SES Project Real-World Sandbox

This series of posts reflects solely the author’s opinions and is provided for informational purposes only. The content of the post should not in any way be relied upon as legal, business, investment, financial or tax advice.

Dear Community, this post kicks off a thread to collaborate in a SES-backed project we named Real-World Sandbox. It will be a 5-week intense project that we hope will give everybody the occasion to contribute and shape what Maker’s role can be within the monetary and lending stack. My role will be that of merely facilitate and formalise outputs, in addition to contribute based on my experience and ideas.

You can read the document and see the full recording here:

The Challenge

Maker’s expansion to encompass use cases that aren’t native of the blockchain, like real-world financing, is vital for DAI’s sustainable development but has brought forward a new set of challenges. Those challenges have sparked wider questions about what Maker’s role within the wider monetary and lending stack is – as demonstrated by SG’s recent MIP-6 and by @rune’s call to action in proposing Maker as an engine for a sustainable development.

What we call the lending stack is a complex ecosystem of different actors, with a set of often adversarial incentives and little visibility compared to the world of smart contracts. For this reason, decentralisation and removal of single points of failure becomes even more crucial. Defining Maker’s ideal position within the stack is a difficult, and iterative, task, that should include the wide Community – although facilitated by dedicated Core Units. A similar stylised representation doesn’t apply only to real-world financing, but to the wider lending eco-system. In this space, attracting people with relevant TradFi experience is key for a successful development.


The Proposed Approach

The SES CU and the project team believe that a few activities could be instrumental for removing the barriers between decentralised capital and the workforce in the context of real-world financing:

  • Develop a common vision of the lending stack and of Maker’s role within it, in accordance with the DAO’s long-term view of its role within the world
  • Formalise a detailed manifesto of this vision – such a manifesto (subject to governance approvals) will influence how internal (Community, MKR holders, CUs, etc.) and external (potential partners) engage with Maker on the topic of real-world financing
  • Define, as a consequence of such manifesto, a clear roadmap to incubate, alongside the existing RWF CU, other agile groups (potentially CUs) dedicated to reducing and monitoring risks for the preservation of the DAI
  • Keep incentivising a culture of continuous decentralisation and development, in accordance with SES’s core ambitions

So, What Now?

The next week will be focused on activity (1), i.e. trying to understand and formalise a common vision of what is the TradiFi-DeFi monetary and lending stack, and where is Maker currently playing within it. We invite all interested parties, both internal and external, to contribute to the thread below.

For those who, for several legitimate reasons, want to communicate with me directly, you can do it at [email protected].

Let’s now make the world a better place.


Looking forward to this, @luca_pro

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Week 1: Develop a Common Vision of the Lending Stack


    1. The lending stack
    1. The key differences between TradFi and DeFi
    1. Maker’s best position within the lending stack

1. The Lending Stack

As we have discussed over the last days, what we call the lending stack (or actually the lending and monetary stack) is a complicated beast and trying to understand it is of paramount importance before arguing and formalising where Maker could fit. For the benefit of the community, I will try offer here a high-level view of the way I see it – a longer version of it can be found in a post called Full-Stack Central Banking.

Lending means providing a tangible resource in exchange for a promise to share value. When virtuous, the value generated is dependant in some way on the lending being there in the first place. That is why the function of lending and that of monetary creation are deeply interconnected.

Money has the core function of incentivising the allocation of capital and labour to fruitful uses. Sovereign issuers of money, being the FED, the ECB, and Maker, do mint the currency but cannot do everything on their own to spot the best end-users of that currency. That is why they use conduits of some kind. In the TradFi old world those conduits are commercial banks that do print money for eligible borrowers. That bank money is almost similar to that printed by the central bank - thanks to preferential agreements, but not an exact copy. If a bank goes under savers will lose some portion of their deposits, and the same cannot happen for banknotes. A portion of the lending that is created, the top quality bit – so-called eligible collateral, can get re-financed directly by the sovereign issuers at negligible rates. The rest stays on the bank’s balance sheets, or gets distributed out to investors that have a different risk/ return appetite.

2. The Key Differences Between TradFi and DeFi

A similar portrait can be done of the DAI sovereign monetary system. I call it sovereign because it is managed and sustained by MakerDAO’s communal efforts. It is the trust in such efforts that back the DAI, in the same way that trust on the US economy – as well as on the virtuous link between the FED and the US economy, backs the USD. For as much as we, in DeFi, criticise the FED policies, the fact that the DAI is pegged to it is an implicit testament of the permanence of such trust.

