--- tags: Forums threads --- # CU budget questions ## Modify Core Unit Budget Clarifications @aes Thank you for your questions. I hope the below will provide answers and information for MKR tokenholders to make an informed decision on the budget. First, before I cover the deal economics and workflow to address delivery, a few considerations on budget: 1. A budget in the setup of this CU multisig is not a "blank check" without checks. The **operational multisig has no direct access** to funds from the DssVest (see[ implementation diagram](https://forum.makerdao.com/t/rwf-001-auditor-flow/12900#budget-implementation-1)). It reports its budget forecast and actuals to the Auditor and only receives funds from the Auditor wallet once the auditing passes. 2. There is a fixed and variable cost to legal fees in each transaction. 3. Professional services (external legal fees) is mostly a **variable cost** and credit demand driven. If borrowers approach Maker for financing, there is transaction cost. If they do not, there is no transactions and therefore no incurred cost. Also, no revenue. 4. A budget for professional services is there to support an operational function, if and when there is a need. In reality it could stay in the DssVest forever and never be used. * If the budget is available at the DssVest level, and there is credit demand, it can support a legal review need. * **If the budget is not available, and there is credit demand (i.e. a legal functional need), the transaction may never occur/be closed**. 6. External legal fees are a part of transaction negotiation. Market practice says the borrower pays lender fees. There is a caveat though. Maker is not a normal lender. Borrowers that see the "defi risk" as a risk of higher legal review costs can and are more likely to ask Maker to pay its own lender-side legal bills. 7. The assessor team (this CU) will make every effort possible so the borrower pays the lender external legal fees. There is no guarantee of success 100% of the time (see point 6). 8. Non-successful transactions **(failed deals) often incur a lender legal review cost**. Would you spend 50K DAI to protect the loss of 100M DAI due to unbalanced legal agreements? ### Pre-mip transactions A few considerations on this topic. I think there is misunderstanding of the actual role of this team or how the role of the team is perceived, whichever is true. * The RWF-001 team is **primarily an assessor team**, before anything else. It undertakes assessments on counterparties, their collateral and, with the legal support, on legal agreements associated to transactions. Then provides that output so the DAO can make decisions. * The role of **assessment is different from the role of sourcing**. When you source, you control the so-called pipeline. When you assess you diligence the pipeline that comes from borrower demand. This distinction is really important. * As an assessor, you may have a **view of the borrower demand (not control over it)**, not because you source but because borrowers approach your team for clarification during MIPs and pre-MIPs phases. * Categorisation of an assessor view of borrower demand as "a pipeline" (or worst, our pipeline) is misleading. Pipeline infers (1) control of sourcing and therefore (2) predictability of demand over a long period of time. This team has neither (1) nor (2). * An assessor does not make decisions. MKR tokenholders make decisions according to their collective risk appetite for the protocol. * An assessor provides a credit and legal opinion on the transactions. MKR tokenholders, as the only decision makers, then decide whether to make a decision in line with the assessor recommendation or not. * An assessor or a group of assessors may [provide guidance](https://forum.makerdao.com/t/mip67-methodology-and-review-process-for-structured-finance-transactions/13737) on risk, methodologies or processes it recommends for borrowers. These guidances are more like opt-in/opt-out framework options for each assessor team. Both borrowers, MKR tokenholders or other assessor teams can decide not to follow them or even create alternative guidances or MIPs. * Given the assessor has a view, not control, of borrower demand based on the present, **any forecast is only an assumption** that the present demand will continue or even increase into the future. * A view of future demand is by no means a guarantee, because **the assessor does not control deal sourcing**. ### A view of current demand: Beyond what is already available through MIP6 [greenlight](https://forum.makerdao.com/t/collateral-status-index/2231) the following gives a view of applications in pre-mip and post-mip stages. | Transaction | Category | Phase | | ----------------------------------------- | ---------------- | ------------- | | SocGen | Reg. Institution | Risk/Legal | | Asia-Pacific banking group | Reg. Institution | Scoping | | Top 5 US Credit Fund | Institution | Scoping | | Atlantic Regional Bank (US) | Reg. Institution | MIP6 Imminent | | 2018 Vintage US Credit Fund | Institution | Initiation | | Regulated secondary market platform (US) | Platform | Scoping | | Regulated