Real-World Finance Core Unit Report - 2021-06

June 2021 reporting for Real-World Finance Core Unit

Current strategy

(no changes vs last month)

Our current strategy is to onboard $300M of real-world assets. While the long-term strategy is to simply invest in senior tranches of structured products rated by credit rating agencies, we recognize that it’s not currently possible in DeFi. We have a two-path approach. First, partnering with Centrifuge, we work on a smart-contract way of investing in structured finance. Second, we are investigating a Trust-based way to invest the MakerDAO balance sheet in the real world using real-world tools.

We also think that having a strong capital base (i.e. surplus buffer) will be important to disrupt the traditional finance world. As we recognize that people prefer to burn MKR while it’s seeing as cheap, we also work to inform the market and the community on the financial strength of MakerDAO. We think that if the market recognizes the financial prospects of MakerDAO, the MKR price will increase, giving more opportunities to consolidate the capital base. Such knowledge will also help Maker Governance make more scientific decisions.

Review

State of RWA at MakerDAO

New Silver is still the only RWA on MakerDAO and continues to grow steadily.

You can read the Post-mortem - New Silver - Executive summary change that details the issue we faced when New Silver changed the executive summary. We have improved significantly the process going forward. New Silver will ask for a Debt Ceiling increase to increase exposure.

RWA Pipeline

All 4 Centrifuge-based RWA proposed to MakerDAO Governance were accepted but some Tinlake (following an audit) and legal (see the New Silver postmortem) improvements delayed the deployment. They should be onboarded in July (with the possible exclusion of Peoples Company SPV which is not live yet).

6S is still waiting on administrative finalization.

For SolarX, the risk assessment is delayed as we are discussing with them to improve MakerDAO safety by having more collateral at the beginning. It is our understanding that the community doesn’t want to take early project risks without having collateral.

The pipeline remains strong and we meet with plenty of prospects around the globe. We have started to work more closely with a major bank to refinance a native blockchain bond (MIP6 expected in July but no promise).

Finance

@Aes worked on a MKR compensation financial model to see what are the impacts of MKR distribution using a bear, base, and bull scenario. @LongForWisdom and @Aes then proposed alternative MKR compensation guidelines.

The new budget proposal for RWF (MIP40c3-SP12) was approved by MakerDAO Governance. That will give us the ability to expense for legal work and increase the team size to have more throughput.

Going forward, the focus will most likely be on forecasting the financials to give an overview of the impact of Core Units on the profitability of MakerDAO especially regarding the low rate environment we can expect going forward.

Legal

We have achieved to onboard three legal firms. Those firms are hired by the legal entity of the RWF Facilitator and not the DAO (which doesn’t exist legally speaking). They are (in the order of engagement):

While the first two are working on refining the Trust model, Shearman & Sterling will audit the New Silver (and all Centrifuge based collaterals) structure and most likely will suggest ideas to improve on-chain securitization of RWA.

Research

N/A

Marketing, Communication & PR

On June 4th, Participation in the DeFi for StructuredFi workshop. It gave us exposure to a non-crypto audience.

@williamr was the guest on the first Ask makerDAO Anything, you can find the replay here.

2021-06-ama

Data infrastructure

The first brick of the new RWF data infrastructure is there. We have created some tooling and set up a PostgreSQL database.

Since the beginning of the year, we are using a mix of Dune Analytics dashboard and Google Spreadsheet which limits us in things we can do (mixing on-chain and off-chain data like RWA) and doesn’t scale well in complexity (a lot of error-prone copy/paste).

Like most RWF projects, evolution will be iterative. The first step will be to port all queries we have under Dune Analytics to the new framework. As you can see below, porting the first query was quite easy (<10 minutes) and is now available in Excel (or any SQL compliant front-end).

Moreover, everything is open source and RWF is happy to give access to the database to any CU that needs it or help them set up their own (cost is quite low < $500 / monthly).