In Maker’s case, MakerDAO is the sovereign issuer, conduits are Vaults, and ultimate borrowers the users of those vaults. MakerDAO, like the FED, writes the rules at which ultimate borrowers can access those discount windows. Like the FED, there is some form of over-collateralisation; the monetary expansion happens somewhere else along the lending stack. There is another point of contact: MakerDAO, like the FED, should have the stability of the currency as its core value. The FED has a wider mandate that incorporates other stuff, but I would put that aside for a the time being.

Real-World Financing (or RWF) applications sit somewhere in between, but are not again dissimilar in principle. It is therefore very important, in my view, to converge on a vision of what type of lender will Maker be in the real-world financing stack.

3. Maker’s Best Position Within the Lending Stack

In my opinion, Maker’s position shouldn’t be (too) dissimilar from that of central banks in the USD or Euro sovereign systems. With a mandate of sustainable growth rather than profit maximisation, Maker should act as the ultimate lender against the highest collateral quality, leaving the rest of the value chain to allocate other portions of the risk spectrum.

Sustainable growth still requires evangelisation and education on our side, but I believe that the job of the RWF CU, projects like the Real-World Sandbox, and interactions with counterparties like SocGen, are instrumental to all this.

We, as a community, shouldn’t underestimate the power of being able to mint currency at an almost negligible cost. This is a testament of the trust of the wider DeFi ecosystem for Maker’s governance principles and the quality of the collaterals onboarded. Such trust should not in any way be compromised. With such negligible cost of minting new DAI, it is my belief that we should focus more on expanding the collateral footprint rather than in onboarding collateral that yields higher returns – but carries significant higher risk. There are several instances of this type of collateral, and SocGen’s MIP6 is a great example – you can read my detailed views here. I will explore other similar types of collateral in the next days and weeks.

There is one, remaining, important element that I would like to stress: such collateral, as it happens for SocGen’s OFH tokens, doesn’t always appear in its ultimate form in nature, but is instead the result of careful sourcing, structuring, and packaging. As in the OFH case, most of this careful work has been de facto outsourced to the issuer and its partners, and the token itself is the result of immense work in the background – such work has been done in order to obtain the privilege to access MakerDAO’s sovereign ecosystem.

For all these reasons, acting as a super-senior, programmatic, lender of the highest quality collateral in passive partnership with sophisticated and motivated intermediaries could be consistent with Maker’s core mandate of protecting the DAI, as well as with the principles of economic sustainability, decentralisation and dynamism at the base of the project.


Why Extra Security Matters

We have been advocating for ultra-seniority, ultra-standardisation, ultra-institutionalisation of the real-world collateral types and counterparties Maker could engage with in RWF.

Everything has a cost, and the cost of the extra-prudence in RWF comes in the form of missed volumes. Still, it is my belief that, when considering Maker’s core ambition of preserving DAI, those costs are more than justified. This is because lending is a very difficult activity, made of often adversarial incentives that are difficult to balance even for the most experienced and resourceful experts out there. The story of Greensill, that I report below, is one worth sharing as a reminder.

The Collapse of Greensill Capital

Greensill Capital was a financial intermediary based in the UK and Australia, focusing on the provision of supply chain financing and other services. The firm was founded in 2011 by Lex Greensill and had diversified its activities beyond supply chain financing into conventional banking – through a German regulated banking subsidiary, and fund management – via a partnership with Credit Suisse and others. In 2018 General Atlantic, an American private equity firm, invested USD 250m in Greensill. In 2019 it was Softbank’s turn, with USD 800m. In 2020, the firm started pursuing additional investments, aiming at raising further USD 500-600m and subsequently complete an IPO. Contextually, KPMG, Deloitte, and BDO, decided to become the firm’s auditor, preparing its public profile for the next steps to come.

It would be difficult to come up with a more regulated entity than Greensill.

Greensill was a major player in the market of supply chain financing, where a lender advances payments to a major buyer’s suppliers for a fee. This is not something new, as banks have been engaged in these activities since medieval times. Greensill story, however, would turn differently.

Greensill crisis began when the Sydney unit of insurance giant Tokio Marine decided not to extend policies covering the loans the company had made, and fired the manager who had a key role in signing off those policies. Around the same time, the German regulator BaFin started a probe into his fast-growing bank. BaFin was concerned that too many of the assets of Greensill Bank were tied to the same source: Gupta. The investigation found numerous irregularities. When the company lost a legal fight to get Tokio Marine extending insurance the credit quality got questioned, valuations became tougher, and Credit Suisse froze the Greensill-linked funds. GAM followed. On March 3, the German financial regulator shut Greensill Bank to save money for depositors and creditors.

