Weekly (almost) Narrative on MakerDAO – 26 June 2019


During the course of the last week, the community held a polling vote where the winning proposal was to increase the rate by 100bps to 17.5%. At the time of this narrative, the executive vote looks unlikely to pass as market conditions (a DAI price that had sagged slightly below 1.0000 has since recovered without a rate change) has now started to push DAI above 1.000* thus leaving the Stability Fee at 16.5% per annum. 

The overall price* of DAI has solidified around its soft peg target of 1.0000 and for the most part stuck to the peg. During the last week, the total outstanding DAI has now expanded to just slightly above 85.5mm DAI following a surge of new DAI being minted (and even after some notable CDPs closing their large positions). The above being said, as the DAI price* continues to hover right at the target of 1.0000, we can draw an initial conclusion that most of the market maker inventory has been cleared out with some market makers indicating challenges in fulfilling large OTC orders. 

If the current crypto rally extends into ETH in any way similar to 2017, we should dust-off the discussions on the debt ceiling and prepare for further tightening of our monetary policy.

Further, the average daily maker burned (as calculated) is now right at ~50 MKR per day, down from over ~60 after the recent Stability Fee decrease. The total MKR in the “burner wallet” has now surpassed ~1858 MKR after some large CDPs closed their positions. The P/E ratio (fully diluted less the burner wallet) has also increased as a result of both price appreciation of MKR along with the earning component bring reduced with the recent decrease in the Stability Fee. 


With the upcoming introduction of the DAI Savings Rate, we need to start polling for / forecasting where to start the DAI Savings Rate. As it is strongly recommended to treat the introduction no different than another other new market force, it is strongly advised to roll-out the DAI Savings Rate slowing starting at 100bps. As the DAI Savings Rate should be viewed as a competitor to traditional saving rates or even United States Treasuries, iterations on the increase post DSR launch should be no more than 25 bps at a time in general (but as further outlined and determined / calculated below which may be less than 25bps). Further, the objective should initially be price the DSR below a UST and slowly increase to YTM harmony and then increase above it, as needed.

As outlined in the past with MCD, the Stability Fee for collateral #1 (“SF1”) shall be computed with the following equation:

SF1 = DSR(uniform) + Oracle Fees(1) + Risk Team(1) + VaR_MKR(1)

For a common nomenclature, in the past, VaR_MKR(x) has been used. For continuity purposes, RP(x) = VaR_MKR(x) … RP = Risk Premium. It is the amount the MKR token holders will be compensated for absorbing the risk related to (x) collateral to price the collateral as riskless.

(Note: While not discounting their value to the system as a whole, for the purposes of this evaluation, we are going to negate the Oracle and Risk Team fees as they should be materially close to zero and thereby negligible when viewed from a macro perspective as they should be basically static with no real change based on the collateral package at hand.)

From the governance call, the topic of MCD and RP was discussed with no conclusion drawn, but the discussion has started in the community related to how this challenge can be addressed / solved. 

During the call, considerable time was spent discussing the aspects of risk management. This conversation then continued offline and in the Maker chat forums. 

Post MCD, we will be bringing on new and different types of collateral, each with its own parameters, Debt Ceiling / Liquidation Ratio / Collateralization Ratio (in aggregate they comprise a “collateral package”). Thereafter the objective is to initially (and then on a recurring basis thereafter) price the RP(x) such that the collateral package is viewed by the system as riskless. 

As the DAI that has now been minted based on the riskless collateral, using the DSR (a riskless tool) to help control the excess supply is now warranted as the riskless nature of each offsets the other.

The single greatest challenge that Maker has in-front of it will be how to correctly price that RP(x) per collateral package in a manner where voter apathy doesn’t inadvertently inject Risk Subsidy into the system. That is to say, that at scale, MKR token holders will simply not be able to keep up with the RP(x) for each collateral package to ensure the riskless nature of the desired output. 

As such, in a world that will have hundreds if not thousands of different collateral packages, it is recommended to have multiple risk-teams that are compensated to evaluate the RP(x) for each collateral type and then average (or other) out their recommendations for the benefit of the community. Further, the community should avoid voting on the RP(x) directly but rather voting on the aggregate recommendation of the Risk Teams that are familiar with and can maintain the exponential nature of RP(x) for more risky collateral packages. The same holds true for the DSR. 

The real elephant in the room is how much and what type of voting is the community realistically going to be doing? What is pragmatic? What is operationally feasible? What is logical?

It is clear that MKR token holders should vote in or out a risk-team member with X frequency. What is unclear (post-MCD) will be what else MKR token holders should vote on with more frequency? Will the community “outsource” the RP(x) setting aspects to a group of Risk-Teams (that were elected in)? 

Purely from an operational perspective, in the absence of risk-teams “watch-tower” review of RP(x), each time a new collateral package would be added, the entire community would need to vote on each RP(x). To that end, imagine a list of collateral types and associated RP(x) that are page after page. The introduction of voter apathy is almost a certainty then.

Further, we as a community would then hope (and argue) as to why they exponential nature of the RP(x) may not have been maintained with time as voters could easily introduce Risk Subsidy for a given collateral package. 

As discussed prior, when we start to misprice RP(x), any related DAI is now no longer “risk-less” (not in the actual sense, but rather think of it is slightly tarnished). Thereafter as that excess DAI is then removed with the DSR (to maintain the harmony of overall supply and demand), we have now added systemic risk to the system. 

In summary, distributed decentralized tools are exceptional at value transfer and removing inefficiencies in the market. That said, they are not exceptional at removing risk, maybe that will change with time. Until that day, it is recommended that MKR token holders “shard” off some of their governance responsibility to groups of voted-in professionals to ensure the RP(x) and DSR(uniform) are set correctly. We need multiple teams to ensure that a governance pricing risk is at least hedged / minimized.

MKR token holders should then continue to vote on executive changes, however the polling aspect should be retired and replaced by the blended average (or other) of the Risk-Teams recommendations across all collateral packages and the DSR. 

By doing the above, MKR token holders retain control over the system but have now introduced a market solution of “elected participants” for risk-management that both monitors Risk Subsidy as well as addressing voter apathy. This “shard” of responsibility is an unfortunate but highly likely requirement to be able to scale (an ironic parallel to ethereum itself) where the objective is to be decentralized but no realistic way to expect that each participant in the community (MKR token holders) will have the same risk acumen as the risk professionals that would be staffed to cover those roles. Full decentralization for risk governance just cannot scale; however, sufficient (aka good enough) decentralization to risk-teams can.

* – price being determined by USD fiat offramp via USDC – DAI (at pro.coinbase.com)

NOTE: Not a part of the Maker foundation, just my $0.02 and not intended as advice in any capacity.  

Top 250 MKR holders = 691145.757

1d 🔺: 363.426

1wk 🔺: 2486.389

Live STBLTY Fee: P/E (dilut.) 53.74 – P/E (w/o dev. fund) 39.96

FCST 50bps STBLTY Fee (VaR MKR burn portion): P/E (dilut.) 1811.63 – P/E (w/o dev. fund) 1334.89