Real-World Finance Core Unit Report - 2021-09

Real-World Finance Core Unit Report - 2021-09

September 2021 reporting for Real-World Finance Core Unit

TL;DR

  • The RWA Foundation and MIP58 are live.
  • SolarX is delayed as a new land should be used.
  • SocGen published a MIP6
  • @teej and @Eumenes joining the team

Current strategy

(changed)

The RWF CU is currently focused on RWA. RWA at MakerDAO are considered at the experimentation phase. The current goal is to achieve around 300M in a wide range of assets/structures to learn. It follows a 3 pronged approach:

  • Off-chain lending: lending without leveraging the blockchain, cash is managed in the real world by legal entities acting on behalf of MakerDAO. For instance, 6S and SolarX are in this bucket.
  • On-chain lending: MakerDAO is investing directly or indirectly (through a legal entity) in a DAI denominated product. Tinlake pools and the OFH token are in this bucket. This adds significant complexity in the short term but allows to leverage of blockchains.
  • Scalable off-chain investments: Both previous buckets are complicated and are taking significant time to assess and monitor and are risky. TradFi offers commoditized products for short-term, low-risk investment. In order to solve the USDC exposure, we can invest in short-term investment-grade ETFs.

Facilitator thoughts

After one year of dealing with RWA, here are some thoughts.

Should asset managers be Core Unit?

A significant number of MIP6 are new asset managers meaning they are allocating capital (not borrowing for themselves but to lend to third parties). For most of them, the senior capital is coming mainly/exclusively from MakerDAO. We are the lender, but also the main customer.

It was my view that, with time, we should move to more institutional asset managers. It seems less risky to have Blackrock invest your money than a young startup. Nevertheless, the latter can offer a deeper relationship with MakerDAO than the former (for which Maker will always be one of many customers). In a decentralized manner, they would provide “internal” asset management for MakerDAO.

Hence, the idea is to have those “Asset Managers” being Core Unit so they have a more direct relationship with the community. They would still have the same business model (management fees, exposure to the junior tranche, excess spread profitability, origination fees, …), therefore no additional budget.

Limiting to 20 slots

There is currently around 30 RWA-related MIP6. In my view, we should aim towards 10-20 RWA onboarded collaterals maximum at any time. The crypto-collaterals are already showing that most are a distraction and costing more in Oracles than what we earn (ETH and WBTC are providing 92% of revenues). There is a strong Pareto law. There is a tendency to approve collateral as we want to scale and use RWA to decrease the USDC exposure.

It is my view that each new collateral should be intrinsically better than the rest, offer strong diversification, and/or strategic value.

This might also mean flipping the system by not using what is submitted as MIP6 but looking for what MakerDAO needs (top/down approach).

Following the 20-slot rule of Warren Buffet, have already punched 6 cards. 14 are left. Time to be strategic.

The RWF CU will limit itself to 10-20 (active) due to its maximum expected size.

1:1 peg for real for the whole DeFi

I’ve published an article on how to solve the peg and enable “fungibility” for all DeFi stablecoins. DeFi spent years now making fees on stablecoins swaps. That doesn’t make any sense. One dollar at any bank or fintech is worth $1.

Obviously, DAI has a key role to play here.

Review

State of RWA at MakerDAO

New Silver is still the only RWA with significant exposure on MakerDAO and continues to grow steadily. FortunaFi financed it’s first loan. 6S, ConsilFreight, and Harbor Trade Credit have open vaults and will use them as soon as they have assets to finance.

RWA Pipeline

The pipeline remains strong and challenging to process. The greenlight process seems contested but it is an important input for the prioritization.

We are also improving our internal processes (see MIP6C3-SP1 for instance) by working on a new framework and onboarding new team members.

RWA Committee

We are reviving the RWA Committee with a meeting tomorrow. The new version will be RWF presenting 2 challenging topics and getting feedback from the RWA Committee.

Thanks to @ElProgreso and @prose11 for the work here.

Centrifuge improvements updates

Following the New Silver audit, both Centrifuge and New Silver are working on providing a better setup.

The short-term items were:

  • Revisit the Independent Director clauses: Centrifuge working with Manatt on Shearman & Sterling comments
  • Construction cash escrow: this is now fixed.
  • True sale vs Security Interest: not yet started
  • Security interest for TIN/DROP holders in the Tinlake Protocol Service Agreement (TPSA):
  • Pro-rata exit: the wording is there, will be used onward. Doesn’t change what is really done.
  • Limitation to change the executive summary: will be negotiated onward.
  • DROP and Investment Company Act: waiting from Centrifuge what are the exemptions for each pool.