Public work

Team composition

@SebVentures - Facilitator
@williamr - Full-time contributor RWA
@Philinje - Part-time contributor RWA
@jameskmccall - Expert for farmlands
@christiancdpetersen - Expert for energy-related project finance and legal
@Aes - Financial analysis

Core Unit budget

You can find the ledger of the RWF Core Unit multisig here . 38,349 DAIs were spent, mainly on compensation then legal. More legal expenses (~20k DAI) were accrued during the month but not paid yet.

Previous reportings

13 Likes

Hi Seb, thanks for the report. I am not seeing plans for onboarding Solidblock and Reinno, at least you are not mentioning that in the pipeline. Reinno is the only AO that is lending against low-risk stabilized properties and could bring over 100M in business relatively quickly. I do not understand why we are not moving forward toward risk assessment, but instead thinking about prioritizing projects that are not having greenlit yet.

4 Likes

Hi @Viktor_Viktorov1 , both Reinno and SolidBlock need the Cayman Foundation (or any similar structure) which we are working on. I agree that @Philinje , which is the lead on those collaterals didn’t had much bandwidth those last few weeks. But that doesn’t change the fact that we need to move forward on the legal structure.

Why do you need a Cayman Foundation to onboard Reinno?

1 Like

The latest proposal from Reinno is to invest in some seasoned loans. So we need a legal structure to hold them. Not that we force which legal structure should be used. BTW, that’s maybe remote from the original MIP6 application which is not ideal neither.

Hello SebVentures,

Reinno is not investing in seasoned loans. Reinno is a tokenized real estate loan originator. What Viktor mentioned was that Reinno is tokenizing and giving loans to low-risk, income-producing commercial real estate.

For the last 3 years we have been working on building tokenized lending solutions that could be integrated on-chain with MKR and other DEFI protocols, but most importantly is solving the price discovery problem based on automated valuations. Those data-driven valuations are taking into consideration multiple data points like electricity usage to calculate occupancy, crime rate, delinquency of tenants in the neighborhood, proximity to schools, restaurants etc., cashflow, avg price per sq.f. in the area etc. in order to have accurate ongoing price discovery.
We believe that what we have built is gonna help to bridge the real-world assets and DEFI in a more scientific, fully automated way and we are open to help if our help is wanted.
We understand the current status and the complications involved in onboarding real-world assets. We also understand that on-chain integration is the next step in the process. That is why we’ve put a lot of effort, resources and energy in order to help with the Trust structure. I was under the impression that it’s in the common interest for Reinno to be onboarded and start providing tokenized commercial real estate loans. We prepared the legal setup and the collateral agent for less than a month and have already provided everything for review. Up to this point, there’s no feedback. Can we do something to speed up the discussion on it? That will be useful for other companies as well since, as already shared, the legal structure is free to be used by any company.

What about the legal setup on MKR side? When will the Cayman Foundation be ready? Or if there is another solution in discussion - could you provide some feedback and / or whom could we get updates from?

Another topic where we’re pending feedback is the risk assessment. Reinno’s MIP6 greenlight was 5 months ago. Yet, is there any issue with our risk assessment application or is it the normal process taking that long?

In order to improve the communication, I’d suggest having a document with those (and if there are other) tasks with some status updates. Wouldn’t that help in updating us and the community on the progress?

Best Regards,
Kris

3 Likes

I am still not understanding the role of a Cayman Foundation in this structure. @krlozanov correct me if I’m wrong, but hasn’t Reinno been developing a Trust structure similar to 6s?

Also @SebVentures does the RWF team have an objective prioritization framework? If so, can you please share it? I can’t find it anywhere in the forums.

5 Likes

Hey g_dip,

Because of the legal structure entity is needed. Is it in Cayman or another location is up to MKR. Our structure is similar to 6s, but lighter and more cost-effective by my understanding.

What is the entity needed for exactly? Feel free to PM if it’s easier to discuss in private.

@Philinje, who is the lead on Reinno, answered yesterday on your chat.

I understand it can be frustrating to wait. It was my understanding that we were discussing about onboarding loan under the Cayman Structure as a first step. You can probably use 6S structure if you think it’s better. I would advise to sync with @Philinje . But again, without the legal structure set, we are kind of blocked.

