I want to introduce a new feature we’ve been working on: a structured finance product for DeFi
We allow all sorts of asset originators to create portfolios of loans and issue an ERC20 token against them that represents a claim on the underlying assets. You could imagine a factoring business minting several NFTs that each represent an invoice that a supplier wants to borrow money on. Those NFTs are put into escrow in our contracts and we allow investors to lend money to the borrowers by buying an ERC20 token that is minted for this portfolio. We’ve done first pilots of these assets together with the Maker Foundation last summer and are now getting ready to release our new version of our Tinlake contracts.
One of the new product features we added is the two tranche structure. I’ve explained how the two tranches work in Tinlake in a post I published here. I believe this is a very interesting property for Maker and I’ll go into some of the benefits:
Skin in the game and expert investors
We imagine the asset originators to invest in the junior tranche tokens (we call them Tin) to signal a certain amount of confidence in their assets. This gives the asset originator some skin in the game and creates a strong incentives for asset originators to not add bad quality assets to the portfolio.
First loss covered by the junior
By using the senior tranche tokens (we call them Drop). If there is a loss, say one of the invoices in the portfolio is a complete default, the Tin token holders will loose their investment first. Our contracts guarantee that the Drop token investors will recoup their investment + interest rate before returning any funds to Tin holders.
Lower collateralization ratio and/or lower stability fees
The “insurance” the Drop investors get by having the Tin investors take any first loss means that the the collateralization ratio can be lowered significantly without any extra risk (as opposed to not having two tranches).
We’ve designed our Tinlake contracts with the DeFi ecosystem in mind. We’ve built these two tranches because we think that it elegantly solves the skin-in-the-game issue and allows for a higher collateralization ratio that is many times wanted by a real world assets.
I’d love to hear your thoughts and feedback. Our goal is to allow our users (the asset originators) to have the most attractive MCD collateral out there. WDYT?
For anyone that is interested, I’m hosting a video call walking through how our contracts work. I’ll be going into how we built the tranches and other stuff. Please attend and drill us with hard questions. Feb 25th at 9am PST/6pm CET: Add to Google Calendar