Centralization or Decentralization? MakerDAO’s Governance Fog

1. Development of MakerDAO

Six years after the concept of the stablecoin DAI was announced, today’s MakerDao protocol remains one of the most successful DeFi applications on the Ethereum chain.

Same plan as founder Rune Christensen ‘s long post ” Introducing eDollar, the ultimate stablecoin built on Ethereum ”  left on the Ethereum Redit in March 2015 : The Maker Foundation creates a DAO on Ethereum And issued a stablecoin pegged to the US dollar. The main responsibility of the foundation is to guide the development and management of the project, and as CEO Rune Christensen is also constantly leading the realization of the blueprint.

In September 2018, the foundation passed the proposal; the MCD was launched in the following year, that is, the stable currency DAI can be generated from various encrypted assets approved by Maker Governance . DAI (previously known as SAI**)** is a stablecoin on Ethereum and the first stablecoin in the crypto world to be managed by a DAO.

MakerDao provides innovative solutions with DAO governance, opening up new financial opportunities for cryptocurrencies. The cryptocurrency market fluctuates violently, and centralized stablecoins such as USDT and USDC continue to battle with regulation. The decentralized stablecoin DAI has opened up a new model. The first breakthrough was the prosperity of DeFi Summer, the surge in market demand for stablecoins, and the greater transparency of DAI. The second breakout started with the breakdown of Terra.

As of September 14, according to CoinGecko data, DAI traffic was about 6.38B. These DAIs in circulation prove that people want more access, more opportunity, and more control over their own finances.

Data source: Coingecko

As the leading lending platform on Ethereum, CoingeckoMakerDAO’s main purpose is to promote the process of financial democratization by taking the lending business as the entry point. Regarding the operation process of the MakerDAO protocol, the article will not introduce too much here. Now, we will focus on its governance logic.

Image credit: MakerDAO's Dive into Real World Assets

2. How MakerDAO is Governed

Before talking about how MakerDAO is governed, let’s first confirm “what is governance”. According to MakerDAO’s description in its governance proposal, governance refers to: “How to control an organization, while describing who is accountable to the organization’s stakeholders. Governance is about finding what is best for the organization and what is right for the organization between a set of different governance groups. A balance between what’s actually best for the organization.”

Between stakeholders and the balance within the organization, we briefly explain the four elements of the MakerDao protocol :

1) MakerDAO : The development of the project was initially led by the Maker Foundation and handed over to the DAO organization MakerDAO in 2018. In May 2021, the Maker Foundation, which was responsible for most of the protocol development, announced that it would dissolve the foundation and gradually transition development and governance responsibilities to the DAO. From the perspective of governance framework, MakerDAO is not a leader with final decision-making power, but more like a guide for the community, ensuring that the project can run completely decentralized.

2) $MKR : $MKR (MKR token) was launched in August 2015 and is a token with governance functions. From the DAO model, the rights are delegated to the holders of MKR tokens. Holders participate in governance decisions, assume responsibility for system operation, and assume fiduciary responsibility for their own “funds”. $MKR is the decision maker, voting to modify governance decisions such as parameters in its smart contracts to ensure the stability of Dai; and the defender, defending against any proposals that run counter to the overall governance goals. The owners of $MKR form a DAO, and $MKR holders can also vote through delegates. The voting result of $MKR determines the future development of the protocol.

3) Maker Protocol : The on-chain smart contract that runs the MakerDAO protocol. MKR token holders vote on governance decisions, while operations are performed automatically by smart contracts . We can understand it as the lowest pillar in the product line.

4) $DAI : It is the core product of MakerDAO and a means for MakerDAO to ensure the operation of the protocol or generate funds through new strategies . DAI grows with the protocol and is one of the core goals of governance. According to Foundation Proposal V2 , the five principles of Maker governance include Driving DAI Adoption. That is, the goal of governance is to maintain the stability of the long-term operation of the project by ensuring the stability of DAI. The stable “currency” DAI was born in information technology, and the governance model of MakerDAO has reshaped the definition of “currency”. In the world of the MakerDAO protocol, the long-term development is $DAI, and the long-term development controller is the owner of $MKR.

At the end of 21, MakerDAO’s @wkampmann tweeted that with the end of the foundation and the formation of an independent DAO team (core unit), MakerDAO achieved “complete decentralization” in 21. These core units have their own separate Twitter: MakerDAO Core Units .

Source: tweet by wkampmann

But is MakerDAO really decentralized? Is MakerDAO’s DAO governance model the best choice for peace and stability that can promote the long-term development of the protocol, or does the entire protocol governance lead to a situation of intensified conflict?

