RWA - Last 2 months review, updates and looking forward

[SebVentures]

Following the perspective from @mrabino1, the update from the autonomous working group and SC team, I thought it would be good to give a view on what happened on Maker side regarding RWA. The tone might be subjective.

I’m working on RWA since September 10th (2 months ago). It started like that:

I have time to take a project, but unsure what is best to be helpful. Don’t think I can do much regarding strategic reserves funds (MIP13 in progress). Is there something I can do to push RWA forward or is that worked at the Foundation?

The plan was quite straightforward, I thought, producing a piece of content like I did for the EURS or HUSD smart contract assessment.

I took a risk assessment template and … well … things got more complicated than expected. For a crypto assets, it’s mainly about liquidity and volatility. Good luck with that for RWA.

Just to name some elements:

• Legal stuff: RWA are using contracts and the DAO can’t sign them. How should we proceed, what is risky and what is not?
• Processes: Let’s say you do a deal. How do you monitor it? For a crypto-asset, you expect the market to do the monitoring and the price to reflect it. Doesn’t work for RWA. Centrifuge has a lot of data on the blockchain but we don’t have the infrastructure to monitor it. At some point, it will be built but for now, it will be some google sheets.
• NDA: Risk evaluators might need to sign NDA. Now how do you report to the community something you can’t disclose? How do you work as a team on a collateral without being able to share documents? We just figured last week that we needed a NDA template. NDAs are signed by risk evaluators themselves and they take the legal liability.
• Housekeeping: Now that we are a kind of team with @williamr, @Philinje and @Primoz we needed some tools (shared Google Drive, Trello) and establish meetings to coordinate.
• Community/Governance relations: Communicating and reading/analyzing all the forum RWA content (which is growing quickly).

For all that, @Philinje and myself are working part time on collateral onboarding grants, @williamr only got more dedicated recently on the subject. We are helped by a growing working group and by the risk domain facilitator @Primoz.

We are targeting to have risk assessments for New Silver (@Philinje), ConsolFreight (@williamr) and 6S (myself) for end November, early December.

We already have PaperChain in the pipeline. We have discussions with OST-1 and Blocksquare which provide a different view on RWA.

While growing the list of onboarded assets will be the most visible part, the most important one will be to build the needed infrastructure to monitor those investments, defining the processes and writing documentation (and MIPs).

As said here, currently, RWA are thought as B2B relationships (we deal with the asset originator, only one borrower per vault, heavy oversight) while crypto vaults are B2C (anyone can get a loan from the collateral). RWA are defined as illiquid while crypto assets are defined as quite liquid and easy to liquidate on the market. RWA are usually managed by a third party (asset originator) through a SPV so we can have both scale, diversification and lower risk (due to the equity part that takes the first losses).

There is a lot of work still to be done, a lot of unknown unknowns but I hope we can achieve something we will be proud of, and, let’s say 10M annualized stability fees at the end of next year.

[williamr]

Absolutely, I agree with this post on all points raised. Thanks a lot for keeping the community in the loop, @SebVentures!

As you mention, there is the end state of onboarding & growing RWAs which will (eventually) be great for the growth of the DAI Credit System in terms of adoption, Risk and diversification of the overall portfolio. This is the futuristic view. And then there are the multiple intermediary steps between where we’re at right now and how we can evolve to be become a fully fledged RWA-too Credit System. The team right now is working on the very present state, and giving the best effort as we can to overcome one challenge at a time, diligently, with the best available information at hand. Greatly, we are operating with community partners such as Centrifuge & the AO that have been very patient and are fairly aware of the challenges we’re facing. Moreover, the partners are iterating with us and embedding our learnings and numerous questions into their own business models, which is great!

However, again as you say there are a significant amount of challenges we’ll overcome that will require a close-knit group working together (and an interdisciplinary one). Some of which you have already mentioned, which we’ll need to complement with:

