[Signal Request] Raise SF On RWA When Issuers Unilaterally Change Terms

To the broader point about our reputation and our status as the blue chip defi protocol, especially as it relates to RWA, I really worry that we are ruining our reputation and watering down our brand with all these low-tier centrifuge deals, and as a result we are cutting ourself off from all of the legitimate, large-scale deals that would be possible to do in the future if we are just able to prove that we are able to do standard deals and follow best practice, and have the capital available.

It’s like we are in such a hurry to go full speed that we just drove straight into a ditch right off the bat, and will be stuck spending all of the governance bandwidth for the next many years, arguing and litigating about random issues that occured in these tiny, bad deals that we are shoveling in to the protocol right now.

And of course we won’t just be stuck, we’ll have no credibility. Even if we did have governance bandwidth, we simply won’t be able to engage with legitimate, large-scale counterparties if they see how out of touch we are with best practices and how many dumb disputes we are involved in.

The root of the problem isn’t one specific term or issue, it is the general arbitrary and thrown together nature of these structures that in the end don’t protect maker at all, and are instead fully based on trust, and are basically unsecured with no real guarantees or collateral. The lack of any real, solid, and enforceable legal claim is the fundamental reason why things such as terms arbitrarily changing are even possible.

It takes very little structured finance knowledge to know that these issues simply will not occur if we do things right instead of trying to take shortcuts, and use tried and tested structures that are already being used in the real world, like the trust company.

To be brutally honest what is really happening here is that we have gone dunning-kruger and are trying to reinvent the wheel of structured finance for no real reason, and it has already blown up our face on the very first deal. Considering how important real world assets are for the future of the project, this is nothing less than a disaster that puts the future of the whole project at risk, because of how it can nuke our reputation. Reputation is extremely hard to build, and really easy to destroy.

We even already have complete deal from 6S which is already being proposed with all legal documents and terms fully published and transparent (and they contain no possibility of the kind of shenanigans that it is now clear we should expect from each of the current centrifuge deals on a monthly basis), but it is being sidelined in favor of these tiny centrifuge deals that don’t even have nearly the same level of documentation and legal work, and contain endless amounts of these gaping holes such as terms changing unilaterally, and of course the fact that there is not even real recourse through the DROP mechanism, and these flaws will just overload governance with brain damage as they inevitably blow up in various big or small ways.

Btw, I’m not arguing against centrifuge as a whole, just the specific bad, unsecured deals that are on the table right now. If you are an MKR holder and are looking at this problem from the perspective of what is best for the DAO, it really isn’t hard to understand why we need to demand locked down, reliable and regulated trust company-based structures (or equivalent regulated and best practice approaches) from the deals we do, centrifuge included. There is just no benefit for the DAO to engage in this risky and time consuming experimentation when this is the time where we should be scaling and growing.

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Incredibly well said. Thank you.

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In November 2020 6S was supposedly was only weeks away. Matt said the following:

Yet 7mo later we are still waiting on 6S to publish the enforceability opinions and for any legal review to be able to take place. If we are able to get a legal opinion on the feasibility by our own lawyers and the community decides this is an adequate way to onboard RWA to Maker we will be the first ones to adopt it. @SebVentures is working actively with SolarX on a similar setup and I fully support legal innovation within MakerDAO to improve Maker’s position. The reality is, in November it was just around the corner and it still is just around the corner.

I’m personally convinced it was the right decision for us to move ahead with a simpler structure for now. Maker finally onboarding the first RWA, New Silver, was welcomed by the community, led to publications in every major media outlets, a very positive market feedback (on the MKR price) and countless institutional MKR investors (A16z and the likes) reacting positively. These deals are small today because we never wanted to onboard $500M of assets in one step, it would simply be irresponsible of Maker to do so; we should learn along this process and improve it along the way.

This is what we all are doing, appointing independent directors is the next step for New Silver (and will be implemented for all future collateral types we bring). This process is discussed in the RWA Committee and a solution is put forward to the community by that community & Centrifuge. Until then, this forum thread is an inferior solution as @SebVentures has pointed out in his well written response.

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I reached out privately half a week ago to try to figure out a different, lower-bandwidth way to onboard your platform’s assets (I suggested we perhaps try a smaller % of more pools that meet hurdles XYZ and just make it automatic). I was told Centrifuge was not interested in a conversation.

In the call with NS and Centrifuge yesterday, several of us asked about this very unusual power of borrowers on your platform. We were told if we didn’t like when an Issuer changed the terms, we can liquidate/redeem.

If you expect Maker to onboard even more assets under this structure and plan on asking for a quadrupling of the debt ceiling for NS, you cannot expect us to delay trying to patch this hole on our own after it being a demonstrated non-priority for Centrifuge.

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Agreed 100%.

Also, Lucas (@spin), many people are clearly focused on issues with the structure your team (and Manatt?) designed, which may be detrimental in some regard to MKR holders. This is a healthy conversation to have and Paper’s concerns, with which I wholeheartedly agree, are an attempt to suss out options to improve the Centrifuge design for the benefit of the DAO/MKR holders.

