping very slowly (nothing in the next few months) and very carefully.

Focussing on experiments/small collaterals

Another path is to onboard collaterals as we can but focusing on the smallest ones. This will give us experience without risking too much. Not earning too much neither. In such a path, SolarX will have to be removed as too big (100M DC).

Most trust-based solutions might be too expensive to make sense.

Focussing on profits/scale

This path is about onboarding the largest collaterals first. If we only have a few slots remaining for the year, we should focus on the collateral that can move the needle. SolarX being a good example.

In such a path, I would not recommend onboarding trade finance-related collaterals. They are usually small (but they yield a lot). At the same time, they may be a key component to promote DAI for companies doing cross-border payments that often use trade finance (and are currently using USDT).

Big push on RWA

Lastly, we can also onboard as many collaterals as possible using all those that are deemed interesting by Maker Governance. The objective is to learn as much as we can and be a leader in RWA financing within the DeFi space. We know that the solution is not yet perfect, but we focus on gaining market share.

Onboarding a lot of collaterals is also safer on the credit risk as we increase diversification.

The RWF perspective

My perception is that RWA, at this stage, should be around 10% of the assets of MakerDAO. Enough to be significant, but not enough to be too risky. The unwinding of RWA takes time and I don’t want to risk hitting the peg in case of a DeFi winter season. Moreover, the current macroeconomic environment doesn’t incite us to invest so much in TradFi (very low yields) when it’s the farming season on DeFi. But RWA is key to the future when DeFi becomes the new finance.

We also have 750M USDC that are sitting idly on our balance sheet. This limits us to make a bold move like setting the DSR to 2%. While a good chunk can be used as liquidity pools or lending to earn a yield, there are limits (especially lending will canibalize ourselves). And all that demands also significant smart contract work and research. RWA, using MIP21, is a solution here.

10-20 RWA collaterals is a good target so each collateral is below 1-3% (ideally below 1%) of the total MakerDAO assets, having enough diversification to reduce the risk and learning a lot (so far each collateral type is very different on at least one dimension). This would be a strong foundation to level up our game and going bigger in the future.

We are on the path to get 1 trillion DAI outstanding at the end of the decade (according to the MKR valuation framework). I would love to see a significant part of the capital used in the real world and not only financing the crypto wealthy. It is also super important to learn how to take credit and interest rate risks and not only liquidation risks. I have a strong feeling that margins on liquidation risk will be quite thin in the future (sadly not enough a good place to express all the reasoning).

Achieving this target will need a big push scenario. The governance expressed a significant priority for RWA both off-chain and on-chain. Support for the New Silver executive was also through the roof.

If another path is taken, we should be fair to our customers, prune the pipeline, and set expectations.


Quite interested to see what is the community feeling about this topic.

PS: I am also wondering about an RWA committee that would allow more decentralized monitoring and prioritization within RWA. It a delicate matter and I don’t think leaving that to RWF is the most DAO way of doing things.

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Thank you for providing the RWA update Seb. With regards to onboard one RWA collateral per month–have you had communication with the Risk & Oracle Core units to make this a smooth process? Just trying to gauge if there might be delays with your expectations.

I like your conservative thinking here Seb. Good stuff.

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There is no Oracle work in MIP21 and the risk assessment is done by RWF. This schedule was proposed by SC to leave room to other stuff. But we don’t know what the MakerDAO priority is anyway. My suggestion was two onboarding per month (meaning one executive per month I would say if we onboard two at a time like the Uniswap LPs). That would be needed to achieve the 10% or 300M figure. Then we can think of MIP21v2 based on what we learn (next year).

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So let me point out that if DAI supply grows at .25% on average daily (which is a slowing of growth), that would make 300 million in collateral from RWA as only 4-4.5% of total DAI market cap at end of year. This seems very doable unless we systematically make some egregious error in our due diligence (which can always happen). An even larger amount may be even desirable if the deal flow is high quality and uncorrelated and liquidation possible.

As someone here more suit than geek, let me also say that I strongly believe this is the way forward. Not only does proper execution leave us with more diverse revenue streams and collateral, but it also gives us scale to further de-risk ETH falling out of bed.

This is also the logical next step. More DAI means the market to change DAI to actual USD may be deep enough we begin to attract RWA who view us as the most competitive rate to get USD. A deep market where DAI can be reliably sold without slippage for USD and not by redeeming USDC also presents us with a more independent path overall.

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I would be surprised if I were the only one that feels we should onboard as many good RWF projects as we safely can :smiley: especially when considering risk metrics like Value at Risk (VaR), it seems like a huge win for the protocol. I know I’ve expressed some concern about the Due Diligence work required for these smaller projects, but I’m bullish on that getting streamlined as we have more options to fit different real world opportunities.

