Introducing pool types and modifying the POP and protocol fees to better align

Centrifuge Governance Governance discussion
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Summary

Centrifuge pools are evolving to support more than just private credit securitizations and as such certain features, fee structures and governance processes can’t be applied universally for these pools. This proposal introduces pool types for different applications of Centrifuge pools and proposes new parameters as well as governance processes for the different types.

Note: while I tried to put somewhat reasonable estimates on the fees listed here, they require further modeling beforehand.

Background

A few assumptions were made on the original design of pools and previous versions of Tinlake regarding how they would be used. Some of these assumptions have proven to not always be the case. For example, new applications of Centrifuge pools include:

  • Assets aren’t limited to private credit, users like BlockTower are working on tokenizing US treasuries and public credit.
  • Pools are not just securitizations where an issuer onboards multiple investors to participate in a pool. Another use case of the pools functionality is Centrifuge Prime where a single DAO might be the only investor in a pool. This is already true in the case of BlockTower’s pools.
  • Pools have historically mostly been used for off chain real world assets but Linked Pools allows them to be used for onchain tokenized assets (e.g. implementing index tokens or using a pool to manage a portfolio of RWAs for a DAO)

Different attributes for pools

What is a pool?

In finance what we would call a pool in Centriufge is usually either a syndicate, a securitization or a portfolio/investment account.

Different types of pools
Different types of pools1876×398 10.4 KB

Asset classes

A pool can contain tokenized assets that are brought onchain such as individual loans, public or private bonds, etc. A pool can also contain RWAs that already exist onchain such as a linked pool that invests in other credit pools. Looking at the different use cases for Centrifuge, I would say we can put pools into the following types of asset classes:

Asset class Underlying assets
Private Credit & Securities Debt directly from originators
Debt purchased on secondary market
Fund Shares
Public Securities & Credit T-bills, government debt, money market funds
Public Credit such as Corporate Bonds
Secured debt such as CLOs, MBS, ABS
Equities and funds inc. ETFs
On chain tokenized assets Other pools on Centrifuge
Third party RWAs

Pool Type

A pool can be:

  • Open Pools: An open pool that allows for a broader distribution to third-party investors as well as DeFi protocols. Generally such pools have multiple unrelated token holders and can onboard third party investors.
  • Closed Pools: A closed pool allows different users to contribute capital to a single pool. It is not connected to any DeFi protocols. It has very limited distributions and is not available for investment on the app.
  • Portfolio Pools: A self-managed portfolio owned by a single entity (DAO, protocol or offchain entity) primarily used to manage a dedicated RWA portfolio for a single counterparty. There’s only one owner/controller of the pool and any pool tokens aren’t transferable. They’re intended for DAOs using Centrifuge Prime.

How should different pool types be treated in Centrifuge?

Pool onboarding

The pool onboarding proposal (POP) was proposed and approved as a process for pools to onboard to Centrifuge when most pools fit into a specific subset: Open Pools available to external investors with a focus on complex private credit assets. With the evolution of Centrifuge, there are now other pools that don’t fit as well into this group. For example, the proposed linked pools functionality can be used by users of Centrifuge Prime to construct private portfolios of pools. Requiring these pools to go through a governance process that involves a credit assessment, community feedback etc. doesn’t make sense as the pools aren’t offered to other Centrifuge users.

Thus, I would propose we split the pool onboarding process in different tracks:

  1. Closed Pools: can be launched by anyone with a sufficient CFG deposit (for spam prevention) and a protocol fee

  2. Open Pools: will require a full POP process

  3. Portfolio Pools: the nature of these pools will be more varied (for example, how the portfolio in the pools is controlled) and as such, we won’t be able to create a one-size fits all solution to the onboarding process. To start off, I would propose Portfolio pools go through the standard CP4 Proposal governance process requiring a simple RFC on the forum and subsequent onchain vote.

I also would propose to allow pools to become public at a later point in time by going through a POP to turn it into a public pool.

Functionality available for Closed, Open and Portfolio Pools

The biggest difference between Open and Closed Pools will be the functionality available to pools.

Closed Pools will have the following functionality:

  • Public loan tape/asset list
  • Information onchain and in the app on loan performance, accounting etc.
  • Allowing issuers to add stablecoins to pools and manage their asset/loan portfolios
  • The number of pool token holders is limited to a predefined set of people.
  • There is no automated pool onboarding and KYC integration.

Open Pools will have all the Closed Pool functionality, as well as:

  • They will be prioritized in the UI for users navigating to Centrifuge
  • They will come with integrations into KYC & onboarding tools allowing easy onboarding of investors
  • They will be able to support DeFi integrations to add these pools as collateral to lending markets and other functionality
  • They will receive a Credit Group report which is shown on the pool overview page for prospects to review
  • They can become part of a Centrifuge Prime portfolio

Portfolio Pools will have the following functionality:

  • All reporting and performance data will be public
  • DAOs and other users of Prime will have access to reporting both onchain and offchain
  • At launch, users can define custom rules around the portfolio definition and who can change it, giving DAOs fine grained control over their RWA portfolio

Pool fees

Pool fees should also be re-assessed. They were originally designed for a narrow set of possible use cases on Centrifuge; private credit pools open to different investors. Paying 0.4% anually on a pool is competitive for pools with tokenized private credit but a linked pool containing other pools paying the 0.4% effectively twice would make Centrifuge unattractive. When looking at other products like tokenized T-Bills (effectively a product that competes with ETFs in TradFi), a 0.4% fee also becomes too high. Therefore I would suggest we introduce different fee categories that better fit the different use cases of Centrifuge.

