Maker RWA collateral onboarding/monitoring

Partnership between Maker and Centrifuge is thriving with 4 more new pools being able to finance themselves directly form the Maker protocol. These pools now join the New Silver pool and we are totaling 5 pools with direct integration to Maker protocol. These vaults are serving the purpose to finance Real World Assets (RWAs) and greatly differ from the existing Maker Vaults.

Collateral Onboarding Flow
The process to onboard new RWA collateral takes up to 11 weeks for execution. The onboarding follows 5 stages:

  1. Pre-discussion: during this initial phase, asset originators submit their MIP applications to the protocol and engage in earlier presentations with the Community and Maker Risk team
  2. Information gathering: after prioritisation of RWA collateral is done by the Community and the Maker- Risk team, Asset originators provide business model information as well as financials and non-financials supporting their application
  3. Analysis: internal domain teams perform Risk and technical due diligence as well as technological integration for the assets. The Maker Risk team outputs its assessment including preliminary terms, pricing and covenants after discussion with asset originators
  4. Onboarding: terms are agreed and collateral is voted to be added to the protocol
  5. Post onboarding or Monitoring : the relationship between the Maker Risk team and the asset originator continues. The Maker Risk team monitors the performance of the portfolio and provides insights at regular intervals with data sourced from AOs and the issuer platform.

More information can be found here

Real World Assets
A real-world asset (RWA) is defined as an item from the non-crypto world which is often connected to the crypto world by the means of a token representing a claim on the real-world asset. They greatly differ from the existing crypto vaults in a sense that token liquidity is thin and that the market price can’t be used for liquidations thus a new approach was needed.

Maker takes a role as an investor and at the beginning of the investment a set of rules, also called covenants, are defined.
A covenant is a promise in an indenture, or any other formal debt agreement, that certain activities will or will not be carried out and/or that certain thresholds will be met. Essentially a covenant is a set of rules and if any of the rules are broken, liquidation occurs. The covenant is an integral part of the risk assessment, negotiated with the asset originator and that governance agrees on. The covenant is periodically assessed (quarterly or monthly depending on the collateral). It is also assessed for every debt ceiling increase.

Covenant Structure

The covenant regulates those following parts:

  • Allowed investment
  • Minimum overcollateralization ratio
  • Concentration risk
  • Stakeholder rules

Allowed investment
The first rule set will be the investment that the SPV can do. For example ConsolFreight SPV can only invest in freight invoice financing due in up to 75 days and trade finance cargo of up to 120 days duration. Another example for Harbour Trade Credit Series SPV would be that the SPV can invest in supply chain finance trade invoices due in up to 120 days.

Minimum overcollateralization ratio
The second part of a covenant is about the liquidation ratio. The protocol wants to make sure that at any time the loan is overcollateralized by the SPV assets. If the asset value is lower than the agreed upon collateralization rate, the risk team will trigger the liquidation.

Concentration risk
The last section covers the concentration risks. For instance having a portfolio of 100 loans to only one entity defeats the purpose of diversifying the risk. Concentration risk is a challenge in the beginning, as the first loan for SPV will breach this rule (as there is only one debtor). Therefore, these rules will apply only at scale (a predefined amount) or with a ratio that depends on the amount borrowed.

Stakeholder rules
The previous sections are about the soundness of the SPV’s investments. Nevertheless elements outside of this scope can affect the risk of making a loan to this SPV. Centrifuge model implies that there are other co-investors and a example of the said rule, for HTC, would be that co-investors manage a minimum of 28% of the SPV DROP debt share.

Bellow are links for collateral onboarding risk evaluation for each of the pools that are integrated with Maker: