Partnered With:

How does MakerDAO introduce real assets?

Read this article in 20 Minutes

Explain in detail how MakerDAO "breaks the circle".

Original title: "Guidelines and Cases for Introducing Real Assets in MakerDAO"

Original Source: MakerDAO

Abstract

Real World Assets (RWA) is the focus of MakerDAO's work. This article comes from the MakerDAO Real World Assets Working Group.

Define Reality Assets

In this article , Real World Assets (Real World Assets) refer to assets from the physical world that are mapped to the encrypted world through claims on the underlying assets (in tokens or other forms). Tokens can be either homogeneous or non-homogeneous. Generally speaking, such tokens are less liquid and the market price cannot be used for liquidation. If the token is liquid and the price is valid, it falls into the crypto-like collateral category (which can be financed through an over-collateralized Maker vault).

The underlying real assets (loans, private equity, notes, etc.) are packaged in the securitized SPV and graded : At least one priority and one inferior. The priority is an interest-bearing (fixed or floating) loan. The inferior part is the equity part, which captures the price difference between the cash flow created by the underlying asset and the cash flow received by the priority holder. Priorities have priority over assets. In this sense, priority is overcollateralized. Maker only considers priority tiers for inclusion.

With the existence of inferior grades, Maker can obtain a higher guarantee of value than the original loan.

It is worth noting that for non-real asset vaults, the Maker protocol has control over the underlying assets (meaning in available for sale when needed). In the case of real assets, Maker only has the first claim, but not full control of the underlying loan collateral (and the underlying loan itself). One could argue that Maker can control the tokens that represent the loans, but cannot overcollateralize or price them due to the low liquidity of the tokens.

Important factors

This section highlights key factors when considering real-world assets and how they differ from native digital assets.

MakerDAO KYC and Contract Execution

one A frequently discussed theme is that MakerDAO is not a legal entity and therefore cannot execute contracts and enforce them in court. And some real-world asset tokens must only be owned by wallets that are whitelisted after KYC. Nevertheless, according to US law, it can be achieved through an agreement between a MIP and MakerDAO.

On the other hand, the Maker protocol (also known as the Dai credit system) is a smart contract, even if MakerDAO There is also only limited control. Vaults cannot enforce any contracts that are not code.

Some solutions:

Trust third party: If Maker is also a member of the lender, it can be said that other lenders have an incentive to trigger contract execution. Makers will also benefit from it.

Creating a Maker Legal Entity: It is possible to set up a limited liability entity whose sole owner is MakerDAO. Or use a trust company to represent MakerDAO's interests.

Liquidation processing

Due to the underlying assets Complexity and low liquidity, unlikely to be liquidated through auctions in a short period of time. For example, in the MIP13c3-SP4 proposal, a 12-hour notice is required for any liquidation.

About liquidation fees, this is not common in the real world either. The bottom tier investors are unlikely to accept insuring the top tier investors and paying liquidation fees in case of liquidation (the bottom tier investors have already lost money).

There are currently some solutions:

For very short-term loan portfolios, one way (MIP22) to deal with the underlying asset default is to require redemption when the value of the collateral falls below a standard. Assuming that letting other assets in the portfolio mature is a better strategy than liquidating all assets at once.

It is recommended to liquidate asset by asset in real time. In addition, it is also possible to prevent the mortgage rate from being too low by adding additional principal, within a certain warning range.

Price feed and oracle

Because The underlying real assets cannot be traded or have scarce liquidity, so it is difficult to obtain reliable price feeds.

Model-based price feeds should take into account overall market factors (yield curve, credit spreads) as well as portfolio Specific circumstances (financial status of the underlying company). For example, non-payment records can be used to discount the underlying asset, and redemption requests from other investors may indicate that there is a problem.

MIP21c3 proposes a liquidation oracle that requires manual triggering of MKR governance executive votes.

Monetary policy for real assets

Real Assets are likely to have a specific stable rate, not based on a base rate + risk premium. To be competitive, the interest rate is either fixed for a given real-world asset investment (Maker offers a fixed rate), or derived from a real-world formula (like LIBOR 3M + 375bps). This has implications for interest rates on Dai’s exchange rate and peg. If real assets account for 50% of Dai collateral at a certain stage, the treasury interest rate for encrypted asset mortgages needs to be greatly increased to ensure the same result.

For example, in the MIP13c3-SP4 proposal, the suggested maximum rate is Wall Street Prime + 100 bps as a cap. Loans are due with 12 months advance notice. This would delay the impact of monetary policy.

Emergency shutdown

In emergency shutdown When the stop (ES) occurs, each Dai holder is expected to receive $1 worth of collateral. Real-world assets are unlikely to be easily transferred from Maker to Dai holders (due to contract law and KYC). Also, ending up with a illiquid real-world asset token might not be a good solution for Dai holders.

