6s and related matters

Background

In general, one of the greatest strengths a DAO brings forth is the sense of community wisdom. That is to say that community members that express their points of view may have the same “power” as anyone. Thus a permissionless community-centric model has strengths. We are all in a state of learning. That said, each of us has his / her domain areas where we may excel compared to others. Thus, we all get better with time. This is the vision.

Concerns

Related to 6s, there has been feedback and skepticism related to the irrevocability of the transfer instructions. Further, some general speculation about the power of the trust sponsor.

These topics (among others) have been addressed via legal structuring during the architecture process, which has taken almost a year. As a reminder, 6S engaged top law firms, banking and trust partners and tax professionals to develop a structure that would allow MakerDAO a path to enforce its rights in a U.S. court of law should 6S fail to repay the DAI used under the authorized debt ceiling – at scale. The development of the legal structure required us to overcome banking regulatory issues, creditor enforcement rights, securities laws issues, tax consequences, and AML challenges. To even imply the 6S could do all of this without the legal advice from global law firms with the depth and resources to defend the legal structure if needed, is simply inconceivable.

One comment suggests that MakerDAO’s own risk group is having challenges engaging a law firm because of being a DAO. A DAO simply is not recognized in the real world as a legal entity that can be held responsible in a court of law. This was the same issue 6S first faced. Fortunately 6S had business relationships with business professionals with strong reputations which provided references to the law firms that we were a real company that could conduct business and would pay them. We spent weeks getting through the AML process alone.

6S had been completely transparent and shared valuable information with MakerDAO to help MakerDAO be successful using real world assets. In the real world, creditors build legal structures with independent parties with deep pockets and large insurance umbrellas. Their structures are not dependent on a single individual.

The comments that any single individual at the trust sponsor, the trustees, 6S, Genesis, or the bank could “run off with the DAI” are simply misguided.

Ownership

First is to really step back and understand the role of the Trust Sponsor, in this case a Cayman Islands Exempted Company with limited liability (“CE”). The Trust Sponsor is a legal entity authorized by Cayman law to conduct business, including causing the creation of a Delaware Statutory Trust. This could have been any entity or person in the world. The Cayman structure was selected for a variety of reasons. It is important to note, the entity sets things in motion and can conduct any lawful business it wants, globally. It can set up Delaware Trusts as its business, or it can buy wheat farms in Germany. This is a feature not a bug. This is by design.

The CE is owned 100% by the Cayman Charitable Trust (“CCT”) which then has residual beneficiaries. While it has the name Trust in it, this is not related in any capacity to the Delaware Statutory Trust (“DST”), less the only connection which is the shares of the operating business the Cayman Trust holds, the CE. To say it so there is no misunderstanding, the CCT does not do business in any capacity. It only holds the shares of the CE. It is the CE that engages in lawful business. In this context, it formed the Delaware Statutory Trust. Again this is by design, not an accident nor a vulnerability.

There is no “complicit breach of duty.” The CE can engage in any lawful commerce it wants. This is how orphaned entities work. There is nothing new here and these structures have been used for many decades

Breach of duty

As the CCT owns the shares of the CE Company, and the CE company is permitted to do whatever business it wants, including form a DST, in this case for the benefit of MakerDAO. The CE could have just as easily formed a British Virgin Island Trust for the benefit of the Dallas Cowboys or a second Trust within Delaware for subsequent 6s applications covering a new not-yet-submitted MIP application. It does not matter. This design is intentional. By having the CE be able to conduct business, it is once again a feature, not a bug. Moreover, any business operations unrelated to MakerDAO the CE engages in, does not impact MakerDAO.

For clarity, the notion that the Director of the CE would be in breach of its fiduciary duty of the Cayman Exempt Company to start one or one-hundred Trusts (in any jurisdiction) with common or different beneficiaries represents a complete misunderstanding of the transaction at hand.