In fact, I’d be more curious to hear prospectives against rapid RWA adoption. From my view it seems that even if a deal were to lose us money in the aggregate (because the costs are greater than the interest yield), it is still very beneficial to the protocol as it can create some real buzz and make our portfolio of assets much safer in the aggregate.

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I could not be more excited about our first RWA onboarding and our expansion into RWAs. I think this is absolutely critical for the long-term health of MakerDAO and of the utmost strategic importance. Once the New Silver debt ceiling is reached, this single deal will fund nearly the entire budget of the RWA team from Seb’s initial proposal in January (though I sincerely hope we re-invest the capital and continue growing this business).

As @mrabino1 illustrates in Economics behind Real World Assets ("RWA") - Part 1 and Economics behind Real World Assets (“RWA”) - Part 2 there are key advantages to onboarding RWAs into the collateral portfolio.

Notably, these assets are non-correlated with our current portfolio. Over the last three years, bitcoin and ether have been correlated between 0.7-0.9 with most of that time being spent above 0.8 and peaking at 0.95 during rapid price declines. This is comparable to the S&P and Real Estate which have shared a 0.73 correlation over the past eight years. If one of our major collateral’s price crashes, they will all likely crash and we could be put in a position where we have to drop rates near zero.

If the Surplus Buffer is depleted as well, we could be in the unfortunate position of having to issue MKR during a bear market at low prices to fund the CUs or recapitalize.

As you can in the below table, bitcoin has been largely uncorrelated to Real Estate and at times negatively correlated. I know times are good and growing crypto collateral seems like the easy play - but a bear market WILL come. If we’re able to weather it without diluting ourselves and are actually able to invest capital when others are having difficulty raising it, we will be in an incredibly advantageous position.

As it relates to the strategy - I am in favor of the ‘big push’ strategy. We should be growing as quickly but as prudently as possible - not taking on excessively risky deals but really investing and growing our RWAs so we can become the de facto market leader. We will learn a ton and build up expertise and attract talent as the market leader. This will really change the narrative on MKR.

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I think we should definitely err towards moving fast. The supply of dai in the past year went from 88 Million to Over 3.5 billion. This is an increase of 40x and the growth has been accelerating not slowing down. Our dai issued has roughly tripled since the year started. Its possible our growth for the rest of the year slows down but if it doesn’t our 300 Million target will only be roughly 1% of the 30~ Billion dai issued.

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I am of the same opinion that we should move aggressively in this direction in order to diversify the income stream from ETH/DeFi. Of course, all the while maintaining prudent risk management. This can be a game-changer for MakerDAO and become a huge moat that other lending protocols like Aave or Compound can’t or won’t compete with.

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Thanks for the update. I agree with the general sentiment that we should be more aggressive than conservative in onboarding RWA and experimenting with different collateral types. Like @prose11, I’d like to hear more about the risks in pursuing a more aggressive path and I’m curious about what metrics you’re looking for or at what stage you think it would be appropriate to consider raising or lowering that 10% benchmark for RWA in the collateral portfolio?

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I agree that we had a good start with NewSilver - starting slowly, making space for RWA in MCD. Now it’s time to scale and I believe we are in a very good position to do that together with Maker. NS is starting with an initial 5m debt ceiling but is anticipating to scale this to another 30m in the first year given a good performance and compliance with the covenants. We spent a lot of time getting everything right with the first one and have worked very closely with the community on that. In our team we have knowledge both in DeFi and TradFi that we’d like to, now that we’re live with he first one, bring to many more. We have 10+ asset originator in the pipeline ready to reuse the infrastructure we’ve built and scale RWA to more than 300m this year. I hope we can discuss some of these topics as well in an AMA style discussion with some of the Centrifuge & Maker RWF team members. We’ll host one on Thursday 4PM UTC (right before the Risk and Governance Call). Would be great to have some of you there.

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I´m in favor of a big push, anyway, for any of these strategies, the Growth Core unit (if approved) will be there to help capture potential partners.

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@seth At the moment, I think this is a fairly reasonable target to have. Given the nature of crypto-native assets, which are way more aggressive in terms of exposure in the protocol, it will be actually pretty tough to achieve that target. It is not static, it’s a moving target in nominal $ terms as the protocol keeps growing. 10% today is 300M, in one year’s time it will likely be 1B (protocol exposure at 10B). It will be hard to keep up, unless crypto markets and the protocol suffer a massive deleveraging. Fingers crossed that doesn’t happen. If it does, we want RWA to be there to the rescue :slight_smile:

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@SebVentures thumbs up for discussing this,

With regards to the strategy for real world assets (RWAs) I think we need to see this in the light of what goes on in the Engineering and Oracles. As you mention Maker has the bandwidth to onboard about 2 types of collateral per month so let’s start there.

