RWF - Ask Me Anything - September 2021

Following a chat with delegate @Planet_X here are starting questions. Please feel free to ask any questions and I will update the first post of this thread.

0.a) A few words on the strategy

The view is that up to 300M DAI of RWA we are on at the experimentation/startup phase. The key is to learn what RWAs at MakerDAO should be and how to scale. We are building bottom-up.

When we will reach 300M DAI (that’s just a random number to give an idea) it will be time to decide how MakerDAO wants to move forward. DeFi itself is changing quickly so it is hard to know what will be the good path. Therefore our job is to experiment, build, and gives the tools for MakerDAO to chose the good path.

We are also expanding the team with people from TradFi as we are now credible in RWA. As stated I’m not going to manage a team of more than 7 people. Teej is starting this month with a background in CRE and CMBS. Therefore I hope to grow people wanting to spin off CU at some point.

We are also, in the background dealing with the thought questions. Who is responsible for making what decision? What do we mean by decentralization? We tried to open this question in the forums but did somewhat fail to attract interest (as it is still quite abstract). @prose11 is setting up a PPG, and we will leverage this group first (PPG on which, like the previous one, I don’t want to take any leadership to preserve decentralization). We will all mature with time on those topics (I can point to this, this and this among others). It will be done with time.

0.b) Priorities

On our priorities:
@SebVentures : SolarX onboarding (RWA Foundation), On-chain securitization, MIP21 improvement, hiring and onboarding new members, prospect management, data
@williamr : RWA reporting, risk analysis of Monachil, PandaCredit/Naos and NebulaCapital/Tinka, improving the onboarding framework to provide more requirements for MIP6, developing a tranching framework to estimate risk/reward
@aes : Financial report, and FP&A roadmap
Teej : onboarding month, will learn all the legal structures and follow some onboarded projects (New Silver) and some analysis (120dB, REINNO)
@christiancdpetersen : SolarX onboarding (project-finance side)
@Philinje : REINNO, 120dB
@luca_pro : auditing the FortunaFi investment

1) Treasury or no treasury notes

There is an active discussion on this topic here.

As discussed, the Cayman Foundation provides a legal structure that makes such kinds of investments possible (there might be many other ways, but this one we have done the work). We are in the view that such an approach would scale nicely (I agree with @lev comment ). It should be noted that such an approach is less impactful than projects like SolarX.

The poll was quite a tie for a long time and moved in favor in the last few days. I recommend people voicing their opinion there.

The poll also goes more in favor of short-term investment-grade bonds which provide a sound mix of credit and duration risk. But I can only recommend the discussion to be continued in the thread.

This is an area where we will devote more time starting next month I guess. Most of the work we have and will do on SolarX will be reused.

Another brick that might be needed is a replacement for MIP21. More on that later this month.

2) project finance or no project finance. Or only if it suits us

SolarX was agreed on by the Maker Governance.

So far SolarX took a lot of time but not due to the project-finance part but on the legal infrastructure side. Now, @christiancdpetersen is really on the project finance part. There will be key learnings here going forward.

I must stress that project finance asks for more involvement. The solution is to have a third party handling the work (which was the initial plan with SolarX but we are starting with a single loan).

3) priority given to Centrifuge assets

We are at the experimentation phase so there is no priority on Centrifuge assets. It’s mainly Will that is working on them. There is a significant deal flow coming from Centrifuge. I’m also still working with Growth on a significant banking project (which might or might not go public later this month). This will also be a new hard problem to solve.

Priority is as much on onboarding collateral as creating the building block to make it happen. The problem for SolarX and REINNO was not so much the collateral itself but how to invest. Now there will be a blueprint for a Cayman Foundation and a Delaware Trust. But soon enough we will have the issue to diversify the structures and a need for an Irish Trust or something Singapore-related. And MIP21 doesn’t scale beyond the SB which is why work is needed.

In the past (when had more time to be proactive) we did reach to Goldfinch as they are also doing on-chain securitization. But they are using USDC and it seems that MakerDAO is not the top priority.

If Governance wants to be more clear on what they want, that might be done by not greenlighting a MIP6.

My personal favorite mix would be 1/3 on-chain securitization 5Centrifuge-like assets), 1/3 off-chain lending (6S, SolarX, REINNO, 120dB, bank, …) and 1/3 off-chain simple bonds/ETF investment (question 1). Then we analyze what we have learned on those 3 kinds and decide how to move forward.

4) 6s - hot or not?

