Proposal: Add Support for Centrifuge Real-World Asset Money Market

Governance New Market
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Aave 2.0 comes with many new features and there’s one we’re particularly excited about: creating new money markets. This opens up a whole new avenue of accommodating real world use cases for the wider DeFi ecosystem.

We’re proposing to add a real world asset (RWA) money market to the Aave protocol allowing investors to gain exposure to a portfolio of different crypto-uncorrelated asset types.

Motivation:

Centrifuge has been building the necessary technology for adding RWA to DeFi and with the arrival of Aave V2 it’s now possible to connect these two building blocks. These assets bring stability to the highly volatile market, diversify risk and are the avenue to move DeFi beyond its niche status. Aave is pioneering on-chain lending, starting with flash loans and expanding to credit delegation. Extending decentralized lines of credit to existing businesses seems the natural next step on its path to pose a real alternative to traditional financial products.

Centrifuge has helped Asset Originators such as ConsolFreight, Paperchain, Harbor Trade Credit and NewSilver to tokenize real world assets and facilitated since its launch in May financing of over DAI 2.4M. These Asset Originators jointly have capital needs of well over DAI 50M and bring a diverse set of crypto-uncorrelated assets to Aave.

A brief overview of how Centrifuge works:

Centrifuge is building a full stack of tools to bring RWA into DeFi. Assets such as freight invoices, warehouse receipts or even real estate can be tokenized in the form of an NFT. Each NFT represents one unique real-world asset with a unique default risk that is priced by an off-chain oracle. Centrifuge Tinlake is a set of smart contracts that handles the bundling of these individual loans and issues interest bearing ERC20 tokens against the pool. Pooling these assets allows the Asset Originator to offer a more stable return (and diversified risk) and offers a tradable, fungible token to the lenders.

Tinlake has two different ERC20 tokens that lenders can buy: TIN and DROP. The TIN token is the junior tranche that takes any first losses and is primarily bought by the Asset Originator and other lenders that seek leveraged exposure to the portfolio. Tinlake is configured to require a minimum amount of investment in the TIN token. Any losses that occur in a portfolio will first be covered by TIN token holders. More information on how the two tranches work can be found here.

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Centrifuge is partnering with many Asset Originators. Four are already live today and new ones will go live every month. Each Asset Originator deploys an individual Tinlake pool, hence issuing its individual TIN and DROP token.

Creating an Aave Money Market for Real World Assets:

Aave’s support for multiple markets makes it easy for the Aave community to start onboarding these assets into the protocol and allow investors to opt into lending against these assets: Aave users can provide liquidity to the market by depositing DAI and earn interest from a balanced collateral portfolio of different RWAs. The Centrifuge Real World Asset Market will be managed by AAVE token holders through the same governance processes as with the existing markets live today. They set the different risk parameters and onboard these pools as they see fit.

How are Centrifuge Assets Liquidated:

RWA are not as liquid as crypto native assets but they are much more stable. This stability means liquidations are a rare occurrence. These assets are not traded on liquid exchanges and instead the default way to liquidate them is to redeem them for DAI: In order to allow users to recover their funds in case of a default Centrifuge has built the Tinlake contracts to manage the liquidation of loan portfolios on-chain. This mechanism entails letting the portfolio of a compromised pool either mature (in case of short term assets with a maturity of less than 90 days, e.g. invoices) or refinancing them off-chain and using loan repayment to settle the debt balance. Repayments are directly disbursed to the Aave market making them available to Aave users immediately.

When a price feed reports bad performance to the Aave market and the minimum portfolio value of the pool is not met anymore a custom liquidation mechanism for Centrifuge Tinlake pools gets triggered. It immediately posts a redeem order for the entire collateral to the pool. This will automatically redirect any cash flows coming in from borrowers to DROP investors. They will receive any money that is repaid on the existing portfolio as it gets repaid.

This post is intended to give a first introduction to the concept of a Real World Asset Money Market on Aave. We’re looking forward to community feedback and happy to join one of the next Aave community calls to walk through the proposal.

Technical Documentation:

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Like music in my ears.

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+1 +AAVE +aAAVE lets do it!

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Really like the idea of this market. Have to take a deeper look. But looks promising.

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The greater the connection and opportunity for transferring value between the DeFi finance world and traditional assets the better, in my opinion.

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Bring on Centrifuge and RealT. The tokenization of RWA is beneficial for the Aave ecosystem.

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Thanks @lea. This proposal seems very interesting. However, I would like to better understand some things:

  1. My first question is with regards to the Asset Originators and how they benefit from the Tinlake platform. As I see here, the Asset Originators are financing companies themselves. As you said, they’re the main investors in TIN tokens. So, the incentive behind offering TIN and DROP tokens to outside investors, for them, is to source additional capital and be able to scale beyond what their balance sheet allows. Is that right? I’m also guessing that those companies have a harder time sourcing capital from the traditional finance world?

