[Signal Request][P1-DROP] Change of covenants for P1-DROP (farmlands)

As a previous business owner here I am sensitive to these things which is why I tend to go for middle of the road here solutions. I think we can find the middle of the road solution while MakerDAO decides the ‘whether we should be doing this at all’ go - no-go addressable/unaddressable concerns list.

The Arkansas part I am a ‘support’ the amount seems to have grown here to what nearly 3M? This is in a range that Maker could absorb with existing SB. I mean I want to look carefully at the larger picture - global DC on all the Centrifuge assets if there is some existential question regarding the ‘class’. I also really want to hear form all of you in RWF whether you see Centrifuge vault(s) scaling into the billions once this settles or will Centrifuge always be a small player and never hit 1B or beyond.

I am looking at the 1T DAI mark and feel like we are just pissing around on 1-3M. It is like my wife says - why do you even bother to spend 5min to save $1 when you are making $50-100/hr with investments. Maker profits are what 1-2M/month net expenses we are quibbling over minutia vs. going after the bigger questions here.

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Interesting discussion to say the least! As a representative of the “random actor”, I would like to provide a link to a webinar that our affiliate, Peoples Company, is hosting regarding its just released 2021 National Land Values report. This report features data-driven research on current farmland values across the U.S., trends that may impact future values, and practical stories from around the country. It starts at 3pm Eastern U.S. time on Oct 28th. It will be useful in understanding the high quality of the collateral involved in the transaction. Here is the link to register for the webinar: Webinar Registration - Zoom.

I hope you can attend. If not, it will be made available on YouTube in the next few days.

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Here is a link also to the 2021 National Land Values Report: Industry Research | Peoples Company. Enjoy!

I would also like to point out that the transaction structure has been basically unchanged from initial discussions that started nearly 1 year ago and we appreciate that it was approved by the decentralized administration that governs Maker just a couple months ago. It would be severely disappointing if the structure is changed at this point. The critique of the structure is understandable…any lender would see that. However, changing the structure to address the mentioned concerns might make this financing look like loans we can get from a bank of which there is no shortage. We finance farm properties with banks several times each year. The structural features of the DROP financing is what makes it appealing to us. Offsetting the concerns raised about structure, is the fact that we have to keep 20% - 30% subordinated capital in each farm asset. We will feel substantial pain before DROP tokens are impacted by any losses. Also, we are a very experienced farmland investor, appraiser and broker and we manage farmland on behalf of some prominent investors. We and our affiliate, Peoples Company, have been involved in farmland transactions since the 1960s. Collectively, we are involved in well over $1 billion of farmland appraisals and brokerage transactions each year and manage over 50,000 acres of farmland. These credentials are important to understand because this will help ensure we select strong assets, partner with strong farm operators as lessees and have the ability to sell farms as quickly as possible if a DROP redemption is requested. In practice, we believe we can liquidate a single farm in approximately 90 days. If a portfolio of farms needs to be liquidated, that may take longer. Any asset portfolio would. However, the farmland market is huge – a $3.1 trillion asset class with approximately 1% - 2% changing hands annually, or more than $31 billion farmland transactions each year. So, liquidating $20 million to $30 million of farmland in an orderly fashion is nothing the market can’t handle.
Lastly, we have always discussed this as a first evolution of a very interesting opportunity for us, Centrifuge and Maker. There is room to grow this but I think we all expect to find problems or imperfections to fix along the way without impacting the value proposition vis-à-vis financing that can be obtained from banks.

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I would much rather gain users by undercutting the banks on cost than undercutting them by taking on weird risk I don’t understand.

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I wanted to comment on the concerns that you brought up Rune. I am struggling make sense of your most recent response:

Perhaps we can get past the hand waving and work on understanding what exactly these risks are together. Centrifuge & AEA has shown readiness throughout this entire process to engage with the DAO and talk about how this deal is structured.

As for the structure you talk about earlier in the thread, I want to respond with the following: We hear you and think we understand your concerns. We started together on this RWA journey when no one thought it was possible. We’ve shown that we can and want to work on improvements with the DAO to build out a safe legal framework for Centrifuge issuers, as well as our Investors including MakerDAO, to mint DAI and bring valuable collateral to MakerDAO.

Our success with the first RWA Maker vaults is attracting more professional and established borrowers to DeFi and MakerDAO (e.g. Nebula & Monachil), and also arguably created positive externalities in terms of PR and others.

