The accounting is on chain - Net Asset Value calculation is done on chain based on the metadata of Asset NFTs but there will be some centralisation at least in the beginning with oracles.
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I agree that centralization is inevitable at certain points, the transition to fully decentralized systems will take a while.
Okay I’m down for this game, at least can flash liquidate all of the type2’s
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Sure. We will release our white paper shortly and will share with the community.
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Thank you for this framework, Manrui!
My assumption is that high quality land (e.g. rainforest) or shares of a holistic project beyond carbon credits will be high in impact & high in yield because high quality projects will not only produce valuable carbon credits that rise in price over time but also biodiversity credits and the land itself will rise in value. I spoke many times with Kjell from https://www.forestbase.io/ about it and think that something like this could be a great asset. So I would disagree on the low yield part.
But as you point out these assets are currently illiquid. I think by pooling projects & land and balancing pools this can be mitigated to a certain extent. Another possibility that I would like to explore is to bring institutional investors on board. You seem to understand the legal implications well so I’d like to hear your take on it:
Imagine, there was a tokenized rainforest on-chain with a current value of 1.500$/ha but the asset is fairly illiquid. Now the treasury could buy this asset and mint up to 1000cUSD. The one hectare will be in the vault as collateral. Should the on-chain price of one hectare fall to or below 1.000$/ha (+5% safety margin) then it would be automatically liquidated. To achieve that, we set up a smart hybrid contract where big institutional investors commit to buy as many hectares as possible for 1000$/ha.
We assume that the value of the rainforest appreciates over time as high quality offsets will be valued higher and further ecosystem credits can be developed and issued in the next few years. So after five years the price might be 4500$/ha and another 2000 CUSD could be minted because institutional investors would be willing to buy any amount at 3000$/ha now.
This could work similarly with high quality carbon (removal) credits, (insured) futures as well as bio-diversity and other ecosystem credits yet to be established.
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One concept that I don’t think has entered into the conversation yet is that the overcollateralization will not be a forever thing.
What I’m getting out of here is a matter of scaling up, if/when Celo stable coins 10x to $1 billion 100x to $10 billion, at that point there will be essentially no “over” at all.
Those aren’t really big numbers compared to the possible market.
The basic purpose of the coins is to improve the economics of “the people”, that in itself is a huge economic and environmental boon.
The reserve collateral needs to support that purpose above all other considerations IMO.
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I dont think we need to scale cStable up all that much for it to be useful though.
For example, I want to think of cStables as the equivalent of CASH, and the total amount of CASH that needs to be in circulation in the economy is actually quite small compared to the net wealth of everyone.
There only need to be enough cash circulating around to facilitate transaction, and a healthy economy is one where we have high velocity of money and the same $1 cUSD moves between people many times over as part of commerce.
I think if you think of cUSD from this perspective, then it’s still feasible for it to always be over collateralized, because the true store of wealth is going to be stuff like BTC and such (things that are resistant to inflation long term)
Or do you imagine people hoarding millions of cUSD? I just dont see why someone would want to hoard cUSD given that there are much better investments available.
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I’m not sure how far we need to go.
The basic design philosophy of the protocol is to capture value via the rise in price of the native asset. More usage/higher price. I haven’t figured out if it will take inflation to keep the whole thing working or if it can work if with a stable supply that just covers transactions.
The hope behind Proof of Deposit seems to be to have cUSD replace Tether.
This is one reason I’ve been chasing down how Celo intends to make money. Scale needs to be large enough to keep people doing their jobs.
I think you are correct about BTC, that’s where I ran when Terra went sideways. A year ago I thought BTC was risky, giggle.
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USA draft stable coin law. Full draft here: Lummis Bill Draft | PDF | U.S. Securities And Exchange Commission | Securities (Finance)
“9804. Settlement finality.
“9805. Notice to customers; enforcement.”.
TITLE VI—RESPONSIBLE PAYMENTS INNOVATION
SEC. 601. DEPOSITORY INSTITUTION ISSUANCE OF
STABLECOINS.
The Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.) is amended by inserting after
section 14 (12 U.S.C. 1824) the following:
“SEC. 14A. DEPOSITORY INSTITUTION ISSUANCE OF
STABLECOINS.
