RFC: Establishing a Centrifuge Credit Group

Hi Centrifuge Community,

I’m Mike, the Founder of DeFi Capital Markets (“DCM”), an entity focused on building the decentralized future of capital markets through bringing institutional investors, assets and infrastructure to the DeFi ecosystem. Previously I was a core member of the Centrifuge team and we at DCM are currently contributing to the Centrifuge, RWA Market (Aave) and MakerDAO ecosystems.

I would like to ask CFG token holders and the community for feedback on a proposed formation of a cross protocol credit group to analyze Centrifuge real-world asset pools. The purpose of this being to provide risk-reducing analysis for the onboarding of Centrifuge pools to DeFi protocols. The intention of this group is not to replace individual protocol governance processes, but instead to provide communities with critical knowledge and information they need to make decisions around onboarding new real-world asset collateral. Ultimately giving a view on whether the asset pool is safe or not. This group will also act to accelerate the decentralization of the Centrifuge network bringing further impartiality to decision making.

We are well aware that real-world assets are an emerging asset class in the Web3 space that is not familiar or intuitive to many current DeFi participants. To that end, we aim to build community trust through education and knowledge sharing. Ultimately, we want communities to feel empowered and comfortable when onboarding real-world asset pools, giving them the tools they need to make the right decision. In our view real-world assets are a truly massive opportunity and we want to help bring this to life!

The Credit Group would function to validate credit work and seek support from the community through:

  • Providing independent information and research to aid in liquidity provision decisions to pools of real-world assets
  • Focusing on providing a thorough risk analysis on the underlying collateral
  • Providing a view on the structure of the real-world asset pools
  • Highlighting potential risks
  • Discussing market trends for the underlying asset class
  • Presenting information in a digestible and actionable manner
  • The relevant members will provide this information, along with their relevant qualifications, to communities to facilitate decisions

Members of the Credit Group could work on an ad-hoc basis for a minimum term of one calendar quarter, with the ability for membership positions to be renewed subject to approval via governance. Applications are open and can be submitted as set out below.

Given the levels of expertise required, I would propose members receive $100-500/hr in the form of a treasury grant subject to governance approval. Payment could be based on success metrics (level of participation, amount of reviews completed, etc).

I would estimate that the starting budget could initially be roughly $12,500 per quarter - this covers 5 members working 40 hours at an average of $250 per hour, along with a small contingency budget for additional expenses. Member compensation could be based on the specific skills provided so individual members may earn more or less than $250 per hour.

The Credit Group in the first instance will look to work with the Centrifuge, Aave and MakerDAO communities.

Participating in the Credit Group

Ideally the Credit Group would be composed of experts from various DeFi protocols, professional institutional investors as well as experts from the wider Ethereum ecosystem. The focus at the moment is on structured credit. If you are interested in being a Member of the Credit Group or would like to nominate someone to be, please reply to this thread with basic info, including:

  • Describe your/the expert’s interest in the Centrifuge/ MakerDAO/RWA Market (Aave) ecosystems?
  • Describe your/the expert’s involvement in structured credit?
  • What skills/experience do you/they bring?
  • Can you commit a couple hours a week?

I would suggest that token holders ultimately vote on new members inclusion and membership can be reviewed once a quarter should opinion in community change.

In summary, I would like to gauge support for this proposal from the community.

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Hi Mike. I like the purpose of this credit group especially the “acceleration of decentralization” and that the group should “provide knowledge about decision making to the community”. Safety (and legitimacy) are important aspects when it comes to onboarding new assets pools.

How should the organizational setup of the credit group look like? Who will be in charge of the group?

Did I get it right individual members of the credit group are subject to governance votings as well?

Hey @Tjure07 I think DeFi Capital Markets would aim to organize the group in the first instance. We are happy to do the groundwork on creating a recyable framework that can be applied to the asset analysis and in helping to attract some of the people we think are right to get this thing started.

As to individual members being subject to governance, upon review I think that might be a bit much. Any suggestions on how how we could structure that more efficiently? Maybe an overall review of the group as whole once a quarter?

Yes, I agree. An individual review of each candidate would “spam” the off- and on-chain governance :wink:

@hardik @benbastic what are your comments on this proposal?

@thespaceacatjr Thanks for sharing the idea. Just a few things, if you can response to:

a) The community will be glad to understand the current onboarding process of AO on tinlake. If this information is shared, I believe it will give better understanding and benchmark for further improvement in the adopted framework to overcome the limitations or constraints.
In terms decentralization, does that mean the member of Credit Group will be able to onboard AO if the deemed qualifier? I think such aspects would require deeper consideration and working methodology in place, something that can be evolved as a part of this group as well.

b) Also, would like to understand, how are we planning to collab with other protocols for this Credit Group apart from AAVE & Maker (since we are already working with these protocols, its reachable). But how we are approaching to other similar protocols for collab for this group? There are out there who are working in this RWA space.

c) The purpose of this group is to mitigate associated risks in the onboarding process of pools or is this the starting point and that there is more to it? Certainly different assets might have risks associated with it and different protocols might have their own method to approach for same scenario? How about other DApps that can be built on CFG chain as well?

