Hi Community,
This is my first contribution but I have been a long time observer and holder of Aave. Pretty excited that this is the first topic I am commenting on.
In full disclosure, I am a founding member of the Hashnote team. Hashnote is a team with roots at DRW / Cumberland and we are a digital asset manager. We are intimately familiar with the instruments being discussed here, hence the post. We have tokenized RWAs, specifically US treasuries.
We applaud @Khan and the Centrifuge team for putting together this proposal as well as their contributions to the GHO Facilitator application and onboarding ARFC.
General Risk
There are many good points raised in the proposal as well as comments. To start, I want to emphasize @Khan’s point that from a risk perspective US Treasuries are currently about as risk free a yielding asset as you can hold (despite what your views may be of the US government). As we’ve seen over the last 6 months, the risk and uncertainty around Banks has created a flight to safety and quality. Rightfully so, a lot of that flight has landed in US Treasuries. The US Government is historically (and currently) considered the most ‘risk free’ counterparty. For these reasons, we highly recommend Aave take advantage of the current climate to earn an attractive interest on an otherwise idle asset (stable coins). Currently Aave is giving all the ‘risk-free’ upside to Circle.
I can appreciate the concerns around risk and what happens in scenario x, y, and z. I believe it is the point of proposals and discussions like this to help bridge the knowledge divide. Organisations like Centrifuge, Hashnote and others can assist in augmenting Aave’s capabilities.
Acquisition and Custody
One concern that’s worth addressing is that US Treasury exposure can be acquired in many different forms. Many retail investors access these returns by investing in money market funds (MMF). These funds hold cash and/or cash equivalents. The “equivalents” part is the thing worth addressing. Not all MMF are created equal and their actual holding may consist of different products, not all of which meet the same low level of risk as you get from US Treasuries. Institutions have a bit more optionality, they can purchase treasuries through brokers, which means there is more control over the type of risk they are putting on. Few organisations actually hold treasuries (CUSIPs), many are held at qualified custodians. This is an important thing to understand for this topic. To become a qualified custodian is an extremely difficult process, they have strong controls and are highly regulated. If you hold assets at a qualified custodian you are bankruptcy remote from that entity. In the event your qualified custodian goes bankrupt, your assets are not included in proceedings, they remain in your ownership and are fully accessible.
Duration Risk
The thing worth understanding here is that there are different durations of US Treasuries. It is important to align the goals of an entity before choosing the right mix of durations. If you think you’ll need liquidity in a few months, then you probably shouldn’t be buying 6 month bills. You wont get your cash back until maturity (in this example 6 months). But if you have enough liquidity then you can purchase further-out dated bonds (like 1 yr or 5 yr) to lock in a higher interest rate. But these bills come with duration and liquidity risks, lots can happen between now and 5 years from now. The SVB situation is a prime example. MMFs are also at risk, because they ladder their exposure. If the Fed raises rates again and many investors pull their funds to purchase higher interest bonds through broker-dealers, then the MMF will be forced to sell not-yet-matured bonds for a loss to meet redemptions, meaning there is principal loss to the remaining holders.
Repo Market
Another interesting mechanism for receiving attractive interest rates is the Repo Market. Without going into a ton of details, it’s essentially a market that exists to allow Tbill holders to sell the asset overnight (receive cash) and buy it back (at a slightly higher rate) in the morning (aka repurchase agreement). There are a number of reasons why it exists, for this discussion what is important to understand is that the buyer has treasury exposure for less than 24hrs. This means that for most of the day, you have fast access to liquidity. This is highly attractive but unfortunately not accessible to many organisations and certain MMFs.
I am not intimately familiar with how Centrifuge structures their Liquid bucket, but our suggestion would be to scope any initial foray into RWA to only US Treasuries and to do so at the lower durations (repo and no greater than 6 month bills).
Legal
All that said, we are putting the cart before the horse. Before any of this can happen, the DAO needs to be legally capable of such activities. At the moment the first phase of this proposal is probably the most critical. Without it, the rest of the conversation is moot. @Khan raised an important point, this entity is not specific to Centrifuge, it’s a tool that opens the door to many opportunities that will be important to the DAOs growth (this topic is a subset of those opportunities).
I suggest extracting the legal entity into its own Temp Check so that the particulars of this conversation do not muddy the waters. It’s also the longest lead time, so while this conversation evolves that work could be performed in parallel. Fortunately, AaveDAO can lean on precedents set by others in regards to legal structure (MakerDAO). From our experience, we believe the legal costs specified in this proposal are inline with what can be expected.
Conclusion
I have read many of the community posts and governance proposals and there is a theme surrounding sustainability and risk reduction. I believe these things are achievable with the right discord and participation from all those around the table. Looking forward to being a more involved party in these discussions!