As an MKR holder, I commend those efforts especially because we – MKR holders – are responsible for the system’s performance, for better or for worse.

Lastly, on your points about media, you are correct, the coverage was positive. But it was also superficial and does not negate the issues many have brought up in this forum. I for one would rather see a quality structure that will last a decade slowly make its way to Maker rather than something fast tracked through while laden with risk. Again, I’ll vote my positions as I always do and I want to thank you for your engagement, which I have found sincere and good natured, despite our different points of view.

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The proposed solution in this Signal Request is taking money from others TIN investors when we have a disagreement with the Asset Originator (TIN providing the over-collateralization buffer in the MIP22, that will be used to pay that 3% penalty). The AO is one of the TIN investors but not the only one. So it is stealing from third parties that have nothing to do in the “dispute”.

We can discuss if the liquidation poll should be mandatory or at the discretion of the RWA Committee to avoid Governance overload (I tend toward the latter as it scales better).

That’s the problem, if governance is using emotion to decide when the core value is “scientific governance” we are not going in the right direction. Granted, it’s complicated. Granted, we could do a better job at explaining (but all parties are still learning). But having discussions that are mainly based on opinion, feeling or superficial understanding of the reality is not helping neither.

We are still lacking the legal opinion on which the whole structure is build on. The published documents have significant changes to the MIP, yet no one is complaining on those unilateral changes. And the only thing we are waiting for the DC increase is @mrabino1. Therefore, on what exactly the 6S “being sidelined” is based on? 6S was prioritized with MIP21 being worked on before MIP22 (which delayed New Silver).

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I think that’s the problem, it is not about emotion or sentiment, how do you want to do your science based on data that changes without notice.

Was your scientific governance based on the previous data or the new one?

How could you integrate unknown data on your risk evaluation?

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This request is supposed to be narrowly about borrowers changing terms without input from the DAO. But since you brought it up:

  1. We don’t have any legal opinion on behalf of the DAO or a CU for this structure, which we are already involved in.

  2. 6s hasn’t borrowed any money. It has also — I think understandably — been a lower priority for us to go through closely than Centrifuge because of #1. 6s will get their turn to be questioned when I and others stop having to play catch up on deals the DAO was pitched with incomplete information.

  3. RWF has disbursed money to begin getting legal counsel on 6s. Exactly 0 DAI have been spent on getting a legal opinion on the Centrifuge deals.

If this is so important — and I agree that it is — why was the DAO rushed into these Centrifuge deals with zero legal advice? Surely a lawyer would have caught the very clause this request is about.

Even more importantly, why is the DAO being rushed into more exposure to this structure? We have already been taken advantage of once, and we’ve only been doing this for a month or two.

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Quite the same that any crypto-backed facility on which the liquidity profile or other parameters (think TUSD for which we still have 26M) can change over time. Collateral can make sense at time t but not at time t+1.

Another barely hidden accusation. Our focus always was on having an audit on New Silver. We had peoples from other Core Unit on the mail thread. Cayman lawyers are more easy to work with and Centrifuge has no link with the Cayman. Nothing I can do about.

No need for a lawyer, the RWF CU highlighted the issue.

It is my view that it works and provide diversification, fees, and good risk exposure for MakerDAO when stablecoin exposure is 58%. The updated executive summary don’t change anything to that. The target of 300M RWA was approved by MKR token holders when onboarding RWF (and I would like 100M for Centrifuge/6S kind of trust/SolarX kind of trust). The last discussion on RWA strategy showed that the community wants more and not less.

I think there may be some miscommunications happening here, so (respectfully) I’d like to have a few things clarified.

I’m confused by this logic. Are you saying that Maker raising rates is tantamount to theft? I agree that rate changes impact TIN holders and that the ability of the AO to raise equity needs to be accounted for in our internal decisions, but I think you perhaps meant a different word than “stealing”?

This is not a correct use of the word unilateral. MKR holders have not yet voted to approve the 6s debt ceiling, hence this is still a bilateral decision. I’m not trying to be pedantic, it’s important that we’re able to effectively communicate when nuance is required.

I agree that an attorney was not needed to detect this issue, but can you please point to me where it was publicly disclosed that NS could unilaterally amend the agreement after they had already generated Dai? To be clear, I’m not saying that it wasn’t disclosed, just that I’m having trouble finding it and it would be appreciated if you could point me to the text.

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There is two mains difference :
First we hold value inside the vault when we hold tusd.
Second tusd can’t change the CF factor which is an equivalent of what has been changed, right?

Also I am not against centrifuge and I believe they did a excellent work but this issue needs to be addressed.
They can’t change the contract without our approval

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I don’t. Put yourselves in the shoes of a TIN investors (not sure numbers will be 100% correct but that’s the idea). You invest 15k DAI and should get a high return in exchange for protecting the DROP. Now Maker increases the SF above the DROP APR and take the vault over-collateralization that was provided by TIN holders. Let’s say 5% over 50% of the pool so 2.5%. If TIN is 15%, you just have lost 2.5k even without impairment in the loan portfolio. I know that there are interest rates, that we are speaking about only 3%. But the idea is the same. While not contractually theft, it is what the TIN holder will feel.

