Difficulties and Opportunities of MakerDAO: How to Realize Governance Reform?
The real situation of the DeFi protocol may not be as bright as the surface data.
Original title: MakerDAO's Risks and Opportunities: Loss, Regulatory Risk and MetaDAO's Redemption
Written by: Jiang Haibo
The real situation of the DeFi protocol may not be as bright as the surface data. Our impression of MakerDAO may include: TVL is in the first place for a long time, DAI is an important DeFi infrastructure, and MakerDAO can rely on stable rate income to buy back and destroy MKR.But who would have thought that MakerDAO, the most representative DeFi protocol, has also fallen into the mire.
The dilemma of MakerDAO
According to the revenue data of MakerDAO, the annual stability fee income of MakerDAO is about 51.4 million dollars. However, in addition to the apparent income, 115 employees are required to maintain this huge and complex governance machine. The annual cash consumption is 43.6 million dollars, and MKR compensation based on DAI is about 17.3 million dollars. These costs have exceeded MakerDAO's stability fee income, and resulted in MakerDAO's annual loss of about $9.4 million.
Rune Christensen, co-founder of MakerDAO, realized this problem in May this year and formally proposed the Endgame Plan in June, hoping to simplify the complexity of governance. The signature of Rune has also been changed to "Now I am working on some new projects and making contributions to Maker as a community member".
After Tornado Cash was sanctioned, Circle, the publisher of the USDC, actively cooperated with the sanctions of the U.S. Department of Finance. In the Anchor Stability Module (PSM) in the Maker Agreement, there are USDCs worth more than $3 billion, which accounts for more than half of all the collateral of Maker. This requires that the final plan can simultaneously deal with security issues from the supervision.
Governance reform: MetaDAO
On the one hand, the existing governance process is too complex, which restricts the speed of MakerDAO to develop new functions; On the other hand, it needs to rely on the participation of huge manpower, which has become the main reason for MakerDAO to lose money in the bear market.As an important part of the final plan, MetaDAO is committed to accelerating the governance process, reducing the human costs of MakerDAO, isolating risks, and parallelizing highly complex governance processes.
Similar to the current blockchain mainstream "modularization" idea, the complex MakerDAO governance is divided into small pieces, that is, MetaDAOs one by one. Each MetaDAO can focus on its own tasks without being distracted by other responsibilities. For example, MetaDAO focusing on creation will recruit developers to build front-end products and functions on the chain; MetaDAO, which focuses on RWAs (real world assets), will be responsible for managing RWA Vaults. This can also overcome the single thread problem in the current Maker governance process, achieve multi center governance, allow MetaDAO to execute in parallel, and speed up the governance process.
Maker can create a new MetaDAO by deploying a new ERC20 token. Ideally, Maker Core only needs to support collaborative MetaDAOs in the end, and the specific work will be completed by MetaDAOs one by one, reducing the burden on MakerDAOs. Some members of the Meta Core will also be reorganized into the Meta DAO, reducing the manpower cost of MakerDAO by half.
Compared with MetaDAO, MakerDAO is like Layer 1 and Layer 2. Maker governance can be seen as a slow, expensive but more secure "governance Layer 1", while MetaDAO is like a fast and flexible "governance Layer 2", but ultimately the security is improved to Maker governance.
MetaDAOs are independent of each other, have their own governance tokens and processes, and need to earn their own profits. According to Rune's statement in the "Complete Overview of Final Plan v3", MetaDAO tokens (MDAO) will be distributed in the form of mining, in which 20% will be allocated to DAI farms, 40% to ETHD farms, and 40% to MKR farms to promote the entry of decentralized collateral.
Path to achieve decentralization
MakerDAO mainly increases the degree of decentralization through the following paths, focusing on increasing the use of decentralized collateral and accumulating decentralized assets owned by agreements with agreement revenue.
1. Increase the use of ETH collateral
After Tornado Cash was sanctioned by the US Treasury Department, Maker has adopted a series of measures to reduce its dependence on the USDC.
