MakerDAO, the protocol that issues the Dai stablecoin, has passed a governance proposal that will usher in the transition to its “endgame plan.” This plan fundamentally changes many aspects of MakerDAO.
Here is a breakdown of the main points of the proposal:
clean money
In October 2021, MakerDAO founder Rune Christensen unveiled his new vision of what Maker should become, and it was all centered around a concept he dubbed Clean Money. It was a way to take the collateral from Dai and use it to fight catastrophic climate change. This was to be the vision that would unite the Maker community and bring it together around a common purpose.
This is actually not a new belief within the MakerDAO community with their Sustainable Finance Principle adopted in 2018 stating: “That the management of the collateral portfolio considers long-term societal, environmental and sustainable impacts.
The maker project as a whole must maintain the principles of sustainable finance as a core value and always include negative externalities as a key factor in collateral risk assessment. This means Maker will be biased towards, for example, renewable energy, which offers long-term global benefit, while being biased against financing fossil fuels and other assets, which pose long-term risk.”
Rune hoped that “within a year we can invest 3 billion or more of our USDC exposure in ESG corporate bonds protected by a top tier trustee in the UK or other super country.” A year later, MakerDAO has invested $0 of its collateral in ESG corporate bonds protected by a top tier trustee in the UK or other super country.
USDC and Real World Assets
USDC is specifically mentioned by Rune as it poses one of the biggest potential risks for the stablecoin Dai. According to makerburn.com, 81% of the outstanding Dai was minted from “stable collateral” dominated by USDC. This somewhat exaggerates the magnitude of the problem, however, as the stablecoin vaults are not over-collateralised, unlike other vaults. USDC and USDP together account for about 42% of the total collateral blocked for Dai. These stablecoins pose such a significant risk to Dai because issuers can blacklist these tokens and render them worthless at any time, but many parts of Maker either explicitly or implicitly assume that they will continue to be worth a dollar. This was one of the reasons for trying to reduce this exposure in favor of US Treasuries.
In addition to stablecoins, Maker has increasingly relied on other real-world assets, bridged assets, and other assets that could come under pressure from regulators and law enforcement.
Maker’s critics have for years implied that this is an untenable situation, as these assets fundamentally undermine Maker’s goal of being a censorship-resistant stablecoin.
Rune hoped when announcing the Clean Money initiative that Maker would be able to reallocate assets from USDC to other bonds, which would increase the yield it generated. This would arguably make it more difficult for regulators or law enforcement to quickly disable Dai.
Maker’s endgame plan
The endgame plan is a major overhaul of many parts of the Maker protocol, changing some of the expectations people have of it.
One of the changes is the intention to create a variety of MetaDAOs – smaller communities that own pieces of Maker functionality or growth. MetaDAOs are nominally intended to help address some of the political and interpersonal issues that maker governance struggles with, but they are incredibly complex. Each MetaDAO will have its own treasury which is not controlled by MetaDAO but is under the control of Maker Core DAO.
Each MetaDAO will also have its own token, run its own front end, and have yield farming. MakerDAO will move from a two-token system (plus collateral) to a many-token system, with a complex system of token economics that will hopefully allow MetaDAOs to create their own value while returning value back to Maker Core.
There are said to be GovernorDAOs who are “responsible for organizing Maker Core’s decentralized workforce,” CreatorDAOs who are “focused on growth and innovation in the Maker ecosystem,” and ProtectorDAOs who are “focused on facilitating Maker Cores interaction with the physical world.” The plan is to start with two each for a total of six MetaDAOs.
Maker Core, which will continue to be managed by MKR holders instead of MetaDAO token holders, will maintain control of all MetaDAOs and their treasuries at all times. The votes in MetaDAO still signal and require the execution of Maker Executive Votes.
The ability to create sustainable communities and values around managing individual aspects of a broader community has yet to be proven and will likely be an ongoing challenge for the MakerDAO community. Many DAOs are seeing very low turnout, and even in Maker’s recent major governance vote to see if Pre-Endgame Maker Improvement Proposals (MIPs) should be passed, only about 16% of the governance tokens were voted on.
In addition to dissolving Maker’s current organizational structure, the endgame plan also intends to fundamentally change the type of collateral and posture that MakerDAO takes.