3. Practice governance of MakerDAO

Under the planned vision, MakerDAO has experienced several waves of setbacks, especially in a volatile market environment. After Terra’s failure, MakerDAO revealed a management problem that tends to be “centralized” when addressing “how the DAO can remain decentralized and generate the growth needed to truly reshape finance”, among which there are internal group organizational issues , there are MKR holders’ obligations and income mismatch, and there are many and complicated control issues of participating institutions, etc.; all of which are frictions and collisions between the pursuit of the goal of sustainable finance.

The complexity of governance depends on how clear or obvious the definition of “best” for an organization is. The less obvious the definition, the more likely it is that groups will form around their own interpretations, which is one of the root causes of conflict within MakerDAO.

Internal Conflict in Governance: The Excessive Control of Leaders

The first big thing at MakerDAO is Real World Assets (RWA) . Using RWA as collateral is not actually an out-of-the-box idea for MakerDAO. As early as December 2020, the Maker Foundation and U.S. real estate company UPRETS conducted research on the model and possibility of real-life asset-backed lending . In April 21, Maker began issuing real estate investor loan service provider New Silver with real assets (RWA) – in the form of tokenized real estate, invoices and accounts receivable, as collateral for loans.

In October of the same year, Rune proposed the RWF 001 proposal , proposing the removal of Sébastien Derivaux, the coordinator of the original RWF group. Sébastien responded at the time that he did not leave voluntarily, and that Rune, as the founder, was “quietly trying to take control of MakerDAO.” ashleigh_schap also left a message below , telling that Greg Diprisco and Joe Quintillian of the project side (Distributed Capital) who cooperated with Rune contacted as VCs and eventually controlled part of MakerDao’s operations.

Centralization or Decentralization? MakerDAO's Governance Fog

The internal contradictions were first seen in the open letter after the departure of CTO Andy Milenius 19 years ago . In the letter, Milenius outlined his conflict with Rune Christensen. Rune suddenly informed in January ’17:

“He [Christensen] told me it was necessary that he have full unilateral control over the Dev Fund from that point forward.” )

Image credit: Internal Power Struggle at MakerDAO: When Coding and Personal Interests Collide

The RWF 001 proposal unveiled a farce-style power struggle. Behind this is the “perennial” and “series” melee between MakerDAO participants and Rune, and the “rule of the ruler” that DAO represents. Desire” collision.

Under the internal conflict, there are still undercurrents under the long-term development goals of the MakerDAO protocol. All conflicts come from “people”. In the event of changes in the market environment and the capitalization of RWA, the internal operators’ “centralized” governance was challenged, and MakerDAO’s governance began to enter a new round of chaos.

The Dark Battle of Governance Objectives: Reshaping the Road to Financialization

The 22-year market environment hasn’t gotten any better. The stablecoins represented by UST collapsed in the outbreak; the cryptocurrency circle entered a bear market; in the global macro market, rising interest rates made investors’ demand for safe-haven assets rise rapidly. MakerDAO, on the other hand, chooses real assets in reshaping finance to continue its beginnings and enter a new world.

From a governance perspective, MKR holders have the right to vote on the collateral assets for lending DAI loans. With the help of RWA.CO , in 2022, Huntingdon Valley Bank (HVB) obtained Maker’s loan of about $100 million cap through RWA; HVB became the first US bank to connect to DeFi.

Under this 6-month transaction, the MakerDAO team fought side by side for the needs of the DAO. Less than 2 months after the transaction was completed, and against the backdrop of strong US regulatory impact on Tornado Cash, Rune Christensen published the article ” The Road to Compliance and the Road to Decentralization: Why Maker Had to Prepare to Let DAI Free Float “. Proposed de-dollarization of DAI . The change in MakerDAO’s governance goals is the opinion of the “oligarch” Rune, which also triggered the start of a game among the various forces within the MakerDAO team. Without a doubt, it’s a Game of Thrones again.

@g_dip described it all as MakerDAO Drama in a tweet . He elaborated on the separation of powers within the team:

The futurists represented by Rune promote the development of Maker;

Centralists produce work-oriented output;

The decentralists are the only group of people who symbolize the ideological rights of the DAO.

The HVB deal was the last straw to overwhelm the semblance of calm. The most obvious reason is undoubtedly the sluggish macro market, and MakerDAO’s book profit has declined. Under the bear market, the three schools began to play their own small abacus. Centrists’ pay is considered “corrupt and wasteful” by futurists; futurists’ visions are considered “unrealistic and unplanned” by centrists. The first step in the conflict is the LOVE series of votes .