6S is now live so we will sync with @g_dip RWA Co to incorporate their reporting. 6S is another kind of interesting experiment where the Asset Originator took all the burden to create the lender side structure. This is great in the sense that we didn’t have much to do. At the same time, we didn’t learn much (well the Cayman Foundation is a direct child of the 6S structure) and some trust is delegated to the borrower. I’m not sure how scalable that is. It works for the 6S case (as agreed by governance), but I’m not sure it would work for a random borrower coming to MakerDAO.

Nevertheless, the point is not that important. With @g_dip (for 120dB) we might swap the charitable trust component of the 6S structure for a Cayman Foundation under MakerDAO direction. That solves all the concerns our counsels have.

5) Thoughts on liquidity management for MakerDAO (by @g_dip link)
You are quite right that the only “contractual” obligation we have is to pay $1 per DAI at ES, nothing more. So DAI is kind of a perpetual bond with a 0% interest rate. That being said, we kind of like having DAI at $1 on secondary markets as well. This is why we have PSM which is short-term lending (indirectly). So liquidity (a pape I wrote on it) is of prime importance not for commercial reasons if not for “contractual” reasons. I guess we can still describe MakerDAO as lending long and borrowing short.

We’ve asked last year about maturity risk. It’s quite experimental right now as rates are low in the short term. The underlying idea is that for low scale (<300M) it doesn’t really matter.

But this is a problem that will come in the next few years. We will need a stronger asset liability management (ALM). But at this stage, I’m not even sure we agree on the MakerDAO balance sheet structure. And no one in DeFi can model the DAI holder behavior for the medium term anyway (it’s just too early). And all that is before DeFi gets a yield curve on stablecoins.

I think having an ALM committee at some point will be useful and have an easy way to tell the community what is the liquidity risk level of the protocol.

As always you can contact me by DM here or on rocket chat. Feel free to post questions below as well.

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Not surprising in that I am a project development and finance lawyer, I am in favor of more project finance-like transactions for the following reasons: (1) when structured properly, they can provide a stable return; (2) DAI can have a meaningful impact on some of the most important issues of the day (climate, infrastructure, etc.); and (3) because of (1) and (2), we may be able to create broader geographic exposure for DAI.

When you look at who invests in project finance debt, it is mostly pension funds and the like. This would seem to support my point (1) above.

Now, I understand that there may be concerns over term, transaction size, and construction risk. I think that each of these can be adequately addressed and that, at the end of the day, there exists a sizable market for post-construction, project debt.

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@sebventures thank you for this.

With regards to Real World Finace I would like to emphasize that Maker is mainly limited by bandwidth, not capital, not oracles, not dev work. Every single onboarding must matter.

Accordingly the right way forward is to avoid taking on RWF collateral that eats up more bandwidth compared to what they give in return.

Examples of this are:

  • Startups. Fails too often. Upon fail we are likely to recover little or nothing. There are a few of those in the pipeline.
  • Project finance. Per definition not repeatable. We do not have the human resources to learn everything in every industry. The only exception are projects where the PR potential is substantial - such as SolarX.
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This trends towards the “Treasury” question, but is a bit different…

Something I have been thinking about a lot is the need (or lack thereof) for liquidity on Maker’s balance sheet. Commercial banks, having the various requirements that they do and specifically the need to redeem deposits at will, tend to keep very liquid balance sheets. Maker, not having any obligation to redeem Dai for anything at any time, can theoretically keep a very illiquid balance sheet so long as there isn’t a need for liquidation.

How is the RWF team thinking about this? On the one hand not requiring collateral liquidity can lead us further into project finance and allow Maker to achieve a higher net interest margin, but it does present a greater risk to the system.

A follow-up: These are incredibly complex and nuanced points, how do you think they can best be socialized and discussed among the community? Keeping in mind that many here do not have a finance background. I think this has been one of the key issues in growing the RWA vertical.

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Good questions @g_dip

You are quite right that the only “contractual” obligation we have is to pay $1 per DAI at ES, nothing more. So DAI is kind of a perpetual bond with a 0% interest rate. That being said, we kind of like having DAI at $1 on secondary markets as well. This is why we have PSM which is short-term lending (indirectly). So liquidity (a pape I wrote on it) is of prime importance not for commercial reasons if not for “contractual” reasons. I guess we can still describe MakerDAO as lending long and borrowing short.

We’ve asked last year about maturity risk. It’s quite experimental right now as rates are low in the short term. The underlying idea is that for low scale (<300M) it doesn’t really matter.

But this is a problem that will come in the next few years. We will need a stronger asset liability management (ALM). But at this stage, I’m not even sure we agree on the MakerDAO balance sheet structure. And no one in DeFi can model the DAI holder behavior for the medium term anyway (it’s just too early). And all that is before DeFi gets a yield curve on stablecoins.