Cayman Charitable Trusts

In addition to this, the “issue” being raised, despite countless similar structures using this construct (a simple google search of Cayman orphaned entities utilizing a charitable trust will yield this result), has never actually happened. It is just not how it works. To label such a purely theoretical issue as “critical” seems unusual, even awkward. It is possible that Canada invades the United States and invalidates all property rights, but I think we can all agree it is exceptionally unlikely. We do not live in a world where a party has to prove a negative. If there is a case to reference, please bring it forward.

Even then (fast forward the nuclear crazy-ville game theory in the Caymans), it still does not matter. Anyone, anywhere could have been the trust sponsor. The objective was to constrain that role as much as possible via the trust agreement (which we have done) and then add a regulated party as the director.

As matter of law, the Delaware Statutory Trust is NOT governed by Cayman law. None of the value is transferred or custodied under Cayman law. That is governed by Delaware law. Therefore, as far as whether irrevocable instructions are somehow changeable by the Trust Sponsor, this is why we are getting enforceability opinions from major law firms in all jurisdictions which hold collateral, specifically to address whether the irrevocable transfer instructions (which are an exhibit to the escrow agreement, which is an incorporated exhibit to the credit agreement), is enforceable under law.

This is why enforceability opinions matter - so that the community can debate on the substance of agreements rather than whether they will hold up in Court. This doesn’t require another attorney to review, and it especially does not require an attorney in a non-Delaware jurisdiction. None of us in the forums, to my knowledge, are Delaware attorneys.

The DAO should feel confident in these enforceability opinions as they are customary for professional commercial / institutional transactions and are required for the Trustee for the exact same reason. They want to know the agreements are enforceable. Put simply, these opinions remove uncertainty as to whether the party can enforce its rights in a court of law.

Perhaps all RWA transactions should come with enforceability opinions to provide the DAO more comfort.

To close this issue, it’s baffling to see an assessment of “critical” come from a mandated actor when my assessment is that this is a “0% issue,.” which is also shared by my legal counsel. Further, it raises the question of why would any attorney (or firm) be willing to issue an enforceability opinion and put their firm’s reputation and economic well-being on the line if they did not share that same assessment?

6s’ intent

The intent on my end is to move forward with the closing as outlined in the MIP approved by MKR holders, and then on to an executive vote which raises the debt ceiling. The counterparties in this transaction will not tolerate disruption or the appearance of unprofessionalism or a lack of integrity, and in my opinion its failure could set the DAO back years in regards to working with such prestigious counterparties (remembering the counsel for the Trust in Delaware works for basically all of the major Trustees). I am glad to see that there’s no intent to block this transaction from progressing, but I want to make this point abundantly clear so the consequences of doing so are apparent to the community. I am hopeful that the MKR holders will use their best judgment and review the extensive documentation that has been provided for themselves, and that they rely on the presence of enforceability opinions as opposed to those of non-attorneys (and that includes me!).

Doing Better

We need to up our game and bring a new and refreshed sense of professionalism to how we interact with would-be RWA borrowers. I have presented the community with a structure that works - that’s my promise to you, but you don’t have to believe me, that’s why we have enforceability opinions.

I keep repeating this over and over to stress its importance. I have my reputation and capital at risk to pursue this transaction, there are consequences if I am wrong. Further, there are law firms that are putting their own reputation on the line to provide their opinion.

Reframing once ownership of CayCo is understood

No doubt, this is a complex structure, but once one views the above in the context of understanding the ownership structure, I hope you can see the immense community damage that is done by flaming the notion of “can the documents really be changed?” being put forth as a quasi legal review. Further, from my personal view this is incredibly damaging to the DAO’s credibility when we see “The irrevocable transfer instruction might not be irrevocable”. Smart contracts may be immutable, but for the rest of the world, we rely on the law. This transaction relies on the law.

… and hopefully you know my next line … That is why we are getting enforceability opinions to know we can rely on the law.

The ironic part is that aside from the downstream documents, all of the structuring that has been done is for the DAO’s benefit (e.g. we’re all playing for the same team).

Personal note

I am growing increasingly wary of engaging in what comes across as hoops to jump through when the hoop itself simply requires a complete reading and understanding of the transaction at hand.

As I have outlined to the community in the past when we started, to influential parties along the way, and in a recent G&R call, I am here to make the world better, and I am not going to quit or go away. I have brought forth a world-class transaction, service providers, and done so in a transparent open manner.