Just a quick look at the LOVE proposal. This proposal made by Luca on May 11, 2022: Adding Lending Oversight Core Unit (LOVE-001) , it is recommended to create an Oversight Core Unit to provide professional services such as guidance, process audits, etc. Oversee the development of Maker Strategy, the rights of $MKR holders have not changed.

On June 27, members of MakerDAO discussed two other proposals besides LOVE-001:

  • Governance Proposal #2: Adding a Special Purpose Fund (MIP55c3-SP4 ); proposed April 15, 2022; proposed the creation of a $10 million fund pool, the Makershire Hathaway SPF, to manage stablecoin reserves and diversify through investments income.
  • Governance Proposal #3: Onboard Task Force – Growth Task Force (MIP75c3-SP1) ; proposed on May 1, 2022; establish a Growth Task Force to raise funds, manage and supervise to develop the Maker ecosystem.

In conclusion, these three proposals all share a common goal: to reorganize the MakerDAO leadership; to adopt a more professional but also more “traditional” operating model, such as investing in increasing the company’s revenue and establishing a special team to manage and supervise the development of the protocol. Take MakerDAO from the chaos of decentralization to a centralized, but “efficient” solution. In the end, all three proposals failed to pass.

From the perspective of an insider @g_dip , this is tantamount to a “intrigue” style reshuffle of the party and government. Social media described the whole thing as “David Lynch level absurdity”; first with Rune as LOVE’s opposition leader wooing his own teammates @hasu  and @ElProgreso to vote against ticket. When institutional whales such as a16z through Porter Smith , Kevin Miao and Kianga Daverington publicly expressed their support, Maker’s discord channel began to appear anonymous people’s “speaking” of the VC industry. But opposition remained weak and failed to overcome the proportion of votes in favor. Nikolai, who had been pushed out of the game, suddenly returned to the Maker forum and began to oppose LOVE-001. Among the votes mobilized by Nikolai, one of the votes $MKR was found to be a $9K loan from Aave.

The main reason for the final vote to fail is Maker’s delegation system. That is, $MKR token holders have the right to modify their proxy before the voting window closes.

Image credit: MakerDAO and Our Side of History

This is a DeFi protocol governance voting battle with about 310K votes. But can DAI de-dollarization gain more value in the function of “utility”; or will anchoring “stable” off-chain assets make stablecoins more “unstable”? The massive prelude and sudden downfall of UST and other stablecoins seems to have left some revelations.

What kind of idea does the “revealer” represent? It’s hard for us to know for sure. But the only thing he knows is that he does not support the de-dollarization of DAI. It is precisely out of high disapproval of Rune’s idea that he decided to come forward to reveal the secret battle behind MakerDAO’s governance goals, as well as the instability and contradictions of its own governance structure. Behind the LOVE proposal is also a dilemma for DAO: it is not only a dilemma for the development direction of Maker, but also a “political game”. The internal powers and forces have different ideas to make suggestions on the development direction of Maker, trying to be in the DAO’s development direction. Seek a new organizational structure to break the monopoly of the “oligarch represented by Rune”.

Conflict of governance models: an imbalance of obligations and interests

Regarding the governance of MakerDAO, @hasufl pointed out in ” Simple MakerDAO — Governance from first principles “: “This is not only a problem of MakerDAO, but also” many problems in governance today. These include a general lack of vision and strategy, and a low sense of accountability to MKR holders. “

Back to voting. As mentioned before, $MKR holders vote to determine the subsequent development of the Maker protocol, which is the most decentralized and the most egalitarian move. However, the lack of benign incentives and proxy voting rights system of the $MKR token weakens its decentralized nature to a certain extent.

The Ethereum community is one of the most successful organizations to date. People are the most valuable asset of the community, connected by a common sense of mission and values. However, in Maker or the existing DAO governance model, the governance participation of $MKR holders is low; according to MakerDAO data , as of September 14, 225 delegators (Delegators) have handed over their $MKR voting rights to 110 In the hands of agents, more than 2/3 of the agents’ identities are not transparent. For the MakerDAO governance model with on-chain voting system, this seems to release a signal that tends to be “centralized” management, and it is also easier to generate a “bribery” type of canvassing war in voting.

Data source: MakerDAO

More importantly, the rights of $MKR holders are not 100% controlled, but depend on how to join the discussion on the day of the proposal discussion. For $MKR holders, does holding tokens equal to capturing the ecological development value of the protocol in the long term? This is of course doubtful.