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The community does not need another group to have a voice for a single asset pool, let alone voice without taking responsibility for it. The community needs a single asset pool to weaken the influence of a default in the event of a default. If the current primary and advanced structuring of asset pools is seen as ineffective, devise something more robust, perhaps insurance or options from a third party. I have seen that the team is currently working on making investors more efficient and painless when investing in multiple asset pools more efficiently, or an indexed asset pool product as the target.

Yes, the current RWA introduction work, process and progress, I do not feel the efficiency and transparency that it should have, which is quite a blow to the confidence of those who connect with it. Compared to the asset size and efficiency of the traditional financial field, this work sector needs to be accelerated by at least hundreds of times. In my opinion, the centrifuge recruitment information reveals a misunderstanding. The financial field has a geographical classification. It should not try to be superhuman, but should cooperate widely with local financial institutions.

@hardik thanks for the comments very insightful. I think there are two ideas working in tandem here. The first being the process for screening and onboarding new pools, which I believe you are eluding to. I am aware work is being done to shed more light on this process for the community and ultimately drive toward governance based onbaording. We are not seeking to subvert that. The Credit Group would not replace the onbaording governance function but would strive to provide the information we feet the community may need to make informed decisions on new pools. Structured credit isn’t an intuitive subject for everyone and I belive it may be challenging for governance to act accordingly without some guidance from relevant professionals.

I can give one example for Aave (which we already work with as you mentioned) and perhaps that can be used to infer how we could aid other communities as and when we start to integrate with other protocols. The RWA Market that we built with Aave doesn’t currently have a clear process in place to on-board new Centrifuge pools to the market. The Aave community also doesn’t have the expertise at the moment to analyse the underlying collateral of the pools and that creates a bottleneck in our ability to expand the market. The Credit Group can help here! We can provide risk analysis that the Aave community can leverage to make these decisions easier and ultimately help them execute governance effectively. I think a very similar relationship could be leveraged as we form new partnerships.

I think this is just the start yes. The function of the group is definitely open to growing as new challenges present and ecosystem expands.

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Thanks for elaborating Mike. Very much appreicate.

So we have skill sets and know-how that can be shared with other RWA protocols in space. And same hold true for other protocol to share their bottlenecks on the provided platform which makes sense to derive best framework

My question is - is there not any specialized entity aka RWA business that are specialized in this filed? I mean like specialized consultant that can be onboarded ? I recall Gauntlet do provide risk management to Acala and others. Do you think CFG can partner with such specialized entitles (not necessarily Gauntlet I mean) for risk management if suited to RWA?

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Yes this is possible, and bringing in consultants for individual assets can and will be necessary in some cases. In these cases we still need a group that can find the right consultants, vet their work and translate it into findings that are digestable and actionable for the community. Real world businesses aren’t exactly in tune with the DeFi ecosystem and at this stage I beleive we can really help shepard any work they may do and make it more usable. Ultimately, we would be keen to help facilitate these external groups to become underwriters that actively assess Centrifuge assets that fit their expertise. Part of the broader role of the Credit Group can be to set the roadmap for how this is done, lead by example and really drive the creation of the underwriter network.

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Appreciate the comments @Smile2u. The products you mention are definitely things the CFG team is aware of and will likley look to build down the road as liquidity in the protocol grows (these are most effective with liquid markets). The purpose here is in fact to take ownership for asset onboarding and make sure that potentially defaults are mitigated.

The Credit Group will help to bring more details on asset analysis to the community, improve the efficiency of the onboarding process and increase transparency through information sharing.

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What I object to is a group that does not do this on behalf of the CFG team because the responsibility lies with CFG. other groups speaking out will only create a choice dilemma for investors.

As you can see by the job posting, this department currently lacks the necessary staff, which is why it is so inefficient. Perhaps the team thinks that the work is progressing well enough at the moment, otherwise it would have established close cooperation with financial institutions around the world in such a long time.

Coming from a small investment bank in China, I have access to a wide variety of assets from different business players, each with their own standards and risk controls, and it’s simply very easy to pick the right assets for tokenization.

Regarding compliance and pathways, financial institutions will have a variety of ways and means to accomplish this if they want to.

I have seen some of the asset classes that have been proposed here, such as solar power for individuals, real estate, environmental protection, and if this were a business from China, I would immediately dismiss it because I know full well that the risks are everywhere. But I was really surprised by the forum’s attitude towards these industries, and maybe that’s the difference in determination due to geographical differences.

