# MIP39c2-SP33: Adding Lending Oversight Core Unit (LOVE-001) ## Preamble ``` MIP39c2-SP#: 33 Author(s): @luca_pro Contributors: @wouter, @Juan, @Retro Tags: core-unit, cu-love-001, mandate Status: Rejected Date Proposed: 2022-05-11 Date Ratified: N/A Forum URL: https://forum.makerdao.com/t/mip39c2-sp33-adding-lending-oversight-core-unit-love-001/15098 Ratification Poll URL: https://vote.makerdao.com/polling/QmWYajMq ``` ## Sentence Summary MIP39c2-SP33 adds the Lending Oversight (LOVE-001) Core Unit. ## Paragraph Summary LOVE-001 intends to support the DAO in its evolution towards becoming the central pillar of DeFi by facilitating the sustainable onboarding of tens (or hundreds) of billions of more complex use cases. LOVE-001 will do this by developing state-of-the-art frameworks for internal checks and balances, acting as an additional line of defense within the DAO, and helping to educate the community. As the minter and guardian of DAI, DeFi's leading truly decentralised stablecoin, MakerDAO enjoys an unparalleled position at the centre of the DeFi ecosystem. With the expansion of blockchain-enabled technology well beyond the realm of crypto trading, Maker's role as collateralised lender of last resort will need to evolve to adopt more complex use cases that reside both inside and outside the world of smart contracts. ## Specification ### Motivation In the future, it is not impossible for many of those activities to be abstracted and decentralised outside of the boundaries of the DAO. LOVE-001 wants to help MakerDAO take a leading role in steering the evolution of the industry. The future is not ours to predict, but ours to build together. The creation of additional checks and balances, the facilitation of high-quality working practices, as well as the attraction of experienced talent from several fields of traditional and innovative finance, will be invaluable for the DAO during the next phase of its evolution. LOVE-001 aims at becoming one of those centres of excellence and a source of innovation, with a focus on so-called structured finance activities, by overseeing and supporting all actors involved while improving communication practices and internal processes. There haven't been more exciting times to join the decentralised finance revolution. ### Core Unit ID LOVE-001 ### Core Unit Name The Lending Oversight Core Unit ### Core Unit Mandate #### Mission Enforce MakerDAO’s role as the central pillar of the DeFi monetary ecosystem by supporting the onboarding of tens of billions of complex assets and ensuring the alignment of those activities with a sustainable and decentralised risk framework. #### Vision In five years time, the successful set-up of LOVE-001 would see MakerDAO develop along the following dimensions: * **Coordination:** Embracing a sustainable and decentralised operational framework to onboard new complex collateral sets, made of appropriate checks and balances, full information transparency —both internal and external—, and a replication of roles to avoid the emergence of powerful gatekeepers. * **Connectivity:** Becoming one of the leading ramps into DeFi for institutional capital, MakerDAO can provide a seamless on-ramp opportunity into DeFi to legacy financial institutions of any kind. * **Scale:** Onboarding of tens of billions of complex lending assets, being those assets either inside or (partially) outside the world of smart contracts. * **Resilience:** Onboarding without having experienced bad credit losses or destructive events. * **Education:** Fostering a culture of financial sophistication and open collaboration, while conducting similar initiatives across the DAO (i.e., strategic capital planning, liquidity risk management, transfer pricing, budgeting, etc.) #### Strategy Onboarding use cases that aren’t yet (fully) part of the world of smart contracts, or complex use cases in general, comes with a new set of challenges that have sparked wider questions about Maker’s role within the wider monetary and lending stack. In this context, LOVE-001 would be instrumental to make the **Vision** just described real. The initiatives that would be required to do so would constitute the **Strategy** of the CU: * **Initiative 1: Develop, document, and maintain** a high-level and accessible framework to approach new complex collateral sets. * **Initiative 2: Set (or help setting) all control frameworks** for the internal teams involved, as well as a suggested code of conduct. * **Initiative 3: Act as a second line of defence** within the DAO for the onboarding, monitoring, and management of those assets. * **Initiative 4: Educate and communicate** with other CUs and the broader community. We believe that such a Strategy would immediately address some of the challenges that the DAO is currently facing by improving the quality of the discourse with all counterparties, as well as grow work efficiency and throughput. **Initiative 1.** As part of its duties, LOVE-001 will maintain a high-level framework. Such a framework intends to document: * MakerDAO’s overarching mission and vision — within structured financing. * Key eligibility criteria to onboard complex collaterals. * Processes for both onboarding and ongoing monitoring of those collaterals. * Core governance principles. * An initial version of the Manifesto constitutes an integral part of LOVE’s application set. Although this MIP represents the first official piece of communication for LOVE-001, the framework to approach new complex collateral sets will be detailed further through the publication of additional MIPs and other posts. The **approved [MIP67](https://mips.makerdao.com/mips/details/MIP67)** has been the first step in this direction; LOVE-001 has collaborated extensively with RWF-001 in this initiative. **Initiative 2.