“(a) In General.—A depository institution may issue a payment stablecoin as provided by this
section.
“(b) Payment Stablecoin Assets.—A depository institution shall maintain high-quality liquid
assets under this section equal to not less than 100 percent of the liabilities of the institution
relating to payment stablecoins. In the case of an insured depository institution described in
subsection (k)(1)(A) that engages in on-balance sheet lending activities, assets under this
subsection shall equal not less than 100 percent of the liabilities of the institution related to
payment stablecoins and the assets shall be held in a segregated balance account at a Federal
Reserve bank, in a segregated deposit or off-balance sheet account, or in another equivalent
manner that ensures the segregation of the assets. Eligible high-quality liquid assets under this
section shall be comprised of the following:
“(1) Cash.
“(2) Balances at a Federal Reserve bank.
“(3) Foreign withdrawable reserves, consistent with the legal tender in which the
payment stablecoin is denominated or pegged.
“(4) A security that is issued by, or unconditionally guaranteed as to the timely payment
of principal and interest by, the Department of the Treasury, with a short-term maturity date.
“(5) Any other high-quality, liquid asset determined to be consistent with safe and sound
banking practices.
“(c) Disclosures.—A depository institution shall disclose, in a publicly accessible manner, a
summary explanation of the assets backing the payment stablecoin not more than 10 business
days after the end of each month. The detailed explanation shall include the value of the assets,
total liabilities, and the percentage of total assets for each kind of asset held in reserve. As
applicable, the appropriate Federal banking agency or State banking supervisor shall, as part of a
regular examination of the depository institution, at the frequency otherwise required by law,
verify the composition of the assets and the accuracy of disclosures made under this section and
reports under subsection (d).
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Thanks for your comment Ikarus.
Each of the asset classes above deserves their own post as there are many possibilities, complexities and nuances under the aspiration.
Regarding forest tokens’ yields it is possible that we could find “Alpha” among forestry investments. However, as an asset class, in the US, forestry investments’ (with timber being the main source of revenue) yield is equivalent to 10 year treasuries, according to a World Bank’s report.
Emerging markets assets could bring higher returns and in the above report, institutional investors did not invest in forest assets for carbon credits. However, both emerging markets and carbon credits-based investments bring with them different types of risk, or simply higher risks.
In the case of timberland investment, often there is an offtaker of the timber, providing a hedge. In your example, however, when asset prices go down, you would like to sell to an institutional investor the 1ha at $1,000, essentially by having a put option. Put options for this type of illiquid, long duration assets would be expensive, if they exist. So apart from the $1,500/ha purchase price we would have to pay the put option premium. Any gain would therefore be much smaller than calculated.
Like any investment, forest investment could go up as well as go down. Harvard Endowment, one of the largest natural asset investors in the world, found themselves having to write off about a quarter of their portfolio of $4bn. Not all their natural assets are ecosystem/nature-based assets we are talking about here but still some of their forestry plantations in Uruguay and other LATAM countries were sold at a discount. Finally, as mentioned in the original post, by yield we meant financial yield which is often short term and monetary. The impact of the Celo reserve owning a rainforest in the Amazon or the Congo will be a lot more than just the financial return, but that is a tradeoff.
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Thank you, I really appreciate your detailed response! I personally assume that the conservation of the last biodiversity hotspots will become very profitable over the next years with the rise of high quality carbon credit projects and the emergence of other ecosystem credits such as biodiversity credits. But I understand that there is no historic data to back this assumption since it’s the market is just getting started.
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Your maker dao proposal didn’t seem to go through, can you summarize what was the risk and issue that prevented untangled from being included in Maker?
I feel like the same issues that prevented inclusion in Maker would also apply here in Celo.
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The lack of history is a real concern for me. A different proving ground may be more appropriate.
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Of the 30 odd RWA proposals to Maker since August 2021, none has gone through. Maker updated their approach/methodology leading to many withdrawals.
Our application was one of the most prioritised, greenlit and was the first that got through an onboarding risk evaluation by the real world finance core unit team, among a handful of risk evaluations completed by Maker since. We continue to work with Maker under their new framework.