Nevertheless, these early pioneers were doing the first transactions back when DAI was +/- 1% off the peg and they were +12mo into waiting for Maker to even figure out how to do a RWA collateral onboarding process with them. These startups had the confidence to try DeFi, Maker, and Centrifuge in the early days and paved the way for larger MIP6s both from partners using Centrifuge and others. I think this is aligned with the RWF CU strategy to focus on fewer but bigger RWA vaults, and partners who can provide scale.

But how do we want to treat our early partners who trusted us to be able to prove that DeFi is not only working for the big shops but everyone? We think we have a moral commitment to creating something, which is not only cheaper but also better (much like Rune’s call to positively impact the environment by focusing on green assets). And to follow through on the plans we put in motion.

First of all there is no Centrifuge structure. Centrifuge is a decentralized protocol to onboard assets, like a farm, as an NFT and have the entire fund administration on-chain. Fully transparent and including a first loss protection in form of the TIN tokens. The on chain tokenization framework is coupled with a legal framework that the issuers set up to ensure there is legal recourse. When we proposed MIP22 we made certain trade offs (much like single collateral DAI made tradeoffs to ship before MCD was fully matured over a year later).

However, Centrifuge and all issuers using Centrifuge smart contracts I believe have proven to the community a readiness to keep working on it and work on this together. None of us think that the work stops here and in fact its still in going on. We have already made substantial progress and have a clear roadmap going forward:

  1. In the case of P1-DROP (as well as the other RWAs), AEA (the Issuer) had already improved the independent manager arrangement ensuring better bankruptcy remoteness.
  2. AEA are well into discussions with 3rd party providers, who will act as fund administrators adding another layer of oversight.
  3. A third step is to engage a trustee for the assets. These improvements will be made in the coming weeks.
  4. We are currently discussing how to give DROP a security interest in the underlying assets, which will take a little longer. The RWF CU is involved here and we have a good way forward.
  5. Ultimately though, the RWF CU made a lot of progress with MIP58 RWA Foundations (MIP58: RWA Foundations) to give the DAO a direct claim and enforceability, and to address possible tax issues. At this point there will be slight structural differences between 6S trust setup and the setup that Centrifuge Issuers are employing but will offer similar protections to DAI & MKR holders.

From our side, we are going to put more effort into communicating the progress on this roadmap more actively with the community and will start posting regular updates in the forum.

We are fully aligned here: no one is proposing raising any of the debt ceilings beyond a point that becomes a true threat for Maker and not scaling this up until more progress has been made on the above roadmap. Speaking as an MKR holder and long time community member myself, I would never support taking on risk that could irreparably damage both Maker & Centrifuge.

I also wanted to second Seb & Prose’s offer of setting up a call where we can discuss these issues:

I believe these are issues we can work through without destroying a year long project and endangering the reputation of the DAO.

Thanks for your comments MakerMan overall. I wanted to address this one in particular though: I can tell you that we are talking to debt investors who have issued securities in the billions and are looking at the work we’ve been doing with Maker. And some of them are looking at how they could tap into Maker themselves. We should see these conversations come to the public forum soon.

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Fascinating thread. New here so excuse the basic commentary.

The real world is illiquid. Crypto currently runs on digital rails for digital assets only.

How can we reconcile these two basic facts?

The question is off topic but I guess that is what we need to figure out. (I’m off to look in the other posts to see where that may have been answered.

Great work @jameskmccall and team for pushing the boundaries.

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There are some really good points made here. The market for loans is the same as any other market. Institutions feel that they set the rate, but in actuality it is the market that sets the rate. The rates on US farmlands are low. The “DAO” accepted the MIP6 under the terms shared and if people don’t accept this “de minimis” change in terms, then what? Does it go forward under the original terms of the MIP6?

To me it is obvious that this is more to do with certain DAO members having a competing product to Centrifuge and looking to take this opportunity to throw shade. I find it hard to believe that people have such a distaste for Arkansas farmlands. I hope that if there are concerns or feature requests for the Centrifuge system to address these get added as feature requests and AEA doesn’t get caught in the crossfire.

This has moved me to abstain. I disliked both the terms of this deal and the rushed process to approve it. I am also still unsupportive of increasing exposure to Centrifuge assets until the legal structure is upgraded (my understanding is that this is being worked on already).

But in the narrow interpretation of this signal request— approve/disapprove of these covenant changes — I agree there is nothing in the changes that appears objectionable. Upon reflection, this request should probably not be the forum for debating substantive revisions to this deal, but do encourage further discussion that did not occur when this was originally pushed into a vote the first time.

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Yeah, it was premature on my part to get so triggered by this post. I interpreted this signal request as being about activating the DC of the structure, which I am against. Not that it would just change some stuff that is totally irrelevant as long as the DC remains at 0, which means it is effectively not onboarded as collateral.

