I am writing to request the community’s feedback on supporting Real World Assets (RWAs) on Compound using an extension we at Verified Network are developing. The requirements specification and architecture for the Comet extension with an operator has been created with a grant from the Compound Grants program 2.0.
Summary
The proposed RWA Markets extension does not propose to make real world assets function as collateral on Compound, but instead allows the extension’s users use assets accepted as collateral on Compound to buy RWA backed tokens. This enables RWA issuers who are often asset owners and asset managers to post collateral to Compound to borrow base assets, enhance credit quality by posting collateral procured by them on their own, and procure the balance collateral from the RWA extension’s users. RWA Markets extension users benefit from additional returns paid out by RWA issuers, in addition to returns earned by providing collateral which is posted by RWA issuers to borrow base assets.
Real World Assets (RWA) markets can therefore be supported on Compound as an abstraction on existing asset markets, and bring benefits to all stakeholders, ie, additional returns for Compound users, more collateral supply to the Compound protocol, and additional liquidity to RWA issuers.
The Opportunity
Real World Assets (RWAs) such as real estate, business invoices, etc generate attractive returns for investors. RWAs themselves are often physical objects and are not liquid, so investors in them earn returns by providing liquidity to them. For example, an investor can buy a real estate backed loan note issued by a real estate’s asset owner or asset manager that pays out interest on the loan note. The same goes for invoices that are discounted by a bill discounting service where investors effectively buy the deferred cash flow from discounted invoices for the additional return. However, loan notes and discounted bills themselves are not on chain natively. The liquidity for them is provided by their issuers who redeem them at maturity or at agreed at time intervals.
Fortunately, the challenge of tokenizing RWAs and managing redemption and payouts from RWA tokens are now being increasingly managed by a number of entities in the blockchain / Defi ecosystem.
However, liquidity for RWA tokens still remain a challenge as they are not traded on crypto exchanges. Cost of capital for tokenized RWAs remain higher than crypto assets and the opportunity therefore is to enable RWA issuers to borrow from Compound at a competitive cost of capital while enabling the RWA Markets extension users to also earn additional returns from RWA tokens.
Examples
Tokenization of RWAs is becoming more common and here are a few examples
- MII Credit pool, on Maple finance returning 5.3% APY by lending to multiple asset originators in the pool.
- AQRU Receivables discounting pool, on Maple finance returning 9.57% APY, with the pool being managed by a couple of asset managers Intero Capital and AQRU Plc.
- SME loan pool, on Goldfinch returning 13.05% APY
- Carbon reduction investment pool, on Goldfinch returning 17% APY which is managed by Almavest, an asset manager focussed on emerging market debt.
Solution overview
The RWA Markets extension has to solve for
- RWA issuers – by enabling them to borrow from Compound, at a competitive cost of capital, while at the same time being able to meet collateral requirements of existing Compound markets.
- Compound users – by enabling them to make additional returns by supplying collateral to existing Compound markets.
- Compound protocol – by enhancing supply of collateral and liquidity on the protocol.
The proposed RWA Markets extension will make it possible for RWA Issuers to not only post collateral themselves but also seek collateral from the Compound user community through the extension’s user interface. Compound users can thus provide credit enhancement for RWA tokens by supplying collateral to RWA issuers in exchange of additional returns paid out by RWA issuers. This also enables RWA issuers to meet full collateral requirements of existing markets on Compound.
As an example, if an asset manager managing real estate borrows at 14% APY, and can borrow from the USDC market at 4.23% APY, RWA Market extension users can supply accepted collateral assets (eg, WBTC, ETH) for a fee of 10% APY, a part of which comes from the earn APR on the supply of collateral and the balance from the RWA issuer. This process makes borrowing from Compound attractive for the RWA issuer whose cost of capital goes down from 14% to 10% APY and it also makes it more attractive for collateral providers whose earnings go up from 3.33% APY (eg, on the USDC market) to 10% APY.
About us
The Verified Network is blockchain powered, decentralized financial infrastructure for issuing, investing, trading and servicing issuers and investors in tokenized real world assets. We work with asset owners and managers to enable issuing of tokens from real world assets, source capital from Defi platforms and offchain brokerages that deal in crypto assets, and service issued RWA tokens by managing distributions of interest and dividends onchain.
Deliverables and Expected outcomes
The implementation of the RWA Markets extension will deliver a product that can be used by any RWA platform including the ones listed in the first illustration on RWA Ecosystem above. The implementation will comprise the user interface as well as the operator contracts.
We expect the support for RWAs to transform liquidity and supply of collateral on Compound just as it has done for the Maker protocol which now has USD 680 million of loans originated by RWA issuers.