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What was the criteria that kept Maker from proceeding?
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There wasn’t one reason but many. We can’t speak for Maker but you could find their current criteria for onboarding RWAs here. These criteria are not dissimilar to what are being proposed by the Celo community here.
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So, after thinking about this more I actually think I’m wrong in that comment because of the context, we simply aren’t in an ideal world and to be frank these asset classes are probably less risky than BTC, ETH, and DAI.
I have a couple caveats with that in that Celo (all of crypto actually) needs to do a lot better at explaining the risks involved to people who want to use the stable coins and that sooner or later we will need to move toward a more ideal situation that is darn near as liquid as fiat and regulatory compliant.
For now this may actually be an interesting step forward.
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Hi all, Peter from Pando here. @Dori recently introduced ourselves (Introducing Pando: reliable yield from real world climate solutions), and we have been reading posts to learn more about the community. A big thank you to @Muntangled for raising the important topic of real-world assets and how they might intersect with the crypto world. The frameworks and concepts offered are really helpful and I think should help the community get more insight into this space.
We know the OP from Untangled was meant to be high-level, so we will keep our comments high-level too. As M said, there are a lot of nuances when looking at the various types of real world climate assets, so one framework probably can’t rule them all.
The triangle as presented is interesting and offers a unique way to blend climate, cash flowing assets, and crypto priorities. Our recommendation is to change “Yield” to “Risk Adjusted Return”. It’s challenging to consider Yield as a standalone concept – as Yields are driven by many factors, foremost Risk. For example, a return of 3% for a publicly rated, investment grade debt is likely a very attractive Yield for the associated Risk. Whereas a 10% return on an equity investment in a less-mature market with technology risk likely is a very poor risk adjusted return. We recommend that the community, when using the lens of this triangle, consider evaluating opportunities based (in part) on the risk adjusted return.
On “Liquidity”: We agree with Untangled that it is not terribly complicated to exit investments (there are standards and best practices to follow from the climate finance world). We want to be careful about the definition of liquidity discussed here as being able to sell an asset “without affecting its price”. Even selling a stablecoin could theoretically affect its price and, especially when considering real world assets, liquidating a position is often a factor of time, price and scale. For example:
Time – if the reserve needs to liquidate immediately (and with real world assets like renewable energy systems, this is measured in weeks, not days or hours), you can expect to see a discount on that liquidation, since you effectively are a distressed seller. If, however, the assets are performing well and Celo is comfortable with an orderly exit, you could realize an exit that returns 100% of principal and a % of your expected interest.
Price – if the reserve is sensitive to maximizing price over time, then the last sentence above is more achievable. If, however, the reserve is willing to realize a lower price (depending on timing, this could mean not all of your invested principal), then an exit could occur sooner than later.
Scale – finally, scale is an important determining factor in an exit. For example, the reserve could have approved a $15m debt facility, but only $1m has been deployed. In that instance, the reserve wants to exit its $1m position, which is a smaller dollar amount, likely with limited diversification in the assets funded (for distributed generation), and potentially limited performance history. Exiting that $1m position will be more challenging than if the full $15m was deployed and the assets have a reasonable performance history.
Hopefully the above is helpful as the community continues to explore real world assets!
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I agree risk adjusted return is more useful metric than yield.
Regarding liquidity, in a sense I think there are 2 types, Peter talks about time and scale to move the asset in real world, which is for sure important yet Probably more important is how big an on-chain market is there?
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There should never be a discussion about returns without risks. We deliberately did not use the word ‘return’ for that reason. We could use ‘risk-adjusted return’ but that phrase is perhaps too long. A framework needs a level of brevity to aid memory: ‘risk-adjusted return’ does not go well with ‘Impact’ and ‘Liquidity’. Moreover, in TradFi fixed income market yield is inversely related to price. So say Celo reserve is to buy a riskier asset, it can demand a higher yield (or a lower price) for the asset regardless of the level of coupon (return). In Untangled Protocol, yield to maturity is also used to calculate Net Asset Value (NAV) through the discounted cash flow method, in the absence of a liquid secondary market.
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