As nature-based, impact, ReFi reserve assets are usually real world assets, a liquidation process involving them should follow that of real world assets. The following is an extract from Green assets as collaterals for stable coins - #49 by untangled-finance where we proposed a framework for including green assets in Celo reserve:
“Typically RWAs can’t be liquidated quickly but Celo could employ a combination of strategies:
- Creating a safety margin: say liquidity need for a time horizon of 1 week, when the most liquid RWA can be liquidated
- Creating a liquidity strategy within the RWA portfolios: essentially making conscious tradeoffs among the impact/liquidity and yield
- Working with real world asset funding protocols to create highly liquid exposures to impact assets
1 above could be implemented with the value of the Celo token in the treasury. However it is much more sustainable to use protocol profits or surplus to fund safety margins. For this reason, celo needs to consider assets yields when making asset allocation decisions.
2 above has been covered in this post. Again all three properties and their tradeoffs should be considered.
3 above starts with selecting quality assets to form the impact reserve. The asset onboarding process needs to follow good practices as being proposed in this thread 2. It is important to note that once the asset has been onboarded the on-going monitoring is robust enough to ensure all asset risk parameters are in check. Having real/near real-time, on chain asset tracking, net value calculation and reliable oracles is important.
Even AAA assets have a non-zero probability of default. A proposer of impact assets (to be included in the reserve) should have a pre-approved liquidation process. Typically, these assets are sold under ‘true sale’ to a Special Purpose Vehicle (SPV) whereby an independent administrator or trustee is instructed to liquidate the assets (perhaps with the help of a professional liquidator) when certain conditions are met. This sort of liquidation procedure is well functioned within traditional finance/securitization. The challenge here is to create a legal structure that can work with a DAO as a DAO may not have a legal status.
Legally speaking, impact asset tokens come in two main forms:
- token representing a claim on the actual impact asset
- token representing a claim on the proceed of the impact asset in the event of a liquidation
Both of these are securities: equity in the former and debt in the latter. An equity token might be subject to registration with various authorities before being included in the reserve. Price discovery would need to happen on a licensed secondary market, and in the US, subject to various transfer restrictions. There is also an issue regarding custody of the token, establishing a control location for sovereignty over the custodied token and compliant liquidation mechanism.
Under the second form, assets would be sold to an SPV in the manner described above. Each of the assets are tokenized as an NFT with adequate metadata to enable oracles to price assets on an ongoing basis and in the event of a liquidation. This second form is arguably simpler as it involves less parties, at least in the US. The liquidation process is still manual as described above.”