  2. With regards to Aave more concretely, is the idea to open new TIN and DROP markets that would work in a similar way in which crypto markets currently work in Aave? For example, a TIN or DROP investor that wanted liquidity would deposit their tokens in Aave and be able to get a USDC loan. Am I getting it right?

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This is great despite all the legal risks… But anyhow I support this in full speed.

Any movements to increase the quality of investable assets in the Defi is a good move.

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Hi @JonathanErlich hanks for the feedback. Let me try to answer your two questions:

(1) How are Asset Originators benefiting from Tinlake? As you said correctly, all AO are financing companies. For instance ConsolFreight finances freight forwarding invoices and trade finance transactions allowing the involved companies to receive payments instantly instead of having to wait 60-90 days for their money. The money they pay out to their borrowers comes from different liquidity sources (that could be a bank credit line, non-bank lenders, etc). Tinlake connects them to the DeFi ecosystem and allows them to source additional liquidity through (1) individual investors and (2) decentralized lending protocols such as Aave and Maker that they can tap into. On top of that, Tinlake is a revolving pool. That means that an AO can continuously originate and add new assets to a Tinlake pool and can continuously allow new investors to deposit funds that they can draw from according to their capital needs. Interest is only generated when the capital is deployed. This gives AO much more flexibility in managing their capital sources. The majority of the AO we partner with do have traditional funding sources (e.g. New Silver that finances real-estate backed loans has a private fund credit line with a credit limit of $20m) but they do see the potential of DeFi as a competitor to those traditional sources with better and more transparent rates.

(2) For a RWA Money Market on Aave we propose to use only DROP for now (as DROP is first loss protected by TIN; DROP representing the senior tranche and TIN representing the junior tranche). Aave users can deposit stablecoins (we will start with DAI and open it up to e.g. USDC eventually) into the RWA MM and several AO would be eligible to draw from these funds in return for locking in their DROP. The risk parameters that allow the AO to access the MM would be determined together with the Aave community.

Let me know if this was helpful or if something remains unclear.

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Thanks @lea! Yeah, that answers my questions. Excited to see how this partnership evolves…

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Tomorrow, Oct 15th 7:30pm CET, we’re hosting an AMA session about Centrifuge Tinlake. It will give an overview of how our tech stack works and will go into detail about Tinlake v3 features. This will be relevant for our RWA money market proposal. Would be a great opportunity for us to receive direct questions from you. Link to the call is here: https://discourse.centrifuge.io/t/community-call-october-15th-revolving-pools-and-tinlake-v3/291

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Cool, where can I vote for this?

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Hi @amadeoB, the community will be able to vote on this as soon as the governance process is in full effect. I expect that to happen very soon but I’ll leave the exact time line to the Aave team :wink: In the meantime I’d love to get comments and/or questions from the community so we’ll be able to incorporate the feedback.

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is there any info about it ? couldn’t assist

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This is a great sign for Aave V2!

I truly believe Aave is in the unique position of being able to pioneer the bridging of DeFi and the masses. Excited to see more real world assets brought on board, perhaps starting with Centrifuge!

I really like the idea behind Tinlake. Definitely on board for a well analyzed and implemented “real” asset money market.

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We’re hosting another Community Call this Thursday, November 12th 7:30 PM CET / 1:30PM ET introducing two new asset classes on Tinlake. If you want to get a bit of a better understanding what type of RWAs are being financed - and could potentially be used as collateral on Aave - join in: https://discourse.centrifuge.io/t/community-call-november-12th-who-is-live-on-tinlake/385

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That’s lively sense of humour

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Bridging off-chain assets -> on-chain literally opens a whole new world for DeFi and AAVE of course. There are of course challenges when bridging both worlds, as the Ethereum chain is not aware of what happens off-chain, and therefore this requires either the use of Oracles or workarounds.

The Tinlake workaround built by Centrifuge is great, because:
A. It takes non-fungible financial assets (unique receipts) and makes them “fungible” (see here)
B. Tinlake financial assets are split in two: DROP (safer) and TIN (riskier)

This proposal to add Tinlake’s DROP asset makes sense towards this journey to bridge the two worlds. I expect the supply volume will be relatively small in the beginning, like ZRX and BAT, which is a great way to test things out, but then the potential is huge.

I think this should move to a proper AIP!

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While everybody seems excited about increasing usability of Aave and bridging RWA to defi. I do not see discussions on

  1. Aave pricing for these RWA money market.
  2. Any vetting criteria of what kind of AO and RWA should be accepted by Aave
  3. A lot of Aave are staked into the SM so how does these RWA pools impacting on SM

Questions like these typically takes long discussions in real world so I wonder how these discussions will be conducted, moderated (if any) and accepted here in a community dao.

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I must have missed your comment here @Monsoon, apologies. I agree with you. These are exactly the type of discussions we’d like to have. I proposed to introduce the concept in one of the Aave community calls and take in feedback and questions. We have also been working closely with the Maker risk team to be able to safely onboard RWAs to MCD. While the setup with Aave is a slightly different one there are some processes that can be applied here as well. But we’d like to start the conversation on how we can formalize the risk assessment and pricing of the proposed assets.