The biggest concern is on the collateral agent (which was a medium-term thing). It’s difficult to find a trustee willing to deal with on-chain stuff.

We have spent so far very little resources on that. We are mostly working on providing legal ownership of DROP tokens, therefore working on the RWA Foundations.

RWA Foundation

The RWA Foundation was incorporated on September 21th.

On September 25th, the director took some resolutions:

  • Appointment of the director, the secretary, and the supervisor
  • Resignation of the subscriber, the RWA Foundation is now orphaned
  • Appointment of Ogier as legal adviser

There is still quite some work to be done to have something useful. The plan is to get a public process to issue a DAO Resolution. MIP58 was approved.

We are already looking to duplicate the structure in Jersey for Nebula Capital and maybe SocGen.

SolarX

We are making progress but it’s quite a challenging project. On one front, it’s the first using the RWA Foundations MIP so it’s a learning process on that front (and a KYC/AML with partners which is always taking time).

The legal documentation is also quite complex with more than 200 pages of legal documents.

Finally, the number of involved parties is significant as you can see in the diagram below (which is just a draft yet).

The Mattituck property is no longer available. SolarX is providing an alternative but this requires some new work (and a new risk assessment).

Finance

Not much to show this month as @Aes joined only at the end and spend time understanding the complex SQL financials queries. A new forecast is in the work and should be out soon.

SocGen

Société Générale Forge issue a MIP6 to refinance some bonds. This is the first step after a few months of work (years for Growth CU).

Team

We have news teams member with @teej (full-time RWA) and @Eumenes (part-time RWA). They bring invaluable institutional experience.

Public work

Team composition

@SebVentures - Full-time - Facilitator
@williamr - Full-time - RWA
@Aes - Full-time - Financial Planning & Analysis
@teej - Full-time - RWA
@Philinje - Part-time - RWA
@jameskmccall - Part-time - RWA
@christiancdpetersen - Part-time - RWA
@Eumenes - Part-time - RWA

Core Unit budget

You can find the ledger of the RWF Core Unit multisig here. 42,774.00 DAIs were spent, mainly on compensation.

Previous reportings

10 Likes

I think it’s important to recognize the upward trajectory and improving health of our due diligence/on boarding processes. Y’all are doing good work.

6 Likes

First of all, I wholeheartedly agree with this and think it’s a great guiding principle.

My question is on the implementation. Personally I’d like to see this responsibility continue to reside with the delegates/MKR holders. Given that we have dedicated MKR delegates spending a ton of time in the forums, there’s really no longer an excuse for them to vote for a MIP6 that they don’t want to see onboarded. I think it makes the process more predictable and simpler for everyone if they act as the gatekeepers for collateral (especially considering that was the design intent of the onboarding process in the first place).

I’m not saying they should be negotiating terms, just acting as a stop light to control the quality. I also think that they should publish what they’re looking for in collateral if they’re not happy with MIP6s rather than a core unit sourcing deals. It’s important to keep the protocol as a taker and not a maker of business and to keep the various powers that be separate.

5 Likes

+1! Thanks for the report!

1 Like

Fantastic report, thanks!

1 Like

I think the issue is that the Greenlight is not a grading but a yes/no and is static.

Delegates can maybe keep a list of 10 collaterals they want to see, updated once a month, and their RWA strategy.

On the maker/taker, I’m not sure. I agree that it’s better to have an ecosystem and have RWA Co and Centrifuge sourcing the deals (which are already kind of gates). Yet at the same time, we have deals coming from your old BD team. I’m quite sure we all agree that having SocGen is nice.

Broadly, on deals like you might think of, I would say when sourcing is a value add, RWF plans to be as passive as possible. Other CUs can act as they want. Finding good asset-originators/managers can also be a source of alpha.

If we want to invest in ESG Bonds, I will not wait for a MIP6, let’s ask directly Blackrock what they can offer. Let’s say a new startup submits a MIP6 to buy ESG bonds, charge 1% on top, and having the risk that they blow off the year after. We didn’t wait for Circle to put a USDC MIP6.

2 Likes