I think having an ALM committee at some point will be useful and have an easy way to tell the community what is the liquidity risk level of the protocol.

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On the priority discussion, there is probably still a significant disproportion of projects coming through Centrifuge vs other channels. In an ideal scenario, personally I would like to see more projects coming from different channels, from both on-chain and off-chain setups. But I think also the projects on average need a much higher degree of preparation and understanding of solid securitisation requirements, if we want to prioritise low default risks in the long run.

For the interest of decentralisation (and mind sanity for MakerDAO rwa teams), my view is that increasing the number of “arranger” (or arranger-like) counterparties such as RWA Co and others is crucial in that evolution. Such entities would be the most well prepared parties to organise the “transaction pack” in a comprehensive and holistic way, including legal structuring, counterparty transactions flows, regulatory/compliance requirements, historical data, ongoing systems surveillance etc. These entities come with the “pack” well thought through and/or work closely with rwa to refine some details. In my view, all of that thinking in the “pack” is taken into account ideally prior to a pre-approval to move forward, which nowadays is represented by the MIP6 greenlight. In a way, the greenlight (or an alternative pre-approval flow) probably should happen later in the process, given the average lack of preparation we’ve witnessed historically in greenlighted applications.

In my view, Centrifuge started with “MVP” originators where the understanding of the requirements “pack” for securitisation was not there. It required a lot of hand-holding and guidance from us. After all, Centrifuge was primarily a tech/SaaS company not an arranger. But in my view, this is evolving. The new wave of originators, e.g. Tinka/NCP, seems to be on a different rank to the original “MVP” group, which is a sign of maturing. These are more traditional fintech players that understand the need (and leverage gained from) for partnership between “arranger-like” entities and end issuers. These new groups are better prepared with “transaction packs”, have closer ties to relevant regulatory bodies, see compliance not as a burden but as a sign of confidence in their internal controls/processes. It’s a different generation.

In a nutshell, we need to be able to encourage more of this latest generation of Centrifuge arrangers as well as arrangers like RWA Co for the true decentralisation of MakerDAO rwa. At least, as far as it concerns securitisation investments (ABS, MBS, Corporate loans and the like).

As @SebVentures mentioned, I am working on a more comprehensive requirements flow that hopefully will guide the expectation from the various counterparties. Therefore they come better prepared and the process is more widely transparent for everybody.

p.s: @christiancdpetersen brings an important consideration on project financing, which is an entirely different game than the rest. I lean more towards the post-project setup bond structuring as an ongoing revenue source, with lower operational risks. The market for sustainable energy-linked bonds is just at its inception, and it’s likely future-proof.

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We have been following Maker’s RWA development with great interest. If it works, it would eventually make it simpler and cheaper for SMEs around the world to access capital. We have seen great demand from asset originators, particularly from emerging markets, we work with. This is why we are building a platform that can on-board RWAs at scale and hopefully address many of the concerns from the community: asset reporting, covenant tracking, security management etc. More of these descriptions from our Untangled Finance MIP6 application

We also appreciate the transparency and good mannered exchanges among the community such as this thread. This helps us to understand what you, as the community, think and your direction of travel with regard to RWAs. In turns it prepares us for a smooth process regarding our application and continue to tweak our platform to meet your need. We even started holding MRK.

So we are prepared to work with you … if only we can have a bit more clarity on the timing. According to @SebVentures:

there is no priority on Centrifuge assets. It’s mainly @williamr that is working on them

Does it means the rankings on the prioritisation sheet do not apply? Given our supposedly high ranking, we were hoping that the remaining process with our application would be imminent… can you clarify?

In summary, we have a team of experienced Fintech, securitisation experts, invested significantly on building an on-chain securitisation platform, have quality assets in high volumes waiting to be financed from diversified sources and geographies. We have also been ready to work with Maker’s community to complete the process only if you can shed some light on the timing.

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Regarding the prioritization sheet, it does apply. At the same time, it is more of an indication and it is not filled properly (not all teams are up-to-date making comparisons difficult).

On the prioritization of Centrifuge assets, it is only pointing to the fact that being Centrifuge isn’t used as an input.

Regarding Untangled, it should start soon. @williamr is delayed on the previous batch of Risk Assessments. We are also adding more resources which should improve the experience.

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interesting update - thanks.

In terms of onboarding new assets, I think its important to track the unit economics of the different investments. Start with the gross yield (loan coupon) and then subtract various expenses MakerDao incurs over the life of the deal such as costs of the risk assessment, legal & structuring costs, servicing/reporting costs, any eventual credit costs…

Its too early now to be able to reasonably measure net return but ultimately folks will care most about the net return on a given asset (adjusted for risk). What types of deals will be more attractive? I think its important to keep this in mind when evaluating more complex assets and smaller deals. Do they create enough return to cover higher expenses?

