TL;DR: Moving forward, the RWF CU will use strategic value for work prioritization and no longer focus on the number of MIP6 onboarded.
This post is repurposing and expanding on the ideas of the last RWF report. This was also discussed with the RWA Committee and the team.
The previous strategy for RWA was:
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.
On one hand, one could argue that not much progress was made. We moved from 2 vaults to 6 and only 2 are used for financing (New Silver and FortunaFi). Reasons are both internal and external to RWF. Yet, we maintained the lead in RWA, learned a lot, and improved the team. The more important part is that we now have deals coming not from non-crypto enthusiasts but from traditionals companies (Peoples Company, 120dB, Tinka, Société Générale, a major alternative asset manager coming soon).
The previous strategy was crafted of a few assumptions:
- The main task for RWF CU is the Risk Assessment
- Diversity is key for learning and reducing risk
The first assumption is completely wrong as we spent a significant amount of time understanding how to set up and create the lender structure (RWA Foundation). We are also spending a lot of time on how to structure RWA.
The second is fairly valid, but is not going to move us where we want to be fast enough.
We are spending a lot on dealing with the MIP6 pipeline and not much on creating the good structures and strategy. It’s obviously not black & white. But assuming we were working 80% on MIP6 collaterals and 20% on working on what RWA means for MakerDAO (including RWA Foundation, the short-term ETF work). The new strategy will be to change the numbers from 80-20 to 20-80 (or 50-50, only the trend is important here).
The Pareto law applies in DeFi. Excluding stablecoins, ETH is around 80% of the collateral and adding WBTC brings us close to 90%. Yet, we onboarded a lot of collateral over the last 18 months. Tinlake pools of Centrifuge are in a similar situation where 3 out of 9 are 80% of the TVL.
The same might apply to RWA, we use the same process, focused on collateral to onboard, pick one, work on it, onboard it, deal with it. If you look at the MIP6 it’s usually startups in alternative assets. To steal from @Planet_X : “this will not scale”. Moreover, the strategy laid out in the report every month was already clear. What wasn’t clear was the path.
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.
There was a problem with this sentence. I used the words “structured product”. Even after SocGen MIP6, I’m not sure Citigroup would return my call to buy RMBS, nor do we have Bloomberg Terminals. Yet, the debt capital market is a $119T market, so we don’t need to start with an arcane product.
We had discussions about that since June within the team. After a few months letting this idea mature (day to day issues are a great way to forget about being strategic), we now have a more strategic/focused approach proposal.
The best way to focus is to bring scarcity. We will limit RWA (under RWF CU) to 20 collaterals for the foreseeable future. We have already onboarded 7 assets (⅓ of the slots).
Those 20 collaterals will be split in 3 buckets:
- Off-chain lending:
- This is where we are doing private deals by converting DAI into $ in lender-side entity to lend those dollars. Those simply don’t move the needle.
- Objective: flagship projects
- Slots: 5 maximum, 3 remaining
- Current collateral approved: 6S, SolarX
- The RWF CU team propose to publish a RFP to help source something big
- Off-chain investments
- Same as off-chain lending but using off-the-shelves products from financial institutions. This is not to solve a borrower need, but solve a MakerDAO need, at scale.
- Objective: Getting rid of the excess of USDC, managing the balance sheet.
- Slots: 5 maximum, 5 remaining
- Ideas: Short-terms ETF, investment mandate (ESG?) for reputable asset managers, asset manager as a Core Unit?
- On-chain capital markets:
- The future of finance is on-chain and MakerDAO is well positioned as having a big balance sheet. Currently it’s mainly Centrifuge (structured finance) and SocGen (bonds).
- Objective: making DAI the base currency of the future of Finance.
- Slots: 10 maximum, 5 remaining
- Current collateral approved: New Silver, ConsolFreight, HarborTrade Credit, FortunaFi, Peoples Company
The numbers are a bit random, but that gives a guideline.
We are therefore asking Maker Governance to use each slot strategically. Each onboarding should raise the bar in terms of:
- Strategic value
- Counterparty quality
We are currently working on 9 risk assessments that we will finish. Some other great MIP6 are coming. Choosing will not be easy. It’s less than one per month that should be selected. But not choosing is making the wrong choice. Moving forward, we will provide less Risk Assessment as the monitoring of the current investment will take some time so we will focus on the strategic ones. Collaterals will be a means to an end. Maker Governance can always finance another CU to onboard RWA or to set some MIP6 as Core Unit (see my discussion about that).
In the future, we might come to a point where all RWA are on-chain with standardized ERC-XXX with ratings coming from credit rating DAOs with economic incentives. MakerDAO will provide a buy/sell spread and some repo facilities for all those assets based on ratings and the internal ALM policy (maybe some on-chain machine learning who knows). Fully automated, fully permissionless, fully trustless.
It will probably not be like that exactly, but moving toward the future is better than doing more of the present.