For example, increase the debt ceiling of WSTETH-B Vault and reduce the stabilization fee to zero, and reduce the stabilization fee of ETH-A, ETH-B, WSTETH-A, WBTC-A, WBTC-B, RENBTC-A and other vaults.
Lowering the capital rate of other vaults may reduce the need to cast DAI with USDC through PSM.
2. Introducing EtherDai
EtherDai was introduced to have pledged ETH under the control of Maker governance. This product includes ETHD and EtherDai Vaults. ETHD is the encapsulation of the Staged ETH (stETH) around Lido (similar to wstETH). Users can encapsulate the stETH as an ETHD or redeem it as a stETH. The emergence of ETHD and wstETH may be due to Lido issuing pledge rewards through rebase. If users hold stETH, the balance will continue to increase, but it may be inconvenient to use in some scenarios.
Maker governance will have backdoor access to ETHD collateral, which may stimulate liquidity by setting ETHD/DAI short-term liquidity mining on Uniswap. On the other hand, the stability fee of EtherDai Vault may be set to zero to guide the demand for EtherDai Vault.
3. Adjust the use of Real World Assets (RWAs)
The final plan proposes three different collateral strategies, namely pigeon type, eagle type and phoenix type, which will gradually develop along the timeline and gradually advance according to the regulatory threat.
The first is the pigeon strategy. During this period, the main task is to increase RWAs as much as possible and maintain rapid growth. Because RWA collateral can bring higher stability fees to Maker, Maker wants to earn as much as possible during this period and exchange it for ETH.
Three years later, if DAI starts to be attacked by authority and RWA collateral is at risk of being confiscated, then switch to eagle strategy and limit the risk exposure to RWA to 25% to seek the balance between performance growth and flexibility.
If there is evidence that RWA is about to be attacked by authorities or all collateral of RWA has been confiscated, it will be excessive to the Phoenix strategy of eliminating all RWA risk exposures. Only RWAs that cannot be controlled by authorities can be used as collateral.
Starting from the hawk strategy, that is, RWAs have the risk of being confiscated, it is necessary to promote DAI and the US dollar to become a free floating asset.
The basis for adopting this development route is that the supervision may be more strict, and the RWA collateral will be threatened by authorities over time. MakerDAO can also use the current time window to expand the market and accumulate assets as much as possible.
4. Agreement Owned Vault
When users borrow DAI from pledged assets in Maker, a vault will be generated. The anchoring stability module does not distinguish users, has no stability fee, and will not be liquidated. It can also be regarded as a special vault.
The Vault owned by the protocol will help MakerDAO accumulate more ETH. First of all, it is planned to obtain the Stacked ETH with double leverage through the surplus of 40 million DAI. This means that the staked ETH with a value of 80 million dollars can earn income, and the surplus will also be put into the vault owned by the agreement. As Ethereum completes the merger and transfers to PoS, MakerDAO can gain an additional amount of Staking revenue.
DAI will still be anchored to USD in the short term
According to the existing plan, DAI will remain anchored to the US dollar for a long time. Rune also explained on his Twitter that "it is a bad idea to exchange all stable currency collateral for ETH".
MakerDAO is still making use of the assets in PSM to improve its influence. For example, the 1inch and Paraswap aggregation DEX have already integrated PSM. The transaction between the large amount USDC and DAI will directly pass through Maker's PSM, without any transaction slippage or transaction fees.
Rune's final plan schedule published in the MakerDAO Governance Forum on August 30 also shows that DAI will remain anchored to the US dollar for at least three years. If there is no direct threat, this time will be extended. If we can increase the degree of decentralization of collateral to 75%, we will anchor it to the US dollar indefinitely.
In the short term, DAI will still anchor the dollar. Maker's main task at present is to continue to expand its business and accumulate assets. MetaDAO's reform of governance may be mainly to reduce MakerDAO's huge labor costs in a bear market, and also to speed up the efficiency of follow-up work.
The pressure of supervision may not come soon, which is a window of time to seize opportunities for development. When the pressure of supervision really comes, MakerDAO's plan is to achieve anti censorship in the medium and long term and link it with the US dollar.