Fundamentally the way this deal is currently structured simply is not compatible with the interests of MKR holders. It’s not about liquidity or term length, it is how those things exercabate the issues of a structure that is not using state of the art best practices when it comes to enforcement and liquidation - which means doing it the way all the banks, and all the institutions have done it for hundreds of years, using senior secured credit positions held with top-tier trustees. There is no reason why this deal cannot be structured that way, using competitive terms.

There is simply no universe where MKR holders should sign up to scale, or do anything other than PoC experiments, with suboptimal legal structures. It just doesn’t make any sense.

We need to instead investigate how we can restructure this deal and other centrifuge-enabled deals in a way where it becomes appealing to MKR holders to take the risk on it.

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This signal request appeared to me to be plenty self explanatory that it was regarding two small changes to the MIP6 that was approved by the procedures set out by MakerDAO. There are plenty of hot shot attorneys that are going to “doc” up the deal and make sure that the structure is negotiated and protects the interests of the DAO and reflects the terms as negotiated.
It is disingenuous at best to refer to SPV and trust structures that have been done for 100’s of years, as to some extent this is all novel. There is no well traveled play book. With digital assets liquidations and oracles are live and completed on a per block basis. This clearly has advantages and disadvantages. Like recently Cream was exploited and it also appears that potential partner Aave is alleged to have a vulnerability that “could” have been exploited for Lord knows how much. My point is that you appear to be arguing about the color of paint on a house, when building in an earthquake zone.
I am perhaps reading between the lines, but I am going to guess that you have the solution? Is it a proprietary one? Does it require MakerDAO to incorporate somewhere?

Just had a really productive conversation with @spin about a path to how we can restructure the current centrifuge-enabled deals and provide better terms and scalable structures to future partners.

I will be posting my proposal on what I call the Arranger Model asap, which is a way to standardize RWA to optimize for MKR holders concerns around risk and enforcement, making it possible to scale it to very high debt ceilings.

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Thanks, look forward to learning about the proposal “Arranger Model” when it is published. I am just really befuddled of the process and procedures of the DAO and can only assume maybe that there has been a shift of the power center of the DAO since the MIP6 risk assessment and MIP6 were published in June of this year. I realize that with delegated powers maybe that has shifted the dynamic somewhat where the voice that did not have confidence in the Centrifuge model or the contemplated “trust” structure is able to flex. I don’t know. I really have only had the limited basis of doing a risk assessment on this one deal, and perhaps don’t see the governance mechanizations and the larger strategic vision.

That said, my risk analysis was contingent on legal buttoning and due diligence. It was also premised on what I thought the rough model for the real asset container, SPV model, Drip/Drop, etc. Therefore I would request to the extent that this model is going through serious revision that the risk analysis is not relied upon either until I have at least had the chance to review these substantive and material changes to the structure. It would appear that from the “no” votes in the signal, that appear to control large blocks of delegated and owned maker, that either large players in the DAO hate Arkansas or have no confidence in this structure, asset class, and model.

I am disappointed, but understand that strategic visions of DAO’s can change and with that I guess they have the ability to take a second bite at the apple. I know that all parties have had to put up with me, even though I am ornery we tried to get a deal that would protect and benefit all the players.

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I’ll be the first to tell you that your Alternative Equities Advisors Assessment was impeccable and thank you, for the analysis you performed back in May.

And as you mentioned earlier, the infighting we are witnessing within DeFi gets us nowhere.

We woke up this morning to developments in DeFi that can harm the ecosystem, divide it, and take it to a blackhole with no escape. The recent $130M Flash Loan via Cream Finance has led to a Feud between AAVE and YEARN. Do we do the same here, or prove to the world that we are united.

And then…

And then later today we got a $58M rug pull that some folks are alleging that it was orchestrated courtesy of the team using an EOA. This has led to accusations between team members that this one or that one is responsible. All in all these events make DeFi look like :poop:

https://etherscan.io/address/0xb1302743acf31f567e9020810523f5030942e211

13,597 WETH Rugged

Together We Are Great Energy—Divided We Will Fall Apart.

I don’t have the right answers on what is the right structure and how we should proceed with RWA Collateral types, but this is how I’m thinking about it.

We must work together to find the right solutions for MakerDAO. The Maker Community has an appetite for RWAs, therefore we must find the right structures that works for the benefit of the DAO. We must ALL understand and educate one another on what Real World structures best PROTECTS MKR token owners. A “No” Vote has nothing to do with disliking Arkansas. Go Razorbacks!