Rune now believes that a “physical crackdown on crypto can occur without notice and with no possibility of recovery even for legitimate, innocent users. This violates two core assumptions we used to understand RWA risk and makes the authoritarian threat much more serious.”
This was the motivating factor behind many of the changes he hopes to incorporate into Maker. Broadly speaking, these changes are motivated by a desire to make makers more censorship-resistant and harder for regulators to coerce. This is made clear by the three phases that Rune describes for Maker.
The first is called “Pigeon Stance” and is basically where Maker is now. During this phase, which is expected to last for the first two and a half years, Maker will focus on generating revenue and storing ether for the next phase.
After two and a half years, unless delayed or started early, the goal is to enter Eagle Stance and reduce attachable assets to less than 25% of the total. At this point, if necessary, they intend to break Dai’s peg to the dollar to achieve this goal.
Finally, there is “Phoenix Stance”, which is intended to only activate during times of global instability or when an attack on collateral is expected. Keep in mind that this can happen at any time without warning. In this phase, any remaining pawnable assets are sold to acquire more staked Ether.
The other tier change attempts to increase the amount of ether staked that the protocol controls, hoping to further increase the amount of ether the protocol controls.
Finally, the assumption in the past was that if vaults could not be liquidated at a sufficient value to cover the debt and the log surplus was not reasonable, MKR would be sold in the market to keep the log solvent. It has always been possible for this process to have been disrupted by governance, but the explicit assumption is now that this backstop is entirely optional and “the ability to pass a loss on to Dai holders through a discount to the target price becomes explicitly possible” . This means that while MKR holders still have final say over the protocol, they are no longer the ones presumed to be watered down to heal others.
Read more: Ethereum supply will be 100 million by 2027…or 2061
What is actually changing?
That being said, the initial pre-endgame MIPs don’t make all of these changes. You create an emulation of the vault controlled by the protocol and used to store stEth. It expands the mandate for some core entities, changes the collateral onboarding process and removes some legacy MIPs. The process of introducing the first MetaDAOs begins.
The rest of the plan is yet to come, but in a way it starts the clock. The endgame plan posits that in three years it will be time to switch to Eagle Stance and possibly break the peg to the dollar, but MKR token holders are still able to use this one postpone transition indefinitely. They will find this attractive to generate returns due to the additional income from buying bonds and USDC being held with Coinbase, especially when the assumptions around them that they would need to provide a backstop are gone.
MKR owners could end up being incentivized to extend the “pigeon phase” indefinitely and continue to find ways to keep increasing yield because it will primarily benefit them.
Consequences of vertebral fractures
If MakerDAO decides to enter the “Eagle Phase” and break the bracket, there will be second-order impacts across the ecosystem. Any protocol that implicitly or explicitly assumes that Dai will be worth a dollar would have trouble with this kind of peg break, and so it’s becoming increasingly important for any protocol over the next few years to ensure that assumption doesn’t get baked in anywhere Protocol. It’s also important to have properly tested and hardened solutions to handle a sudden Dai peg break (a thing most protocols should already have for all stablecoins).
A previous peg break was the motivator for onboarding so much centralized collateral in the first place. Dai’s peg to the dollar is one of the reasons why it has so significantly outperformed its competitors like Rai, which allow the tie to float. Rai currently has a market cap of less than 0.25% of Dai. Switching back to a conception of Dai where the bracket can break and with this type of collateral change will also affect the demand for Dai which can have feedback loops as the protocol tries to adjust its collateral.
Read More: MakerDAO Passes Yield Increase Proposal as Stablecoin Ban Looms
What does that mean?
I have repeatedly referenced Rune’s communications here, and that is in large part because he was by far the largest voice driving this change of protocol.
He correctly identified a risk to the protocol, found a solution he believed possible, and passed the signals vote. But the structure of the “dove phase” he designed may discourage MKR holders from addressing the problem he identified by allowing them to capitalize on inaction. A “solution” that discourages solving the problem is not a solution.
If the “solution” is pushed ahead nonetheless, it will permanently change the demand for Dai and its place in the ecosystem, potentially damaging or breaking other protocols.
All with less than 20% of the voters expressing their opinion.
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