structured credit platform (EU) | Platform | Initiation | | Monetalis v2 | Arranger | Risk | | Centrifuge | Platform | Legal | | MapleFinance | Platform | Scoping | This view of current demand gives an insight into the count and sophistication of counterparties in pre-mip. Given this is only a view of credit demand in 2022Q1, if you extrapolate this demand to the following quarters (2022Q2, 2022Q3, 2022Q4) you will have an insight into the expected volumes. Therefore it is not unreasonable to forecast 20+ sophisticated counterparties or platforms bringing greater volume in a rolling 12M period. #### Execution To support the assessor role with this volume: * 1 FTE (senior) can lead ~2 deals a quarter * 2 FTE (senior) specialists contractors will be added to do the heavy-lifting on specialised transactions, assisted by a fulltime team member. * Specialised contractors will be onboarded in the coming quarter, pending budget approval. * All FTEs are supported by legal contractors working as intermediaries to external lawfirms, such as @christian. * Engineering teams (CES, PE) are engaged early in the requirements gathering phase to conduct feasibility and architecture overview of MIPs. This is also an opportunity to size efforts, capacity and timelines. * Growth team members are involved throughout the process, from pre to post mip stages. ### Economics To provide a view into the economics (P&L) of the associated legal costs, find here a scenario with a few assumptions that are closer to the reality. Details [here](https://docs.google.com/spreadsheets/d/1ug73b_5WxwSspFaebrh56TunhTq3-A5f/edit?usp=sharing&ouid=114529981085695499641&rtpof=true&sd=true). Assuming an avg 100M deal size for a 2 yr tenor with a 1.5% interest rate. The scenario assumes both successful and failed transactions. Failed transactions also cost lender side review. Here the borrower covers 50% of variable expenses. | Key ASSUMPTIONS: | | | --------------------------- | ----------- | | Number of Deals Closed | 2 | | Deals using legal but fail | 2 | | | | | AVG Deal Size | 100,000,000 | | AVG Deal Tenor | 2 | | AVG Deal Rate | 1.5% | | | | | VARIABLE Legal Expense: | | | AVG closed deal legal | 250,000 | | AVG failed deal legal | 62,500 | | Legal expense % to Borrower | 50% | | | | | FIXED legal expense | 50,000 | With the assumptions above in mind, for an ambitious transaction volume (I agree it is a bold figure), the results on the total P&L across these deals would be: | |  TOTAL | | ---------------------------- | ------------- | | Number of Deals Closed | 24 | | | | | REVENUES: | | | Amounf Financed | 2,400,000,000 | | Amount Financed Life | 4,800,000,000 | | | | | Total Lifetime Deal Revenues | 72,000,000 | | | | | EXPENSES: | | | Closed deals legal | 6,000,000 | | Failed deals legal | 1,500,000 | | Legal paid by Borrower | (3,750,000) | | TOTAL Variable Legal | 3,750,000 | | | | | Fixed Legal Expenses | 600,000 | | TOTAL Legal Expenses | 4,350,000 | | | | | Variable Legal/Revenues | 5.2% | | Fixed Legal/Revenues | 0.8% | | TOTAL Legal/Revenues | 6.0% | If running the same assumptions with an unit deal in mind against legal expenses, the results are like so: | UNIT ECONOMICS: | | | ---------------------------- | ----------- | | REVENUES: | | | Amounf Financed | 100,000,000 | | Amount Financed Life | 200,000,000 | | | | | Total Lifetime Deal Revenues | 3,000,000 | | | | | EXPENSES: | | | Closed deals legal | 250,000 | | Failed deals legal | 62,500 | | Legal paid by Borrower | (156,250) | | TOTAL Variable Legal | 156,250 | | | | | Variable Profit | 2,843,750 | Clearly the above: * Assumes bias towards bigger transactions, given the expected costs * Does count the all internal Opex costs required to deliver a transaction: personnel, soft dev time, infrastructure etc from various CUs involved (RWF, CES, Growth etc) * Assumes the lender side costs to be covered (partially) by Maker. If this turns out to be unnecessary i.e. borrower pays 100% of legal fees, then funds stay in the DssVest. ### Intention: The intention of this budget goes beyond RWF-001 CU. As mentioned several times now [here](https://forum.makerdao.com/t/the-lending-oversight-core-unit-love-001-cu-overview-incubation-update/13858#more-than-a-core-unit-will-be-involved-4) and [here](https://forum.makerdao.com/t/mip40c3-sp61-modify-core-unit-budget-real-world-finance-rwf-001/13152#contributors-17), my role here as "interim" is to facilitate the transition from a single CU body into more decentralised and functional CUs. It is my [key mission](https://forum.makerdao.com/t/mip41c4-sp27-facilitator-onboarding-rwf-001/11308#motivation-6) in this DAO. This budget plays two parts in that mission. (1) Allows to boostrap the legal activity via a spin-off. Once the RWA Legal CU is incubated by @chirstian, the majority of the legal budget will be "moved" from RWF-001 to be available to the new CU (2) Allows to boostrap the contributor base. With newly onboarded contributors, existing contributors can be facilitated to spin-off a new CU with its own strategy and facilitation. I cannot stress this enough. This intention drives every single action I have in this DAO.