A MakerDAO proposal to accept an ERC-20 token which represents shares in a pool of real estate assets as collateral in the Maker protocol passed yesterday. The use of real-world assets in DeFi is a first and is a major step in bringing the trillions of dollars worth of physical assets into the open finance ecosystem.
“MakerDAO onboarded the first Real Word Asset originated on Centrifuge in their executive this week,” Lucas Vogelsang, the co-founder of Centrifuge, the company which developed the protocol for tokenizing RWAs, told The Defiant, “This connects DeFi to the trillions in assets in the real world.”
The world’s real estate by itself was worth $280T in 2017 according to Savills, and the cryptocurrency market capitalization stands at $2.2T at the time of writing. After more than two years of working with the Maker team to accept tokens representing RWAs, Vogelsang and the Centrifuge team appear ready to begin onboarding more of that wealth into DeFi.
But, as their Maker Improvement Proposal (MIP) last April says, “bringing real-world assets into DeFi in a secure way requires more than simply minting an ERC20 token and claiming it has some value.”
Under the Hood
Under the hood, the Tinlake protocol, which Centrifuge built, serves as a bridge between RWA companies, which the project calls “Asset Originators,” and Maker. Tinlake onboards RWA companies, turns their individual deposits into NFTs, batches those NFTs into a pool and issues two tranches of interest-bearing ERC-20 tokens against these assets.
As they are domain-specific experts, the Asset Originator themselves will primarily buy the junior, more risky tranche, called TIN, and the less risky tranche, the DROP token will be used as collateral in Maker. The Asset Originator can then borrow against their DROP deposit in order to finance more loans, essentially using Maker as their bank, which, in itself isn’t new, except these businesses are financing non-digital projects.
The first of these pools’ DROP tokens to be accepted by Maker consist of loans underwritten by New Silver, a company which makes loans to real estate investors who want to “fix and flip” or otherwise invest in residential properties. New Silver can use the DAI minted by Maker against the DROP collateral to finance new loans for real estate renovations. The debt ceiling for New Silver’s DROP tokens will be five million DAI.
The Tinlake protocol has other pools, including music streaming invoices and cargo and freight forwarding invoices, which may be tokenized to allow each pool’s Asset Originator to fund their business.
After over two years of working with Maker governance, which even saw the DAO put together a team dedicated to understanding real world debt, the road to tokenizing RWAs is just beginning. Vogelsang estimates that when mortgages and invoices make up about 10% of total value locked people will really start to wake up to the potential of combining RWAs and DeFi.
“It’s very easy to just work with the tech that you know and understand – adding legal and legacy is a hurdle that Maker struggled a lot to get over and others are still grappling with it. For us Aave is next,” Vogelsang said over Telegram, linking to a proposal for the lending giant to add support for a RWA money market.
With individuals starting to use DeFi more to finance their own lives, Centrifuge may have put another brick in the wall in allowing non-crypto businesses the possibility of financing their activities through Maker and without banks.