[ARC] RWA Facilitator Onboarding Framework

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Proposal Description:

This proposal lays out an overarching framework for setting RWA exposure for the GHO stablecoin. Once the target facilitator and overall portfolio characteristics for RWA are defined, then AAVE should select facilitators and asset types that fit within that strategy.

Facilitators could be other DeFi protocols (Centrifuge, TrueFi, Goldfinch) or non-protocol entities (funds). The important thing is that facilitator strategies are well-defined and that they fit as a puzzle piece in the larger picture in an RWA portfolio strategy.

A portfolio strategy should probably be quite conservative and simple to start. Well-versed credit professionals should define this but it could look something similar to what Rune lays out for Maker in MIP103.

For example:

  1. Maturity & liquidity profiles
  • Target at most [ x ]% exposure to collateral that can be converted to Cash Stablecoins within [7] days
  • Target at most [ y ]% exposure to collateral with a duration of [6] months to [1] year, with a [9] month average duration. This can also be substituted for collateral with a shorter duration.
  • Target at most [ z ]% exposure to collateral with a duration of [1-3] years, with a [2] year average duration. This can also be substituted for collateral with a shorter duration.
  1. Benchmark rates
  • Target returns should be informed by defined benchmark rates
    1. [benchmark return for very low-risk collateral is equivalent to the effective return on Primary Yield Stablecoin]
    2. [benchmark return low-risk collateral is equivalent to the effective return on the 3-month treasury bill

Rationale:

There have been preliminary discussions from interested RWA facilitators who are looking to be early facilitators for the GHO stablecoin. It feels premature for AAVE to be engaged with RWA facilitators without first defining what they want from RWA facilitators (maturity, liquidity, rates, etc.) and creating a process for selecting originators.

Proposal

Facilitator and Collateral Onboarding

Purpose

Facilitators onboard RWA collateral to Aave. They are responsible for structuring these collaterals and attesting to their ongoing value and performance. Facilitators may be protocol or non-protocol entities.

Facilitator Requirements

  1. Facilitators are onboarded by polling of Aave governance.
  2. Facilitators present Aave governance with new collaterals to onboard.
  3. Facilitators must clearly identify the collateral, how assets will be transferred, and how collateral will be monitored.
  4. Facilitators must identify material risks associated with the proposed collateral and onboarding or onboarding that collateral.
  5. Facilitators must identify clear on-chain and off-chain flow for assets, both for onboarding and for liquidation.

Collateral Requirements

  1. Collaterals are presented by facilitators and onboarded by polling of Aave governance.
  2. Individual collateral should have a narrowly defined scope, with easily understood properties and clear mechanisms for onboarding and offboarding.
  3. Collateral will have a clearly identified process and schedule for monitoring.
  4. Facilitators will identify how this collateral fits within the Asset-Liability Management model.

General Asset-Liability Management model

Purpose

This model addresses liquidity risk around assets.

Categories of Real World Collateral

Categories will be grouped into different buckets based on duration and ease of liquidation.

  1. Stablecoins

These assets can be immediately liquidated by anyone and are the first line of defense for the peg. The protocol should initially aim to hold 30% of real-world collateral as stablecoins. These assets will be managed by the protocol.

  1. Short Term Real World Collateral

This class of collateral has a duration shorter than a year and highly stable value, such as short-term treasury bonds and money market funds. The protocol should initially aim to hold 70% of real-world collateral as short-term real-world collateral. These assets will be onboarded by facilitators.

  1. Long-Term Real World Collateral

This class of collateral has a longer duration, with correspondingly higher volatility. These collaterals can be considered as the surplus buffer grows and the market matures. These collaterals will be onboarded by facilitators.

We look forward to a discussion in the comments. We will kick off the discussion in the comments with some “open questions” we came across while researching this framework.

Authors: @Codeknight @RyanRodenbaugh @tylerw

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To kickstart the conversation, some open questions we have on how GHO (specific to RWA in some cases) will work.