So ya, IMO there is nothing wrong with iterating on RWA structures–there is a need for checks & balances–there shouldn’t be a split within the community—we should ALL support RWA iterations. And yes, I know repeating a process is painful—because we All wanted RWAs and honestly, so far not much has been executed. For now, RWAs have been a big disappointment. A promise with not much deliverance.

The greatest performers iterated over and over. Let’s become the greatest performers by performing iterations of what can be the ultimate super power of MakerDAO RWAs. I look forward to the Arranger Model and hope that it will keep this community united.

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I’m not a regular contributor but the Centrifuge deals have drawn my interest periodically because of the legal engineering involved, and I thought I’d jump in here to remind people of some history and +1 @rune 's take from a legal perspective.

From the start of MakerDAO wanting to do off-chain collateral, many people warned about the risks of off-chain collateral in general as well as the specific ways it was being implemented in this case. @Tosh9.0 made a series of brilliant posts breaking down the issues and highlighting the way they were being brushed under the rug with hand-wavey assurances. He was shot down for being “negative” even though he was asking exactly the right questions.

Securitization is a well-trodden legal path; when handled by experts it will inevitably involve extensive third-party due diligence, including legal opinions regarding enforceability and separation of assets. I am glad to see that now at least a good law firm is involved, but legal due diligence only goes so far.

More broadly, there is the issue that illiquid debt securities and asset-backed securities do not have their risks and value dynamically re-priced in a market, thus there is nothing to tell MakerDAO when the position is undercollateralized such that a liquidation should be triggered. Of course, there is also no liquidation mechanism because that involves off-chain actions (including possibly going to bankruptcy court in an insolvency scenario). Risks can be long buried, but in practice all these assets will just retain their “face value”…e.g, tokenized freight receipts could end up being valued at the face $ amount even though, unbeknownst to MakerDAO, the payers could be insolvent and, if there were such an insolvency, the receipts should be getting marked down dramatically. This is a set-up for people selling hidden risk to MakerDAO with little chance of such risks being accurately re-priced over time.

Also, no lawyers can gap-fill for subject matter expertise like the correct way to price risk. In that sense, the process here is wrong–people selling the risks should never be the ones charged with due diligence and pricing, but that is basically what happens here because although I’m sure MakerDAO risk folks try their best, simply put they are not experts in pricing of things like tokenized fractional interests in freight invoices and farm land (and very few people are). The only subject-matter experts involved are the sellers of the risk and of course they don’t have the best incentive (though I understand in some/all cases they have some exposure to the riskiest tranche).

For all these reasons, I think these types of deals are a risk magnet for MakerDAO. MakerDAO should focus on buying publicly traded bonds, treasuries, public company stocks, etc. where risk is less likely to be hidden, instead of these wonky types of illiquid assets that expose MakerDAO to tremendous information asymmetry and counterparty performance risks.

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I don’t entirely disagree, I was asked to help out for this reason. We own and invest in farms, and my Dad was a field agent helping insurance companies place loans on agricultural real estate and now that is also my day job. To help insurance companies and other lenders place loans on quality farm operations.

I assume(d) the model might be more like what a University endowment might do. Keep liquid up to a certain point, and also place money in high quality, longer term, less liquid investments. My concern early on is that a DAO probably doesn’t have the mentality to stick with farmland through a down cycle.

That said, I look at farms (especially in the corn belt)as a bond that pays its dividends in corn and soy. There are advantages to corn dividends in certain economical environments. But your point on bonds is interesting, as I have a distrust of them and generally avoid them at all costs. But we all like what we are comfortable with. Yes, the DAO should stick with what it is comfortable with, though I know that many insurance companies love agricultural investing for the very diversity that it brings.

That said, my issue is never really about whether the DAO should or should not invest in agriculture. It is just that they don’t appear to be following the very process that was set out.

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Wanted to bump this, as a reminder the poll ends on Wednesday.

Currently vote is quite tight with the majority abstaining. Please lock in your vote before Wednesday if you’d like to influence this Governance process.

As you discuss a path forward…We have learned a great deal about DeFi and it seems to makes a lot of sense to use farmland as collateral for Dai or any other stablecoin because of its own stability as an asset class. So, we remain interested in devising an approach and structure that works for all and are excited about the potential for this opportunity. If it would help advance the discussions and thinking, we are available to have a live conversation about this.

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Thanks to those who participated with the additional time provided. This proposal will be live onchain for a poll on Monday (2021-11-15). Voting will last for three days.

@mamoore930 Maybe recommend a live session with a pre-defined agenda. Due to the nature and heated debate, I’d recommend taking the time to collect some questions from the parties that expressed themselves here prior to such session. So we can have a proper thoughtful and constructive session, away from keyboards.

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