So I assume you will change the MIP and restart the whole MIP process as the MIP implementation is different from the proposed MIP. That would be unfortunate.

NS didn’t change the contract, it followed the contract approved by MKR holders and changed the executive summary according to the contract. You can have the view that they breached our understanding then you ask for liquidation.

Sure, section 4.F of the DROP subscriptions and Centrifuge Contracts Review

First, it’s the same. You probably mean that TUSD can be more easily liquidated. I agree but that doesn’t change anything here. Second, TUSD can quite easily change the collateral factor they have.

Then let’s stop onboarding all upgradeable contracts.

I made my point the best I could. The community has now to decide.

Firstly, TIN investors are explicitly told their investment could go to 0. They also get to hold the profits of a debt pool that outperforms. We do not.

Secondly, Maker using its muscle to prevent Issuers from exercising abusive powers is not going to hurt TIN investors. The whole point of this signal is to prevent Issuers from using this power. We don’t actually want the Issuers to use Section 4.F unless there’s a really good reason — in which case they can come ask our opinion.

As is, we have one and only one RWA, and the Issuer has already simultaneously changed the valuation metric of the collateral and come asking us for even more money and cut payments to DROP holders.

I get why Centrifuge would come on the Maker forum to argue against using rate hikes to discourage bad behavior. But why is Maker’s own head of Real World Finance on here saying that raising rates would be actual stealing?

They want to change the terms? Fine. We’ll charge more to compensate for the risk of dealing with borrowers that do that.

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As a quick reminder – we were requesting a minimal legal write-up from Centrifuge’s lawyers in September 2020, which never came (and, in fact, Lucas told us that the DAO should pay for Centrifuge’s incurring this expense). That doesn’t compare favorably, in my opinion, with 6S that is paying for their own legal analysis and is prepared to share it with the DAO through the RWA committee.

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By token value I mean, I can exchange a TUSD token for a value or something on chain. I can’t exchange the fake token makerdao created and put inside the vault for any value. It is not even referenced.

Second sorry for that by CF (coefficient factor) I meant the Liquidation Ratio. And TUSD can’t change the Liquidation Radio of the TUSD vault. I am happy to be corrected on it but for me the LTV would be an equivalent of the Liquidation Radio and that what they changed right?

Regarding the contract even my gas provider or my broadband provider can’t change the contract without notifying me.

Unfortunately, it is not possible to change these settings in a live poll without invalidating all of the votes so far. In this case this is actually pretty problematic, because 38 people have voted (which is good!) however there is no way for me to verify that a significant portion of the voters aren’t sock-puppet accounts (which is less good.)

Given how contentious the topic of RWA has been lately, I think it would be better to restart this signal in public-votes mode - however this will mean that everyone who has voted so far will need to vote again. I’ll make this change shortly. Luckily there is still some time before this signal ends, and I’ll pin it for a few days to make sure everyone sees it.

How do you propose to implement this? As far as I can tell, there is no way to make this process fully automatic, it would require an executive vote. If you mean that it should automatically go into an executive vote, that is possible, though I wouldn’t recommend it due to the requirement to bundle unrelated changes into executive votes.

I would suggest in this case that the RWF team submit an on-chain poll confirming MKR Holders desire to act in any given scenario once notice is received - if successful, this could then proceed to the weekly executive vote.

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I have updated the poll settings such that votes are now visible and limited to TL1 and above. Unfortunately this will mean those that have already voted will need to do so again. Apologies for the inconvenience caused.

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Thank you!

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  1. In the call with NS and Centrifuge Friday, the comments are accurate that it ended without progress on the discussion of unilateral change of terms by the borrower and without Centrifuge acknowledging this is any problem beyond giving the DAO more time to react. A key point of the discussion could accurately be summarized:

Cent: you get a notice. you can withdraw.
Paper: but our only choices are accept or pull the plug
Cent: yes.
Paper: and if we choose pull the plug everyone will get out before us and we are the bag holder.
Cent: um well.

  1. Following that meeting @PaperImperium and I discussed the conundrum and Paper mentioned an automatic increase in stability fee as a compromise as to the NS-DROP that is already onboarded (if we cannot get unilateral change terms deleted or modified to provide that modifications require Centrifuge come to us and get affirmative approval (which IMO must happen as to Centrifuge deals that have not already started)). I support that idea although perhaps not as draconian as 300 basis points.

  2. But I voted no because this is not the time or manner to do this. For one, the impression I got at the end of the call Friday was that part of the problem was Centrifuge didn’t understand the significance of the issue from the DAO’s end of it, and a further discussion with Lucas or others at Centrifuge was appropriate - i.e., I did and do not see the situation as we are at fixed loggerheads with Centrifuge that requires the DAO to take unilateral action. Second, there had yet to be much discussion among RWF members or bouncing the idea off of RWA core, both of which should happen before having a signal request vote.

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