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@quntangled Thanks for reaching out here. At this stage we’re working through applications greenlit, both Centrifuge and non-Centrifuge originators. Up until now, I’ve been looking after nearly all onboardings for Centrifuge, including post onboarding activities (monitoring, convenance management, reporting and modelling building/adjustments). So there is quite a bit of work put into that, as the focus is increasingly on Risk management, not only growth. At least on my side.

I hope you can appreciate there is some resource issues and prioritisation to overcome in that respect. I am hoping to have a colleague working closely with you in the near future.

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Thanks @williamr and @SebVentures for clarifying your process. We look forward to working closely with you hopefully soon.

Not everyone in the community needs to understand everything, however they should have access to dig into details if they want to. My view is that it’s more important for the various SMEs here to work together to understand the differences and nuances so that in the future MakerDAO could be better advised about potential standards or preferences.

AMAs like this are fantastic.
Issue Discussion Calls with an educate & discuss focus (hmu, we can schedule one around a key RWA issue of your choosing)
For people wanting to learn, direct them to the right resources and do your best to teach them.

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To your point @Davidutro, I think what matters are high levels questions.

For instance, if you look to Real World Asset Legal Structures - A comparison you can have two reading.

  1. Discussion about the difference between a Charitable Trust, a Foundation, an LLC or a Delaware Statutory Trust for a specific purpose. You can debate their fiduciary obligations as much as you want. Those are technicals discussions. If you have plenty of time, you can and I’m happy to have the discussion.

  2. The discussion about the locus of control. It’s really who do we trust to make what level of decision making/acting. And I would add (i) does it scale? and (ii) is it decentralized? The great thing is that such discussion is not technical. There is no good answer and no counsel that can help you (or decide for you).

For instance
a - Is a MKR decision (executive) centralized or decentralized? We don’t agree within the team. It depends on what you call decentralized.
b - Should we let the borrowers create the lender structure (i.e. our side of the transaction)? Well, this is best for decentralization, easier to do on our side, but you end up adding risks.

What strikes me is that the community only discussed 1. while outsiders discussed only 2. (with a limited sample for sure). So we failed to entertain the discussion. I think the problem space itself is not clear and that it is the kind of discussion that will take time. This is even a governance meta-discussion (if you link with the “decision-making” of PPG and delegates).

That’s a long answer to say that what matters the most are the important high levels questions only the community can answer (no expert can). Yet, as this answer shows, those are not technical but still quite complex.

PS: I think I made the case for governance-minimized RAI …

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I agree and am thankful to folks like you, @g_dip, @mrabino1, and others for keeping a lot of the discussion public.

If our goal is to invite people to help solve these problems perhaps creating a dedicated office hours call for the RWF CU might be helpful? I assume these problems are actively being worked through by your team, so bringing the public up to speed would be the first step. But should that be the goal? Are you looking for new help to solve these problems, or are the existing people sufficient? I liked the concept of a RWA Comittee stacked with subject matter experts to help take ownership of this problem-space. Not sure if it should be a formal committee, or perhaps a looser working group. My point, ultimately, is that many of these problems will be resolved so long as we stick to our original goals, watchdog the crap out of all the models, and coordinate well with others working on the same problems.

Those high-level questions (1&2) matter, and if that is what we are seeking feedback about then perhaps that’s what we should focus on for a possible issue discussion call :grinning_face_with_smiling_eyes:

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RWF is a much-needed bridge to crypto! Does Maker increase or decrease regulatory risk for itself via RWA in terms of FINRA or CFTC or OCC ?

RWA are for sure increasing regulatory risk. At the same time, USDC is kind of a RWA as well with a blacklist risk. The key is to avoid to concentrate on specific countries (which is not easy as US is the center of the world and the most anti-crypto those days). Our legal entities in the real-world are orphaned (not MakerDAO subsidiaries) so it can be debated how they can be attacked for a MakerDAO reason.

Moreover, RWA can also be the solution. A project like SolarX shows that DeFi can finance the green revolution which is good for public support, which might be a protection against regulation.

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Those discussions should be in the forum where you can think hard before posting, but how to generate that? I’m clueless. Another place would be the RWA Committee (MIP57 or the PPG for this particular concern).

On the RWA Foundations MIP, we made it, by default, to seek a decision from MakerDAO. But MakerDAO can change that to delegate the decision-making to many parties. We don’t know exactly what those decisions will be and whose MakerDAO doesn’t want to make.

I agree. Maybe it will sort itself with time.

Plenty of topics, just need to find what is the most interesting for the community :slight_smile:

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