  1. Will AAVE introduce a peg-stability module-like mechanism to maintain GHO’s peg? In the stablecoin section where we mention “these assets will be managed by the protocol,” this is what we had in mind. @puniaviision also highlights this in the “debt ceiling” portion of their post.
  2. Will there be a surplus buffer? If so, what is the target amount?
  • Is the surplus buffer specific to RWA?
  • Or is it a wider surplus buffer for all GHO potential bad debt?

  1. Funds in the AAVE safety module today are nearly $400mm in USD. Can or should this be used to cover the bad debt https://etherscan.io/token/0xa1116930326d21fb917d5a27f1e9943a9595fb47

  2. Will Facilitators provide first-loss capital?

  3. How are facilitator caps set?

  • Does cap take into consideration concentration risk? (i.e. no facilitator can mint more than [50%] of RWA-backed GHO)?
  1. Does all RWA have a supply cap that takes into account surplus buffer or stkAAVE value?
  2. What roles does the AAVE DAO wish to have in oversight? Does it want to establish a credit/underwriting-focused unit to evaluate and monitor each deal?
  3. What is the process for offboarding facilitators?
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@Wallfacer this is a great and highly relevant post - thank you for offering your collective thoughts on how Aave’s RWA strategy comes together. I noticed your recent writeup on GHO and am excited you all are getting involved here given your deep background in this space.

As an RWA facilitator and active participant in Maker, we are refreshed to see this framework coming to light BEFORE the DAO starts approaching deal flow. We have seen notably poor deals pass governance due to the lack of framework and emphasis on politics. We have also seen notably good deals get zero attention.

We believe Aave should consider the quality of all collateral and facilitators it onboards objectively rather than placing emphasis on whether it fits neatly into the DAO political landscape. The DAO has a shot at doing this correctly from the beginning which will undoubtedly give us a huge leg up down the line.

It is extremely important that the DAO creates a framework related to Asset-Liability Management as well as Credit Risk in order to define what opportunities are appropriate and financially feasible. We would agree that the DAO should outsource as much of the deal-by-deal underwriting as possible to highly skilled and experienced managers rather than having centralized decision-making in the DAO (or any DAO). We’ve seen how that turns out and it just doesn’t maker sense.

Key to the model will be maintaining strong incentive alignment between all stakeholders and having a very well-defined understanding of duration, credit quality, and yield. This is a trilemma that many DAOs are only just waking up to after having optimized for the wrong tip of the triangle (i.e. short duration, high credit risk, high yield).

We would love to work with the @Wallfacer team and DAO contributors to define what makes sense and what doesn’t. As former bank investors, we see an opportunity for Aave to scale significantly if this is done correctly. The bar is not high (at all) for being the choice destination of RWA financing - it only requires having the DAO’s house in order.

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It’s certainly true that investors in crypto had a twisted understanding of the credit trilemma and faced a rude awakening in Q4 of last year, where the high yield, short duration, and super-high credit risk investments went bust.

Given that Aave’s likely initial use-case for RWA financing will be using any excess stablecoin capital on its balance sheet to earn revenues, low credit risk and short duration are just about the only things that make sense [maybe also highly secure commercial paper]. This is basically the strategy that Maker is employing.

The question to us certainly seems to be how we can increase the adoption of GHO as a currency through RWA financing operations. Without a strong partner in figuring that out, all RWA financing will place a strong sell pressure on the peg that requires careful liquidity monitoring.

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This is an excellent conversation coming up at the most crucial time; laying down this governance framework will give the community an understanding of how we can vet RWA Facilitators; considering how high the stakes are, this conversation must be had before and not after the fact.
A number of the risk parameter considerations for this Governance framework would require input from Aave’s risk service providers; we believe that designing a well-rounded approach with input from various contributors will create value in this context.

We would be glad to work with the authors of this proposal to flesh out aspects such as

StableLab has vast experience designing governance frameworks and contributing to DAOs such as Maker DAO, Balancer, 1inch, and Hop.

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