• KYC/AML/Fraud: In the real world, more than 95% of all insightful information on partners, their borrowers and related directors or entities is off-chain, in either siloed or aggregated datastores. This data is critical. On top of that, jurisdictions (we’re a global Credit System) have various ways of handling information on these entities from reporting of creditworthiness to capturing fradulent information. Some of these are compliance-like activities for which we’ll greatly benefit from having Legal teams (or at least Operations/Compliance people) involved in the journey.
• Data availability & asymmetry: the data off-chain for doing world-class Risk assessment is siloed, frequently inconsistent, purpose-specific and dispersed across different entities. It is not like in distributed systems like ethereum. Often, the information available directly from partners is incomplete in the assessment of Risk, which require 3rd party data collection to obtain further information but also to verify that the information directly provided by partners is consistent and accurate. Hence why blockchain is beautiful as opposed to siloed information
• Build up of data pipelines: Eventually, in the ideal world, RWA will be just like crypto-native asset world where data is near-realtime (or block time), and we’ll be able to re-calculate risks on the fly in an event-driven fashion and architecture. e.g. So soon as an accident happens on a cargo on the other side of the world, a data is fired into a datastore to inform of upcoming risks to a collateral leveraged through a 3rd party AO, which leads to risk-pricing adjustment recommendations for pooled vaults. We’re very far from this scenario in RWA in the near future. Will we get there? Likely. Will that take some time? 100% yes. We’ll have quite a bit of work to do building these data pipelines and assisting partners and integrators with the requirements to do so. It will definitely be an exciting journey!
• Build up processes: As @SebVentures says we’ll need to sharpen our tools to make processes at the same time comprehensive enough but simple and scalable. They will need to cater for the various industry and types of collaterals we can onboard through RWA. And we’ll make our best effort so these processes/documentation for onboarding are as explainable as possible so that new people joining the team can hit the ground running . With a bit of coaching, of course!

These are just some of the lego bricks for Risk in the RWA-world. Many more will be plugged in… But one step at a time.

We’re excited with the work that is going on and we hope there is much more to come in the pipeline. The close-knit team is doing great in this iterative approach. Key here has been openness, willingness to learn and to bring partners along with us in the journey. Hopefully, everyone will be better off in the end with a stable and scalable Credit System that bridges to the real-world too.

[iammeeoh]

Thanks a lot @SebVentures for this very useful post. I wish you could continue with these updates, like every 2 months if possible.

@SebVentures

I hope we can achieve something we will be proud of, and, let’s say 10M annualized stability fees at the end of next year.

Great, it’s very useful to have some (even rough) projections.

1. On the one hand, 10m annualised SF would be very significant.
2. at the same time, it will likely not be enough to bring the peg 1:1, just be itself, right?

The point (2) is important to understand since we have often talked about RWA as the final solution to bring the peg to 1:1 in a satisfactory way. But this seems to be >1year away.

thanks again.

[mario]

Well…10m at 3% SF gives out an outstanding dai of over 300m which could definitely put us on track

[SebVentures]

It’s hard to get a clear projection. We are still in the process to go from 0 to 1. It is hard to think about going from 1 to 10.

But as @mario pointed out, 10M can represent a debt of 300M which would take most of the USDC out. My benchmark for stability fees is BBB corporate bonds (the last category before speculative investments) which are around 2.26% currently (meaning 442M DAI, exactly what we need currently). We are starting with riskier assets which make sense as there is also a lot of operational risk.

[ElProgreso]

Plus one on been grateful for the update @SebVentures – TY Sir!

@SebVentures

For a crypto-asset, you expect the market to do the monitoring and the price to reflect it. Doesn’t work for RWA. Centrifuge has a lot of data on the blockchain but we don’t have the infrastructure to monitor it.

Perhaps the community will need to subscribed to RE monitoring tools like pereviewsoftware.com – I believe this tool was built by former Goldman Sachs RE team members

Also, if quality RE companies start tokenizing their properties and using platforms like Blocksquare or, any other similar platforms–IMO it would cut down on the risk of verifying if the property is properly managed, paperwork is in order, etc. With that in mind–in the ealry stages, perhaps we need to push for quality instead of quantity.

My wish is for the Brookfield’s, Klepierre, and Annaly Capital of the World start to tokenize properties and use Maker. But realistically–IMO, Startups of RE will be more open-minded about tokenizing every aspect of a Deal–from the Deed to the Dividend payouts via DAI. Hopefully I am wrong and Brookfield is ahead of the game…

[ejbarraza]

Greatly appreciate this update. I have high hopes for RWA on Maker DAO and think it would be an important building block of the economy of the future. Currently, there is a lot of inefficiency and waste in the traditional financial world. For example, financing of MBS, ILS, CLO, REIT, CEF, etc. If we can get to a point where assets can be tokenized and financed on-chain it would massively increase profitability and the velocity of money in the real economy. It took decades to get these structures in place, so it is only reasonable that it will take Maker many years to onboard them. Having said that, I believe that the right people are in place to get us to the promised land. If you need my help with anything I am always willing to chip in where I can.