Off-chain securities

This structure is not implemented during the time when Sweep is focused on supporting tokenized securities

Stabilizers can place money into liquid securities through a secured margin loan.

Maxos provides tools to make this work:

• Stabilizer mechanics and accounting

• Legal agreements. The Sweep/Legal agreements page describes them in more detail

• A collateral agent that can represent the DeFi lenders

• Participating securities brokers and securities custodians

Borrowing

Borrowers can borrow and repay at any time. They should be motivated to borrow when they think they can make a spread over the cost of funding.

Disbursement will go to a specific wallet. The recipient wallet may have pre-programmed workflows. The main responsibility of the recipient wallet is to trade redeemable stablecoins for bank USD, and wire the money to a brokerage account.

Borrowers will normally have a fairly strict mandate that describes what securities they can buy. The value at risk for holding the securities needs to stay correlated with the equity ratio that the borrower contributes.

Funding and repayment terms

The protocol and the Stabilizer have the right to ask for repayment at any time.

• Funding protocols will use this right to force repayment when savers are reducing funding

• Stabilizers will use this right to liquidate if losses bring the junior tranche equity below a the minimum requirement

Collateral pledges and liquidation

The collateral agent gains collateral rights through a loan agreement, and a "tripartite account control agreement" that provides direct access to the securities held by a custodian. On a default event, the collateral agent can trigger a sale of the collateral securities, and deliver the resulting funds to the stabilizer.

A default is triggered when:

• The protocol or the Stabilizer asks for repayment and does not receive it within an agreed amount of time. For large markets this time should be less than six days.

• The securities account shows losses that bring the junior tranche equity under the minimum ratio

• The collateral agent sees that the borrower does not follow the agreed terms for workflow or mandate.

The content under Sweep/Legal agreements provides more details about the secured margin loan agreements.

Motivations

Risk adjusted returns in off-chain money markets can be higher than DeFi returns. The supply of off-chain securities is much bigger than the supply of DeFi dollar assets, allowing protocols to earn better returns by staying fully invested (in DeFi jargon, running at high utilization of the lending pool). Large and liquid markets can meet demand for redemptions.

Securities custody is much more reliable than crypto custody. It is not exposed to technical, hack, or reserve risk.

Structuring this placement as a loan has advantages over direct placement. Lending DAOs have simplified responsibilities that stay in the world of collaboration and software. Real-world borrowers handle the securities accounts and investments. Loans from DeFi are better established and better accepted by regulators than securities investments from DeFi.