  Image credit: Governance from first principles

When a party holds enough votes, especially when there are project institutions among the participants, voting tends to be centralized, and the risk of malicious governance attacks increases significantly. Back in October 2020, MakerDAO experienced a similar event. At that time, the project party BProtocol manipulated voting by means of flash loans, and finally MakerDAO adopted the method of ” delaying specific proposals ” to face this malicious governance attack. However, how to prevent risks through governance and set firewalls to reduce the uncertainty of preventing such incidents in a more efficient and fast way still needs to be solved.

DAO’s solution

After reviewing the governance process of MakerDAO so far, you will find that some of these risks come from the design of MakerDAO’s governance structure, and on the other hand, it comes from the vulnerability inherent in DAO itself.

Other protocol DAOs on the DeFi track, such as Uniswap and Lido, have tried different governance structures: Uniswap is governed by the smallest unit, and Lido’s innovative dual governance method brings both LDO and stETH to the governance layer. How Maker allocates the ownership of the protocol and decentralizes it to all participants in the ecosystem, such as users, investors, partners, etc., in order to maintain this huge ecosystem for self-rotating operation.

Rune proposed a blueprint for The Endgame Plan , detailing MakerDAO’s new governance plan. This part of the content is described in great detail in the article ” Central Bank Stabilizes MakerDAO, Subverting the Governance Paradigm (Part 2)” by CYC Labs ; the article will not elaborate here.

Simply put, MakerDAO introduced the concept of MetaDAO. This is similar to the subDAO we mentioned in the article ” The History and Evolution of DAO Governance “, but it is slightly different. Each MetaDAO is equivalent to a sub-division of MakerDAO, with the purpose of sharing the business processes of the core DAO and reducing the burden of governance. Each MetaDAO can issue its own token, and members are also assisted by professionals inside or outside Maker. Like the business units of traditional companies, MakerDAO can “kill” these MetaDAOs when these businesses are no longer important. MetaDAO not only has the incentive policy of subDAO to issue tokens independently, but also is not limited by a fixed organizational structure, and can be flexibly adjusted with the business structure.

Image credit: The Endgame Plan parts 1&2

But as mentioned earlier, MakerDAO’s governance issues are not short of its own. The DAO pattern is inherently fragile . One of the difficulties in DAO governance comes from tokenization . In these DAO-governed protocols, currency rights theoretically replace ownership and protocol “property rights”. And owning the governance token of the protocol is not the same as owning the protocol itself. In ” DAO’s Governance History and Evolution “, we also pointed out that the current DAO protocols are facing the problem of low governance participation. When the governance system fails to balance the rights and obligations of the participants, governance rights flow to the “manipulators”. Currency rights have become a means of political gaming. After all, a token has no identity consensus, it can target digital wallets, but not individuals. The final decision-making power of DAO is in the hands of the algorithm.

Freedom needs to be checked and balanced, as does the DAO’s scale of power. As with the growth of all new things, MakerDAO cannot completely escape governance battles. When the agreement expands rapidly and the number of currency votes increases, it becomes more difficult to reach a consensus. MakerDAO is arguing about introducing a more professional team to make more professional decisions, and whether the future development path of the protocol should be linked to the founder’s will. Is decentralization just overkill? It’s hard to come to a conclusion, but it’s clear that other DAOs are also looking for a more qualified, adaptable, and more “decentralized” governance framework to realize the vision of Internet Nation.

Reference:

https://blog.makerdao.com/makerdao-governance-risk-framework/

https://blog.makerdao.com/makerdao-governance-risk-framework-part-2/

https://blog.makerdao.com/makerdao-governance-risk-framework-part-3/

https://twitter.com/DefiIgnas/status/1564502950034042880?utm_source=substack&utm_medium=email

https://blog.makerdao.com/foundation-proposal-v2/

https://forum.makerdao.com/t/the-path-of-compliance-and-the-path-of-decentralization-why-maker-has-no-choice-but-to-prepare-to-free- float-dai/17466

https://dirtroads.substack.com/p/-42-valkyrie-makerdao-and-our-side

https://messari.io/report/makerdao-s-dive-into-real-world-assets?utm_source=twitter_messaricrypto&utm_medium=organic_social&utm_campaign=makerdao_dive_real_world

https://cointelegraph.com/news/internal-power-struggle-at-makerdao-when-coding-and-personal-interests-collide

https://dirtroads.substack.com/p/-42-valkyrie-makerdao-and-our-side

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/centralization-or-decentralization-makerdaos-governance-fog/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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