@juan has started an initiative for scaling that will likely be important.

So maybe just possibly sit down with Juan and map out a debottlenecking to-do list for the whole collateral onboarding process at Maker. Engineering and Oracles included. No grand strategy, just put the as-is situation in a gantt chart or similar form. Somewhere in there is a bottleneck, probably multiple ones, that is preventing an escalation of the onboarding pace of x2, x3, x5 from today’s 2 per month. There is apparently no lack of applicants.

For RWAs specifically you have already touched upon moving towards a funds structure and there is of course the possibility of using standardized offerings.

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Thanks everyone for such excitement around RWA.

Things are already moving and we might have a way to onboard up to 3 Centrifuge collaterals in a single executive.

Regarding the risks, there is always a tail risk of smart contract issues, legal issues (in this case more likely fraud or significant negligence from all parties), or market events. As said some collaterals are a bit small, some asset originators are still on the startup side, but this is fine at this stage and their asset classes are huge. Citigroup is not at the stage where they would put a MIP6 application for their next RMBS and then wait for a year. And the yield would be too low and the duration too high anyway.

It’s mainly learning and PR. And you learn more by onboarding more (because it’s always a bit different).

It’s also about building the foundation for the next wave. And surviving the next crypto winter as well when ETH loan demand might be low. It could also be good for regulation, when you start to help the real economy, it’s always better than passing for a bunch of degen speculators.

Investing more in RWA will demand more work on the impact of lending long versus borrowing short (DAI). The same problem will apply to fyDAI and others. I’m working on a paper on this topic. The current protocol also have issue with accounting. Currently, a Maker loan is either in good shape or defaulting (everything is put as sin and deducted from the Surplus Buffer). We need to find a way to reflect the quality of the assets in a granular and transparent way. i.e. put more of the process on chain.

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Sounds like a bit of modelling is coming down the pipe :wink:

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Maybe we should make a separate thread for this, but I’d like to help. Can you guys break down specifically what this would look like?

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@g_dip I think we need to do a bit more of a brainstorming session around this. The way that I see this there are two parts: the tech and the economics/modelling framework. The tech we’re definitely not ready from a data architecture side of things, both read and write. We’ve started explorations but nothing is set in stone yet. We’ve found out there are bunch of teams doing things in silo across different parts of Maker, essentially duplicating data architectures for different use cases. Also, wrt the on vs off-chain discussion there are several angles to it, gas being of course a concern should we want to run executions in real-time. There are many options where this could run off-chain but have on-chain proofs, which personally would be my preference, should it be on ethereum L1. The economics side of things is probably a little more straight forward as there are existing frameworks, we don’t have to reinvent the wheel across everything, at least not in traditional RWA areas… Digital arts etc is another story, should someday we onboard them. For the economics frameworks we could have some low bandwith proofs of concept (even excel can be used, although not great) and then going full blown once we’re comfortable with some models in a more automated way.

Long story short, “quick and dirty” is ok short term to get stuff done. Long term it becomes a pain in the butt because it doesn’t scale and is too human heavy. Right now, we’re ok with “quick and dirty”. In 6-12m time I won’t be so sure it will be the case. Imagine managing $1B in RWA portfolio in xls spreasheets :crying_cat_face:

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quick update on our side on with Paperchain (MIP6):

  • we’ve successfully deployed/borrowed $930K via Tinlake
  • end of this month we’re launching the first wallet and card product that allows creators to access their digital revenues as they earn them
  • First vendor partner is United Masters (recently raised $50M series B from Apple and Google). Rolling out to top 25 users first end of May and then focused on the 1M creators on their platform
  • initially deploying ~$400K/month but can very quickly scale to $1M-$5M
  • the mechanism will be the same (stream data from spotify apis, converted into digital asset and collateralized into loan) and repayment still comes from the vendor or the streaming platform
  • not publicly announced yet, we’ve just partnered with Stripe for back-end wallet support, making us 1 of 10 companies in the world launching the first products on Stripe Treasury

We’ve been successfully raising capital via Tinlake and are part of the pipeline for MCD.

I think we’ve found a unique distribution model for a consumer finance product.
What we want to get to is daily payments for creators (via programmatic daily loans on MCD).
Daily we take data, create the CDP, borrow the DAI and send to the creator wallet, repay in 45-60 days when payment from Spotify is received. Gas prices make this impossible right now but would love to invest in scaling solutions.
Allows us to 10x the number of customers and revenues faster, while onboarding millions of creators into crypto wallets.

Happy to answer any questions.

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@pcdkd Feel free to keep this update in the Paperchain thread to keep it tidy :slight_smile:

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