Hey everyone, I hope all is well. Apologies if this has already been posted on, as I could not find much related to real-world asset collateral across the forum. If I overlooked something, please forgive my sins .
Action Asked of Community: Compound should create a clearer roadmap on how the protocol will leverage tokenized real-world assets as borrower collateral to increase protocol revenues.
Community Proposal: I propose that Compound adapt Maker’s Direct Deposit DAI (D3M) MIP50 to greatly expand its collateral base to tokenized RWA providers (on-chain to start). To do so, we would need to adapt the existing Collateral Onboarding Framework/Process. The benefits of doing so are the following:
- Provide Compound with an external source of direct income by collection of tokenized RWA interest.
- Greatly expand cross-collateralization opportunities between DeFi-native assets and TradFi-native assets.
- Provide DeFi’s first double-leverage market for other DeFi protocols leveraging RWA as collateral (particularly crypto-collateralized, stablecoin protocols).
- Increase COMP staking behavior by providing interest discounts, rather than via continued token emissions (i.e., increase COMP demand pressure and decrease protocol costs).
As you all already may know, DeFi communities such as Maker and Aave have been engaged in real-world asset investments over the last 2 years or so. Since then, Maker has onboarded over $700M in real-world asset collateral and has doubled its protocol revenue from the sustainable yields provided by such collateral. Aave has just started their RWA journey, with an RWA Market that has $7M in volume.
I think that it is time (again, if we haven’t already) to aggressively start thinking how we can onboard liquid, tokenized real-world assets to allow borrowers to cross-collateralize loans of TradFi and DeFi assets. Doing so would create a integrated TradFi x DeFi lending market where users can borrow against asset classes like never before.
Why does this matter?
Now is more important than ever for people and institutions to be able to diversify & hedge against the risk of increasing de-dollarization amidst a nearly 3-year run of fed rate hikes. Although the USD is still the world’s reserve currency, it is obvious that the U.S. financial market is becoming dependent on fed intervention. This development puts global retail and institutional investors alike (many of which have relied upon U.S. bonds and the USD as their most conservative investments) to question how exposed to America’s financial system they should be.
Digital assets, particularly ETH and BTC, typically experience bull-runs when TradFi faith weakens, yet investors don’t have any simple way of hedging exposure across these assets without needing to (1) facilitate some off-chain transaction, (2) facilitated another on-chain transaction, and finally (3) track the positions manually.
A Business Case for Compound
Additionally, supporting this type of innovation can greatly increase Compound’s revenues, as we can separate tokenized RWAs as a collateral category where 100% of the interest yield goes to the DAO’s treasury, enabling Compound to make other strategic investments in the future. Such yield also makes Compound’s revenue more predictable amidst continually increasing market swings (particularly given increased regulation by enforcement). Compound may even incentivize the borrowing/lending of specific tokens (e.g., COMP) by providing a collateralization discount against some of these tokenized rwas (much like we originally innovated via token emission APYs) for certain borrow/lend token pairs.
If Compound were to on-board tokenized U.S. treasury bonds (which yield 4%+) as collateral for WBTC, users could further nuance their existing debt positions with digital assets just in case treasury bond sentiment experiences a Black Swan event. In the meantime, Compound would earn all the interest generated from the collateral
We must critically consider the following analyses before heading this route:
- Seek legal guidance and use any protective legal wrappers the DAO may need to support such a feature.
- Develop financial pro-formas on the potential revenue that could be generated & identify when borrow/lend pairs are best to start with.
- Ensure that there DAO committees that specifically support this stream of work (along with the technical due diligence already included within the existing collateral on-boarding process) are well resourced to prevent pipeline bottlenecks.
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