The story, that costed investors several billions, had many controversies: involving Softbank - both equity investor in Greensill and early backer of the funds managed by Credit Suisse and linked to Greensill itself, GFG Alliance – a company linked to steel magnate Gupta against which Greensill had USD 5b exposure, David Cameron – the former UK Prime Minister had a prominent role of advisor in Greensill and had lobbied extensively to have the company included as one of the partners to issue COVID-related extraordinary financing.

The Moral of the Story

It wasn’t enough for several counterparties reviewing Greensill’s activities to avoid this to happen, including rating agencies, accounting firms, seasoned investors, renown regulators. Lending is a difficult beast to tame, and as soon as the appetite for yield (and volume) dominate decision making things can turn sour.

The further away we go from regulation, size, standardisation, we go into the credit risk spectrum, the more amplified those risks are. We should keep this in mind


Hey Luca,
Greensill is an interesting example but I guess it’s more a typical greed story than anything else. I don’t recall right now but it was either SB or CS who was an investor but at the same time majority of the funds went their way (some subsidiaries were having financed their supply chain needs)…

Nonetheless, I agree that the riskier the asset classes/types the more complex system in place we need to risk manage it… But another lesson worth keeping in mind is that the financial world is driven by bonuses and so even if things are coming from a major bank and are rated triple A then it might not necessarily mean it’s a real, secure, senior product but could be a bunch of garbage stamped as AAA… It wasn’t that long ago, right?

For me the whole discussion you initiated is first and foremost about the strategic role, sort of vision for Maker, and a few key questions arise:

  • Is Maker a Super-Bank (Fed-like) or more a typical Bank (and then is it more consumer or business or corporations-facing)? Maybe we should think more in a DeFi than TradFi way and figure out our own sweet spot? What could that be?

  • What’s the long-term vision? Is it to be a profitable financial institution or more a source of good (vide Rune’s Clean Money initiative)? Maybe it should be both, profitable and a “do-gooder”?

After some heavy, strategic direction discussion, then some questions should follow:

  • What’s the priority – increasing scale, maximizing profits, value of MKR, stability…?
  • What are the best products for both our strategy and the priorities? How can we scale them sustainably (own resources, intermediaries, etc.)?
  • How do we put in place best risk management practices so that we realize the vision, strategy and priorities? What resources do we need (internal, external) so that we keep the defined Sharpe ratio in place?

That’s how I see it. First some bigger stones need to be taken out of the way, and then smaller and smaller. Hope my few cents are anyhow helpful :wink: Cheers and best of luck with the process!

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Thanks for your message @Tru_Greg,

You make all relevant points. The intention of my post about Greensill story was to prove the complexity of credit markets, even when ‘standardised’ and ‘regulated’, and the exposure to profit taking of the several intermediaries involved. It is, as often happens, more than a pure story of greed - it is a story of lack of controls, flawed policies, and imperfect risk management. Anybody with a solid risk management would have spotted (as they did) inconsistencies in the Greensill story.

I also posted it to stimulate attention of the broader public around topics that are not always exciting.

Regarding your other strategic points, I believe those are extremely relevant and tie with the post recently published by @Porter_Smith from a16z. I can express only my personal opinions, and not that of the community, and I am trying to condense those in the report I am putting together.

First of all, I think that Maker is a sovereign issuer of currency, in this way closer to a central bank than a commercial bank, but it is, let’s say, a central bank with limited independence - and a strong peg with another hard currency, the USD. The reasons behind are many, but I could highlight what I think are the two pain ones: (1) lack of a wide and uncorrelated collateral base, (2) inability to make of the currency a credible source of revenues - those revenues are taxes and repatriations on USD and might be some other form in DeFi. Still, I believe that as it happens for other central banks, Maker’s focus should be in expanding its currency footprint and preserving its stability. I talk in monetary terms of course, and not about a broader mission.

This, obviously has an impact on what type of profitability ambitions the community could have. Given the significant operating leverage that Maker has (i.e. its ability to mint currency at very limited costs), the community could generate healthy profits without taking significant credit risk in the form of high interest rates. Again, as we said before, the higher the interest rates the higher the known and unknown risks.

@rune’s call to action on fighting the climate catastrophe is an important beacon that could act as a pillar of DAI as a sovereign currency, in the same way some constitutional principles should drive the behaviour of sovereign economies.

A question of process, then, emerges, with Maker being committed to the concepts of decentralisation and distribution of powers and responsibilities. This too should drive the constitution of a framework.

I believe that we have a lot of work ahead of us, but it is nothing short of exciting. I hope this symposium will help stimulating the conversations.

Regards, Luca