Pool Type / Asset Class Private Credit and Securities Public Securities & Equities
Closed Pools 0.2% 0.02%
Open Pools 0.4% 0.05%

Fees for Centrifuge Prime Portfolios

Centrifuge Prime is creating a managed portfolio for the DAO with investing in multiple assets but with a single investor. These pools come with some setup overhead but have very little transaction volume and simply invest into other pools. Therefore I think a tiered fee structure makes sense.

Portfolio Size Fee Tier
$0 - 50M 0.35%
$50-100M 0.20%
>$100M 0.10%

What’s next?

I would like Centrifuge users to comment on the above topics at a high level and invite anyone to reach out if you’d like to help turn some of these ideas into more specific proposals that can be voted on. After a first round of discussion I will be turning this into a more detailed governance proposal. @sirj and @ImdioR are working on building out a financial model which we want to publish for the DAO to evaluate how the different parameters impact the protocol. @akhan - your thoughts on Prime would be great to hear and @ctcunning of course for feedback on the fees and pool types.

7 Likes
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A couple of add ons here, specific to the POP Process and the Credit Group:

As Centrifuge’s brand, platform, and size continues to grow – more diligence needs to be given to the types of credit that is being financed through the protocol. Even for highly qualified counterparties, if they’re financing assets that perhaps have a negative view in the broader press, could have a negative impact on the brand of Centrifuge.

I greatly support the initiative to focus the POP Process’ impact on Open Pools – or those Pools that are open to investors, be they retail or otherwise. This begins to address the problem of the Centrifuge brand vs the brand of Individual Issuers. Often times, those two get co-mingled (whether rightly or wrongly), and that can lead to unforeseen impacts on Centrifuge, the community, and the mission we’re all rallying behind.

For the POP itself, asking the community of CFG token holders, to review, diligence, and asses the quality of potential Pools coming to the protocol, without some base level understanding, would be unfair. The Centrifuge Community is not made of experts in underwriting, credit assessment, and understanding the nature of the debt markets. Undoubtedly, some are, but not all.

It’s essential to use the Credit Group, a nascent yet growing group of individuals, that exist to serve the community’s needs – specifically to review and report on potential Open Pools as they approach the protocol to launch. Although not perfect or complete by any means, even the existence of such a group, and creating this hurdle and potential friction, serves as a means to filter and ironically attract Pools and Issuers that will be of a quality the Community could be excited about.

For the Credit Group Members themselves, I’ve seen great demand from traditional credit folks interested in this group and fulfilling the role of reviewing and reporting on POPs. It resonates. Undoubtedly, the traditional credit person is not into the very public nature of DAOs, there are concerns around public association and compliance/confidentially with current employers, and the economics of potentially being compensates to provide analysis, reporting, and reviews of potential Pools and Issuers.

A final thought – I think the Credit Group is still very young – we haven’t yet seen what it can become. The individuals within the Credit Group are quite experienced, and their networks are large into the traditional circles. Today, that group focuses on the review and report of POPs, which is the best first step and mission critical piece of Open Pools. However, the Credit Group shouldn’t be limited to this. There’s many other functions this group could begin to expand into and offer over time including ongoing monitoring, broader credit/debt market analysis (outside of Centrifuge), cap intros and fundraising, etc…

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Excellent, innovative thinking here!

But to make sure I understood the proposal correctly, each of the three types of pools (Closed Pools, Open Pools, and Centrifuge Prime Portfolios) can potentially hold any of these asset classes?

And the choice of assets will vary based on the pool’s intent and the strategy of the entity/individual creating or managing the pool?

Are there specific technical challenges anticipated when implementing these different pool types?

I might be getting ahead of myself here, but can a single pool mix multiple asset classes, or is it recommended to segregate them?

What led to the specific fee structures proposed for each pool type? Is it based on tradfi fee schedules?

Again, first time, long time.
-Synchrotron

1 Like
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Excellent and practical thinking on how to tailor fee level and structure to be appropriate to the asset and pool type.

The existing fees charge on tokenized US public credit is outrageous when compared to TradiFi numbers.

Ondo charges 0.45% on its short-term US Govie product while Matrixdock charges 0.4%.

If you buy the underlying directly either as a BlackRock ETF or as an institution, the fee is 15bps at most.

I thought we were supposed to improve upon existing system. Not layering more fees on top.

5

Almost correct; both open and closed pools hold off-chain assets in any of the asset classes. However portfolios (such as pools used for Centrifuge Prime) would only hold tokens of other pools.

I agree generally with what you are saying and it’s why I think protocol fees for ETF-like products should be significantly lower. Not just because relative fees are different but also because the valuation, structuring etc. of these pools is much much simpler to build.

6

Not necessarily

Take a look at this fee structure: DoubleLine Income Solutions Fund (DSL) Stock Price Today, Quote & News | Seeking Alpha

This fund charges effectively 228bps (expense ratio). The actually fees may be a little less / differentiated, but for argument’s sake, the investor returns here are effectively reduced by 2 points.