It didn’t helped that the Centrifuge batch was delayed by one month. The agitations of last month were kind of disruptive to the team.

@g_dip We try to follow Collateral Framework Official - Google Sheets but we are currently discussing an update of the framework with the mandated actors (and coverage is less than ideal).

But overall the biggest blocker is the legal structure (news on that soon). Copy/paste should be faster (as we have seen with Centrifuge asset where we onboard 4 collaterals in one go).

I think my confusion is around why the RWF team is focusing on building legal structures, rather than analyzing the risk of legal structures brought to them by applicants? Is the plan to put all RWA deals through one Cayman entity? I really hope it’s not. Having a Cayman Foundation that’s answerable to the DAO is a useful tool, but I would like some clarity on how you intend to use it.

Also thanks for this. It’s very useful to know you’re following this as someone submitting MIP6s. Would you be willing to put together some sort of write-up on how your team is reaching the scores for the two categories you’re responsible for?

EDIT: I’m actually going to make a post requesting this from all the CUs, I’ll link it here when it’s done

I’d recommend against this given all the contentions surrounding the Centrifuge set up, which have been reviewed ad nauseum in the forums (and I will vote against any DROP-related projected FWIW).

@Tosh9.0 It is my impression that you are against DROP token for more than a year.
You, therefore, had plenty of time to express your concerns which didn’t convince enough MKR holders so far. Moreover, your citation doesn’t relate to Centrifuge (other than saying that the first one was harder than the next 4). Therefore, I don’t get what point you are making.

Mainly to get things done. We are legal structure agnostic and the creation of legal structures wasn’t expected at the beginning (and no legal structuring matter generally). Yet you have projects coming to MakerDAO to onboard assets and they want to take a loan. I think we told anyone to just copy/paste 6S structure when ready. Some proposed alternatives (Wyoming DAO for instance) or wanted to go through a tokenization path. On the latter, we advised that smart contract time on our end is extremely thin. We highlighted some concerns about the 6S structure. I understand a legal opinion will be provided that will address all possible concerns. Until then, the best option is to move forward and implement what experts are telling us to do. Then, people coming to us with collateral but no legal structure can use it.

Probably not. I would say that having structures in many countries is better. But undecided on having clones in the same country.

I’ve made (and reemphasized in sum here) countless points for the last year and a half re Centrifuge and drop – just look at my comment history.

Hey, @SebVentures thanks for sharing the Collateral Framework Official. I am all for cookie cutting onboarding process. I do understand that @Philinje was busy, but the lack of clarity and timeline is what bothers me. We do not mind using Centrifuge or 6S model but 6s is not ready and is a bit complicated. Regarding Centrifuge, my concern was that the junior debt could be a bottleneck for future scale, but I might be wrong and we could check it out again.
We are all part of this community because we have a common goal to make the financial system fairer, accessible, transparent, and much more efficient. We are not considering ourselves just as AO, we want to support this common goal. That means that I want to see more open communication btw RWF and AO and a clear timeline regarding the onboarding process. Accept it as constructive feedback, as I understand that things are far from perfect at this stage which is normal.

4 Likes

@Viktor_Viktorov1 I agree on what you say. Centrifuge is probably not a great fit for what you have to offer (as you don’t need tranching). Moreover, we want to have some diversity as well in terms of structures.

On the timeline, I don’t like to commit when I don’t have the answer. Everyone is always super optimistic. I never created a DAO-guided Cayman Foundation before.

But we are getting closer and maybe I can update more often. We are at the third iteration of the Articles of Associations for the Cayman Foundation which seems to be the solution. We have a MIP in the work for DAO <-> Cayman Foundation communication (and overall description). This should be posted early August if we settle on the structure. Then community can then take all the time they want to discuss/amend it. Ogier will get some quotes for servicing companies in the meantime. The more we will want something high level looking, the longer it will take. End of August? September? Next year? Never because of KYC issues? Who knows.

I know it’s not easy to manage a business with those kind of answers. I’m sorry for that but making up a fake timeline is not better.

2 Likes