I don’t believe there will be any superheroes who can make accurate ratings on assets from all over the world. Business rules are different from country to country, and there are major changes in the business environment causing uncertainty.

For example, wars, epidemics, disasters. There is always a risk of default, and it is enough to have a clear attribution of responsibility. It is up to the local financial institution to sue the local asset issuer, who has to be more skilled than anyone else.

Hi Smile, I think its more of an initiative that CFG is leading this to understand more on the assets caterisation and associated risks. Other groups speaking does not necessarily will create noise but will add value proposition to explore current and other assets. At least that’s what I understand and the whole point to have develop one avenue/platform to discuss myriad of things and streamline bottlenecks as much as possible.

Yeah and thats the reason, I believe as a starting point CFG did not venture into all different assets and that it will grow organically with time since different countries have their regulations and hence associated risks (which you did specified).

I am just trying to understand from the conversation what is the strong point of disagreement when it comes to formulation of Credit Group?

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To your statement mentioned below

It’s not primarily about a “lack of staff”. One of the goals of this group proposal is to enable decentralization and include more people into decision making and contribution. That’s what blockchain is all about (amongst others).

If you want to see all the tasks and work done in one entity you have the same situation as in traditional banking/finance

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What would a decentralized solution for this kind of thing look like, and is there a visionary blueprint that describes it?
Doing centralized things, shouting decentralized slogans, and shirking responsibility results in no one being held accountable, no trust, stagnation, and missed opportunities.

Excellent. And I agree with the point of decentralization.

But anything, in this instance onboarding AOs/borrow or lending , would require a core group which can have members both inside & outside of protocol to have right measures/decisions for this RWA niche. While this can be a starting point, it can move forward with more influx of external participants/members which can be in definition ‘decentralized’. At least that’s how I view this and is a more informed call imo.

It would be really nice to hear you POV @Smile2u how can the above CFG Credit Group can be more decentralized in your definition?

I think it’s a pretty wild misframing of the initiative to label it as “shirking responsibility”. Collaboration with our close partners, and the inclusion of experts from various fields is a net positive for the project. And yes, decentralization is a critical aspect of what this project is about - both in practical terms and as part of the general ethos. This is not a Chinese investment bank. This is an open platform that will become increasingly decentralized over time. So it’s only natural that the resources and brainpower that goes into making some of these decisions will come from a myriad of sources. I still don’t really see what your concern is, other than you maybe expecting this all to be done in house for the sake of some vague sense of “responsibility”. In any case, with the scope of assets that can potentially be onboarded being vast in quantity and type, it’s completely unreasonable to expect this all to be done in-house and to hire staff from dozens of different fields to establish credit ratings for each type of asset. Proposals like these are pragmatic and a positive thing for the platform.

Hi Mike, thanks for the summary. I think this is awesome, and totally reasonably within budget from the Treasury. Aiming to recruit talent from platforms that we are already integrated with is a great idea.

One question I had was if you can comment on whether the credit rating system will follow a model similar to what Dennis Wellmann laid out some time ago in this Medium post, and if this is the model that Centrifuge still follows.

Would the Credit Group work to modify this over time, perhaps breaking it down categorically into more asset-specific ratings? Or continue on with this broad model, but just work to tweak it essentially.

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@omegafattyasses thanks for the feedback! To this point, I think that is a great starting point, however I would picture the model continuing to evolve as we bring on more expertise and as the proposed assets becoming larger scale. Ultimately, I think the output that Dennis presented is spot on - an easily understandable scoring system. We will aim to keep that ethos and make sure the outputs are useful and not overly complex, while also utilizing more sophisticated inputs to produce them.

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Hi @Smile2u,

I just started following the discussion and I think you are right with respect to decentralization which does only work if people are accountable for their work.
The good thing about the technology we use is that we are able to force actors in the system to have some kind of skin in the game (i.e. they are accountable with the money they lock).
For example, this post here Token design proposal for underwriters to minimize trust in real-world assets describes a possible idea to implement some kind of mechanism for this on-chain.

I personally imagine in the future that asset evaluation and so on will be an active role on-chain that different actors can fulfill and that is rewarded if done correctly and punished if not. Defining what is correct is of course up to discussion.

But as with all networks that only work if enough (rated/known) actors are engaging with it, I think it is reasonable and responsible to bootstrap entities that are able to fulfill these roles at the beginning in a trusted manner and build up credibility before moving to an automated mechanism.
Once the ecosystem is large enough more entities that take these roles will evolve naturally to profit from the protocol.

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This small investment bank, for example, could be a very good actor that values assets in China and gets rewarded from the network.

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