** This MIP identifies a multi-tiered organisational set-up that could support the onboarding, monitoring, and managing process of structured collaterals, as outlined in a stylised way in the chart below. ![](https://github.com/makerdao/mips/blob/master/MIP39/MIP39c2-Subproposals/supporting_materials/MIP39c2-SP33/diagram0.png) LOVE-001 will be instrumental within such a framework as it will, beyond codifying and continuously updating the collateral onboarding process: * Publish views on the alignment with the Vision of all internal activities. * Oversee and report on the overall credit portfolio concentration. * Suggest risk control frameworks for the internal teams, as well as a code of conduct. * Act as next line of defence for credit onboarding and monitoring. * Communicate with other CUs and with the broader community. * Ensure consistency and quality of other incubated CUs together with other parties. * Periodically audit the activity of other CUs. **Initiative 3:** In assessing the activities performed by other CUs, as well as in providing an extra view on the quality of the submitted complex collateral applications, LOVE-001 will act as an extra line of defence to protect the stability of the DAI. Although **no delegation of power away from MKR holders has been envisaged**, those holders and their delegates might not have the required bandwidth nor expertise to act without support from the CUs in all occasions. During the early days of the initiative, the extra layer of oversight will act simply as another set of eyes, empowering token holders and delegates with a second opinion on proposals. With the scaling up of activities, however, LOVE-001 (and hopefully LOVE-002, 003, etc.) will become a crucial actor in suggesting that best practice and healthy risk management distribution are improved throughout the community. The chart below exemplifies how the CU could interact with the rest of the ecosystem during a collateral application process. ![](https://github.com/makerdao/mips/blob/master/MIP39/MIP39c2-Subproposals/supporting_materials/MIP39c2-SP33/diagram1.png) In the future it is not impossible for some or most of those analysis functions to be decentralised to parties that are external to the DAO. Such external underwriters might stake MKR tokens as guarantee, or first-loss capital, in support of their official endorsement of a credit application. Although the decision-making power will remain in the hands of MKR holders, the consultative underwriting process could also be pushed outside. We believe that MakerDAO, through LOVE-001, should play an active part in shaping this decentralisation process. Close to MakerDAO’s core values and vision, LOVE-001 will aim at maintaining the DAO’s commitment to fostering innovation and to supporting the emergence of innovative actors within DeFi. Stimulating innovation while maintaining high underwriting standards is a difficult task, and LOVE-001 intends to play a crucial balancing role in doing so. **Initiative 4:** The introduction of trustless, automated, smart contracts to the financial ecosystem has enabled explosive composability and the widespread distribution of roles. Although this phenomenon has boosted innovation across the board, it has also made the environment exponentially complex and risky. To this, in the medium term we should add the challenges arising from the co-existence of smart contracts and legacy financial systems. For these reasons, ensuring open communication within the Community, as well as the education of all members on the most important concepts underpinning credit underwriting, will be crucial for the success of all initiatives and for MakerDAO as a whole. LOVE-001 intends to support this via: * Producing educational materials, together with other CUs. * Hosting coordination sessions and AMAs among all parties involved (or that should be involved) in the collateral management processes. * Hosting open sessions for all Community members . * Supporting the incubation of new CUs. * Supporting cross-unit strategic initiatives aimed at the continuous evolution of the protocol — i.e., CU incubation, strategic capital planning, liquidity risk management, transfer pricing initiatives, budgeting, etc. * Supporting the emergence of innovative players within DeFi, in accordance with the vision of continuous decentralisation and distribution of responsibilities across the ecosystem. ### Roadmap The development of a fully-functional LOVE-001 will happen along a series of stages, as described below: * **Phase 0 - Seed (*):** Re-engage all contributors, restructure communication channels, start the professionalisation of all working practices. * **Phase 1 - Bootstrap (*):** Install institutional practices in underwriting and monitoring, homogenise existing conversations with counterparties, kick-off LOVE-001 staffing program, graduate from SES incubation. * **Phase 2 - Establish:** Operate now a fully-formed LOVE-001, interact with all other CUs involved in onboarding and monitoring of new collateral, support the incubation of new CUs, communicate with internal and external stakeholders. * **Phase 3 - Decentralise:** As soon as size of business and number of interacting CUs justify it, start a process of further decentralisation of LOVE-001 into parallel units for the avoidance of the creation of single points of failure, enhance and empower the existing team, refine collaborative processes further. (*) Both the **Seed** and (part of) the **Bootstrap** stages have been completed ahead of the submission of this MIP as part of SES incubation program. LOVE-001's team will evolve in synch, as described in the table below. | Phase | Headcount | Role | | ---------------- | --------- | ------------------------------------------- | | 0 - Seed | 1 | Facilitator (F) | | 1 - Bootstrap | 2 | F + Lending Analysts (LA) | | 2 - Establish | 3 | F + Senior Lending Analyst (SLA) + LA | | 3 - Decentralise | 4 | F + SLA + 2 LAs | --- ## Related Documents - [Lending Oversight Core Unit Dai Budget](https://forum.makerdao.com/t/mip40c3-sp71-lending-oversight-core-unit-dai-budget/15103) - [Lending Oversight Core Unit MKR Budget](https://forum.makerdao.com/t/mip40c3-sp72-lending-oversight-core-unit-mkr-budget/15104) - [Lending Oversight Core Unit Facilitator Onboarding](https://forum.makerdao.com/t/mip41c4-sp36-facilitator-onboarding-lending-oversight-core-unit/15105)