The specific realization of real assets

This Part will introduce the implementation scheme of introducing real assets into the Maker system and the evaluation scheme of important reference factors defined above.

Centrifuge/ConsolFreight Accounts Receivable Financing

Centrifuge protocol is the underlying infrastructure of Tinlake. A set of smart contracts are built on the basis of Centrifuge. Tinlake uses NFT asset pools to connect collaborators, operators, investors and users of Centrifuge's global financial supply chain in the open market. NFT is an on-chain representation of off-chain irreplaceable assets, covering royalties, accounts receivable, warehouse receipts, mortgages, etc., and can be used as collateral in DeFi lending agreements.

Tinlake uses an SPV model that allows lenders to invest in two For the token of DROP, the inferior level issues a token called TIN. Priorities have lower/stable yields and take less risk, while inferior grades have higher yields/more volatile returns and have a higher risk of loan default, thus forming a pair of priority protection of.

ConsolFreight is a freight account receivable financing project based on the Tinlake architecture, which tokenizes freight account receivables As collateral for Dai.

Contrast Table

ConsolFeight parameter

TIN ratio: 10-20%

DROP APR: 4-7%

Underlying loan APR: 9-12%

Expected Maker DROP credit line: 5 million

Vault Settings

Stake and issue to the specified whitelist address (ConsolFreight SPV )

Liquidation line: 100% (not the actual liquidation line, but margin holders cannot lend more Dai than the collateral value)

The actual liquidation will be done by the risk team on the CF-DROP risk assessment. SPV equity needs to be > 105-110% DROP collateral value.

Stable fee rate follows DROP APR (4-7%)

Initial debt ceiling is 1 million, every additional 1 million US dollars Requires reassessment of the underlying asset portfolio by the risk group, passed in the form of an executive vote. The target debt ceiling is five million.

The target asset valuation will use Centrifuge net worth and other risk assessment templates

Issue

ConsolFreight guarantees track record for receivables financing, collateralizes NFTs representing SPV contracts, pays using inferior tier (TIN) liquidity.

Redemption

Anytime SPV is available Redeem locked DROP tokens with Dai. Risk groups can reduce the debt ceiling of CF-DROP tokens.

Liquidation

If any terms are not met , the risk group can initiate liquidation. The liquidation will be based on the MIP22 proposal. Consol Freight will have a notice cycle for the underlying assets to mature for liquidation (90 days), and most loans will mature in the short term.

MakerDAO can also initiate a redemption request prior to the maturity date, setting the debt ceiling to zero, at certain notice liquidation within the period.

Legal contract execution

Maker representative

6s trust model case

6S Capital LLC is an American The asset securitization initiator company cooperates with a number of commercial real estate companies to provide long-term lease financing. 6S Capital Partners LLC is an SPV under the management of 6S Capital LLC. The SPV is divided into priority and inferior. The priority is to lend Dai from the Maker agreement in the form of claims, and the inferior is composed of other external investors. MakerDAO will secure interest in the lending process through the regulated Wilmington Trust.

6s token parameters

Loan amount: 15 million

Interest rate: 3%

SPV capital Sufficiency rate: 30%

Mortage and issue to designated whitelist address (LendCo/Trust)

Liquidation through risk team and trust company according to terms and evaluates the lending process trigger.

Fund Flow

1. Issue Dai to TFE (Tax Fabvorable Entity)

TFE borrows Dai to trust companies

2. The trust company converts Dai into US dollars through the dealer

3. The trust company borrows US dollars to LendCo (the lending entity)

4. LendCo executes the lease loan, and then repays the trust company loan, or restructures the capital for a new round of transactions

5. LendCo repays the trust company in US dollars, and the trust company Repaying TFE Dai

6. TFE repaying Dai to the treasury

Other case models

UPRETS.io is a real estate digital securities issuance platform. It mainly provides technical solutions to share and digitize real estate assets. Different from the above real bond assets, UPRETS issues standardized securities, holding digital securities, and correspondingly owns the ownership of real estate funds, thus owning the ownership of real estate and the right to future rental income. UPRETS' East River Bay Phase I Digital Securities (OST-1), which provides technical issuance services, is listed for trading on Equities-SME (Small and Medium-sized Board) of MERJ, a licensed stock exchange in Seychelles. Currently UPRETS is trying to issue digital securities on Ethereum and apply for inclusion in the Maker mortgage pool.

This type of token has a transaction price that can be captured in the secondary market. As a result, oracles and liquidations are automated, and such assets are closer to a crypto-like collateral class that can be financed through over-collateralized Maker vaults.

Next step

Currently 6s trust lease The inclusion of Dai collateral in financing loans has entered the governance voting stage, and an executive vote will be held within 30 days. If the executive vote is passed, Maker will issue the first batch of 15 million Dai credit lines.

This will be an important milestone for DeFi to connect real assets and achieve large-scale application.