IIP Number: [to be assigned]
Title: Launch the $REAL Index
Status: [WIP, Proposed]
Author(s): @sidhemraj
Reviewed by: @afromac @allan.g @overanalyser
Discussions-to: N/A
Created: Jan 19, 2022
Simple Summary :
The aim of $REAL is to allow crypto assets to be lent to real-world businesses in return for an income stream using specialized DeFi protocols gathered within a single managed INDEX fund.
Abstract :
The $REAL Index will function as a structured product that will capture yield generated from Real World Assets (or RWA). Initially, it would be composed of loans provided to RWA pools on protocols like Centrifuge, Goldfinch, Maple Finance, and more.
Investors of the $REAL Index can expect a weighted average return of 10-15% from a diversified portfolio of assets. Rebalances will occur according to protocol-specific epochs and maturation in the respective pools.
Motivation :
A RWA (Real World Asset), in context of this proposal, is any yield generating / value accruing asset that supplies credit to activity in the real economy, but which is represented on-chain through various protocols. These protocols lend to real-world, largely non-crypto-related businesses. The most prominent protocols in this space are Centrifuge(Tinlake), Maple, and Goldfinch. More recently, MakerDAO and AAVE have also partnered with Centrifuge to add liquidity to RWA debt pools. More information about how these protocols work can be found here.
Many global credit markets are failing spectacularly, driving investors towards more and more risky assets. The total volume of negative yielding debt in the world is greater than the total volume of US fixed income instruments - Treasury Securities, MBS etc. This is a large and inefficient market that is primed for disruption. DeFi can solve this problem by democratizing access to positive yield assets for all investors of all sizes.
Similarly, the traditional financial system fabricates credit instruments that are opaque and potentially dangerous. During the 2007-2008 financial crisis, shadow banking intermediaries created billions of dollars in bad credit assets and re-packaged them into AAA-rated CDOs, and subsequently CDO-squared & CDO-cubed instruments. These assets appeared to be diversified in terms of risk, but they were actually composed of high-risk, recycled debt. However, rating agencies considered these instruments safe for the most conservative investors. Sunlight is the best disinfectant, and moving these markets on-chain can provide a safer and more transparent option to all investors.
Size of opportunity in traditional lending markets :
Unmet financing needs for SMEs globally - basically zero or limited access to credit - total of about $6 trillion+. Businesses with basic access to informal finance (individual/community of money lenders, loan sharks, gold & other pawn lending) pay significantly higher interest rates than well-funded corporations. Larger corporations and more established businesses have access to formal credit channels and they borrow at the most efficient rates, while small and medium businesses suffer from limited access. The cost of borrowing can be as high as 30%, leaving them with no viable options to better their business circumstances.
Some of the market inefficiencies which we believe DeFi can disrupt:
-
Banks have limited motivation or strategy to lend to this segment. Even if they are interested in this space, their lending processes and requirements make it extremely challenging for these businesses to access those funds. Furthermore, banks lack the technological capabilities to access alternative data to underwrite these loan proposals.
-
While Fintechs solve some technological problems for banks by relying on alternate data and AI/ML engines, Fintechs still rely on banks for liquidity to lend to this segment, and the credit available is extremely expensive. In developing markets, middlemen (private lending institutions) in the ecosystem exploit these gaps by charging exorbitant rates for credit. These rates can range from 16-30%, while traditional bank loans can range from 5-12% for established corporations.
-
Corporations have the resources and support required to raise capital through public issuance of bonds, while smaller businesses are excluded from this market.
-
Many investors in this debt market today are effectively earning a negative yield.
DeFi can solve this liquidity problem in the most efficient way and provide a fairer cost of credit for these customers. Additionally, DeFi can provide investors in these markets with an opportunity to invest in real world assets and earn institutional-grade yield.
The growth prospects for this product category are extremely high. The creditors that could avail of this credit are companies and businesses situated in regions and market segments that are growing at double digit CAGR, and that contribute significantly to their national GDP. Their sector focus is varied and can range from Manufacturing, Import and Export, Retail, E-Commerce, Solar and Renewables, Property & Real Estate, and Information Technology/Software Development.
With DeFi paving the way for a fairer and more transparent financial ecosystem, $REAL will act as the premier decentralized liquidity provider to RWA-backed loans.
Value Proposition :
$REAL aims to be the first decentralized index of real world, stable-yielding assets, which includes debt assets, tokenized leases, renewable energy assets and more. As DeFi matures, retail investors, DAO treasuries, and institutional investors will seek to diversify their portfolio into sustainable non-crypto/digital asset yield to insulate themselves from crypto volatility.
The Index solves a few pain points for investors of RWA represented on-chain.
-
Investment Cycle Management: Monitoring timelines for each pool, withdrawing, re-investing needs active management. An example of deposit/withdrawal timelines on Maple Finance is highlighted below.
-
Due Diligence: Apart from the above, due diligence of underlying assets, keeping track of repayment risks, working closely with asset originators, etc requires the expertise of a team of professionals.
