We started working with the Maker Foundation in early 2019 to come up with the safest and most transparent way possible to bridge RWAs to MakerDAO. Using Tinlake, businesses can create an on-chain asset fund to finance their loans using crypto - with the adapter we’ve built they can now directly connect to the Maker protocol and finance part of their portfolio using Maker.
New Silver is the first asset originator that successfully went through the Maker Governance Process and onboarded its Tinlake pool to MakerDAO’s Multi-Collateral Dai. New Silver was granted a 5M debt ceiling that allows the company to draw loans directly from a Maker Vault and mint new (real estate backed) DAI. This post will give an overview of how New Silver got there and what the RWA collateral onboarding process entails.
Background: In April 2020 MakerDAO published its Maker Improvement Proposal framework (MIPs) to formalize the onboarding process for new (crypto native) collateral to be added to the Maker system. As RWA have different properties than crypto native assets we had to work with the DAO and especially the team around the RWF core unit to adapt the process. (Find resources on the general Collateral Onboarding Governance Process here)
These are the main stakeholders involved in the recurring process:
Asset Originators: These are companies that originate loans and finance different types of assets. They source their capital from different parties often including banks. Applying to MakerDAO allows them to add DeFi as an additional funding source and get access to instant liquidity at minimum cost of capital. AOs lock up the senior token of their pool, the DROP token, as collateral in a Maker Vault and mint new DAI in return. The asset originator is the owner of a collateral application.
Centrifuge: Centrifuge acts as the technological infrastructure provider. Our tech stack allows businesses to tokenize their assets and finance them via Tinlake. We have built an adapter so that the pools that successfully pass Maker governance can directly interact with the Maker protocol and draw funds from the protocol.
Real World Finance (RWF) Core Unit: This team is responsible for the collateral risk assessment at MakerDAO. Currently there is a core team of three people. Depending on the collateral type the team will be complemented by external industry experts.
MKR token holders: The ultimate decision maker is the DAO and its MKR token holders. Decision makers cast their votes three times throughout the process (Community Poll, Governance Poll and the final Executive Vote).
- Spin up a Tinlake pool to build an on-chain track record. New Silver has been a partner of ours since the early days. To date the company has originated over 40MM in loans and is currently live with their Series 2. They usually originate 3-5MM a month and plan to bridge most of it on-chain over time. The pool performance can be monitored any time on chain via the Tinlake Dashboard.
- MIP6: Every collateral application process officially starts with the MIP6 proposal posted on the Maker forum. It serves as a first introduction to the community and gives the community a platform to give first feedback and ask questions.
- Community Poll: This is the first time the community can cast their vote and help the Maker domain teams prioritize their work before diving into the due diligence process. In the very first governance poll carried out by the DAO RWA collateral took first place over crypto native assets.
- RWA Collateral Onboarding Call: Our asset originators make use of a Maker Vault as a decentralized line of credit. RWA collateral types have a wide range: invoices, real estate backed loans, music royalties or even farm land. In the RWA Collateral Onboarding Call the asset originators usually introduce their industry, their asset type, their business model and associated risks. Find New Silver’s call here.
- Due Diligence: This is where we get into the details. The due diligence is split into three assessments:
- Risk Evaluation: During this phase the AOs work closely with the RWF Core Unit and negotiate terms such as debt ceiling, collateralization rate and stability fee. For RWA the DAO also defines covenants. These covenants specify the composition of the collateral pool to ensure a balanced and healthy portfolio. In the case of New Silver the team specified min FICO scores, min LTV and LTC, min downside protection, etc. (Find the detailed risk evaluation here). New Silver’s performance can be monitored on-chain at any time. In addition to that New Silver will provide extensive reporting to the MakerDAO community at a regular cadence. Good performance will allow New Silver to increase the debt ceiling over time.
- Smart Contracts Evaluation: Tinlake is composable with any DeFi protocol but heavily influenced by MakerDAO. We’ve built the infrastructure that allows businesses to bridge their assets to MCD safely making use of a two tranche structure. Whereas the risk evaluation needs to be carried out for each individual asset type the smart contract infrastructure can be reused and help scale the RWA collateral onboarding process. Find our code base here and the smart contract evaluation here.
- Oracle Assessment: The oracle infrastructure for RWA is different from crypto native assets as the collateral tokens are not listed on exchanges. Tinlake works with an on-chain Net Asset Valuation (NAV) that queries the current price of the collateral. MakerDAO’s oracle assessment is split in two phases allowing us to move ahead and switch from manual control to independent and trustless third party assessment over time.
- Governance Poll: After all assessments have been completed and published on the Maker forum the application moves into the Governance Poll. If it passes all teams prepare the go-live to mainnet.
- Executive Vote: After deploying to Kovan and running tests the application is ready to move into the final vote: the Executive Vote. New Silver passed on April 14th and is breaking grounds in DeFi.
Together with Maker’s RWF Core Unit the Centrifuge team will continue to evolve the process and make the onboarding of RWA more scalable. More asset originators and much more assets are in the pipeline.