-
Gas Fees: Investors would be able to diversify their portfolio across multiple RWA for minimum gas cost.
In the long term, $REAL aims to become the gold standard for Real World Assets represented on-chain.
Opportunity Size :
Real World Assets TVL on DeFi has grown to $500M + at the time of writing, with 90% of that value added in the last 6 months. Needless to say, this is a nascent but rapidly growing sector.
This number could grow to trillions of dollars as major asset classes in the real world economy are tokenized and represented on-chain in the coming decades. Crucially, the potential upside for a dominant product in this class is almost limitless, while the stability created by connecting these debt markets to DeFi creates a long-term opportunity that will outlive the gold rush environment that exists today.
In 2019-20 the global fintech lending market size was about $450B. Were the $REAL index able to access even 0.5-1% of that market, we are targeting a $2.5B - $5B market size. Furthermore, the fintech lending space is projected to reach $5,000B by 2030. If we can continue to capture the same 0.5-1% market share, we could grow the product to $25bn - $50bn by 2030.
At $5B AUM and a 1.45% streaming fee, this index would generate ~$70 million USD in annual revenue for the Index.
Some background on RWA financing in DeFi :
Real World Asset financing protocols are similar, but behave differently to the fully permissionless lending platforms like Compound and Aave in some crucial ways. They are not fully permissionless protocols, and various stakeholders in the value chain work in tandem to make these protocols safe for large scale borrowing and lending. More information about how these uncollateralized lending protocols work is summarized here.
Brief overview of some pool originators and their borrowers:
- Fortunafi
Fortunafi Asset Management is a technology-enabled, revenue-based finance provider, providing capital to small or growing businesses in return for a fixed percentage of ongoing gross revenues. Fortunafi funds through CORL technologies, a Fintech lending company.
- Maven11
Maven 11 is an Amsterdam-founded blockchain and crypto asset investment firm that invests in and supports its ventures globally, focused exclusively on the blockchain, distributed ledgers and disruptive emerging technologies. Their borrowers include NAOS finance that allows for collateralization of loans through off-chain assets.
- Almavest
Almavest provides debt capital globally to high-performing companies in a variety of sectors, including small business and consumer credit, climate finance, sustainable/regenerative agriculture and more. They work with institutions like SKS Microfinance, Fast Cash etc to create a large-scale impact.
Methodology :
$REAL index would initially provide capital in pools across Centrifuge, Goldfinch and Maple. You can mint $REAL using USDC or any other stablecoin.
The initial composition could look like (subject to change based on pools state at launch):
| Pool | Platform | Asset Maturity | Pool Description | Portfolio Allocation | Expected Annual Return |
|---|---|---|---|---|---|
| Databased.FINANCE 1 | Tinlake by CFG | 30-90 days | Branded Inventory Financing | 10% | 10-11% |
| 1754 Factory | Tinlake by CFG | 30-90 days | Payment Advances | 5% | 10-11% |
| Harbor Trade Credit Series 2 | Tinlake by CFG | 60-120 days | Trade Receivables | 5% | 11-12% |
| Fortunafi 1 | Tinlake by CFG | 24 months | Revenue Based Financing | 15% | 10-11% |
| Almavest | GoldFinch | Various | Global Multi sector loans | 25% | 10-11% |
| Orthogonal Trading | Maple | Various | – | 10% | ~12% |
| Maven11 Capital | Maple | Various | Capital Intensive Businesses | 10% | ~12% |
| BlockTower Capital | Maple | Various | – | 10% | ~12% |
| Alameda Research | Maple | Various | Market Maker | 10% | ~12% |
Rebalancing would be manually approved transactions to claim expired positions and deploy fresh allocations in agreement with the methodologist.
Issue and redemption flow is to be agreed with the simplest option being to hold a USDC reserve.
As the product AUM grows, more sophisticated / automated strategies (e.g. white listed withdraw from positions) would be developed.
Costs :
Costs to Customer :
Index Coop will charge a 1.45% streaming Fee.
0.10% of mint and redeem fee would be charged.
Rebalance frequency : Weekly.
Partner protocols retain few basis points on the interest earned as protocol reserve and the indicative APY given above is net of any such deductions.
Liquidity :
The suggested pair for liquidity is REAL:USDC, as the pools REAL deposits into are denominated in USD pegged stablecoins. We request the Liquidity Pod to seed this pool with $400,000 USDC in total.
Author Background :
This is a methodology proposed by the Automated Indices Pod. The AI pod is a multidisciplinary team that works to support automated products for Index Coop.
- Product Design: as experts in this field
- Risk Management: evaluating the risks behind Real World Assets as the nature of these is expected to become more complex as the product grows.
- Borrower Due Diligence & Relations: Build direct relationships with Pool originators to assess borrower agreements and stay abreast with pool life cycles.
- Asset Originator: By working with our partner protocols - would allow the Pod to take a more outbound approach in sourcing Real World Yield Generating assets for the $REAL Index.
- Institutional Sales: Actively work with Crypto Funds, DAO Treasuries and other institutions to diversify their portfolio into sustainable, real world yield assets.