That said, the world of credit in the real-world does not revolve around MakerDAO, not yet and it won’t be for a while. I want to change the world, and I want to do it with you. I also have a business to run and a family to look after. That is a balancing act that has real personal consequences for me.

Worth it

An influential member of the community sent me a text over the weekend, “I’m not gonna ask if you knew ahead of time how much effort/time/$ this would take if you would have still gone ahead”

to which I replied …

"No one said it would be easy… they just said it would be worth it… " – Baltimore Marathon

Note: I didn’t finish first in that race either…

Recommendation

To ensure all collateral that is onboarded represents the will of MKR holders, I recommend each collateral be given the option its own executive vote with no other non-RWA parameters included. This will ensure that the MKR holders have the final approval and such collateral is not gated by community members that may or may not be aligned with MKR holders, regardless of the public commentary.

Execution

The goal has been for the DAO to approve a “set it and forget it” governance-friendly structure by relying on tightly controlled reporting to the Trustee that is then shared with a few individuals / reporting company (in our case we have engaged Greg’s RWA Company) as proxy for feedback to the DAO - note that no oversight from these individuals is strictly necessary as the regulated Trustee is the fiduciary of the Trust. While the DAO may move into a “report receiving mode” post-closing, the underlying LendCo now can start its sustained business operations utilizing this facility.

It is important to remind folks that business execution is not code, and it cannot be “copy & pasted” for scale. Those are people that are running businesses that rely on a credit facility.

Closing Timing

Now… on to the transaction’s closing. We are still waiting on the redline from the B/D for the language they wanted to add to transfer instructions. Once the language is in place, we can proceed to closing the transaction. Right now, we are in a day-for-day slip…


I hope the MKR holders see the value in front of them and, when the time is right, pass the executive vote to raise the debt ceiling on 6s Capital. Let’s all get back to work. We have a world that needs changing…

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Hey Matt, thanks for posting this. I think it’s a very understandable explanation of how some of these entities work, and has been useful in my understanding of the structure.

One point I want to comment on is this:

In an ideal world, I would like this to be the case (the executive containing only the 6s debt ceiling increase) and I’ll try to make sure that this happens if you feel that it’s important. However, I don’t think I can guarantee that the executive is both timely and exclusively contains the 6s changes.

If this is not possible, which would you be more comfortable compromising on? Would you prefer that an executive go up asap, even if it includes other parameter changes, or would you prefer an executive exclusively including 6s debt ceiling changes yet delayed by a week or two?

I suspect that this is impossible to guarantee for all future collateral (even all future RWA collateral) until we are able to make some upgrades to the governance contract.

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It is more than fine (in my view) for it to be included with other parameters. Until we really have our process down on what collateral is “ok”, from an MKR perspective, if all spells are just “smushed” together, then “not” voting for a spell might disrupt a core unit payment or some other highly desirable parameter change (as an example only). Given the debt ceilings that some are talking about for some RWA, there could be spells that expire if MKR holder do not “really” want them (if they are segregated). Thus, we really want to avoid having key parameter changes in those spells. Since we have a limited ways to know what the true desire is, segregating debt ceiling increase spells seems a prudent move.

Operationally, it won’t impact 6s either way. I do however want to set a precedent to protect MKR holders from the scenario as outlined above.

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FWIW, perhaps the resolution is we isolate different RWAs one from the other in executives? So, you can support one affiliated project without having to support another as part of the same executive.

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This strikes me as prudent. The last thing we need is a campaign to defeat an executive over a narrow issue that then leaves a bunch of other initiatives stranded in an exec that has to wait until it expires

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Quick follow-up.

I have received some private messages from folks requesting additional information about the timing on the enforceability opinions or if there was some type of problem. (thank you for reaching out, my door is always open!)

For those that are unfamiliar, enforceability opinions are issued simultaneous to a closing after everything has been signed and finalized (between the parties). Thus, they cannot be issued until the closing. In the broadest description, they outline that the executed transactional documents are enforceable under law. Since before the documents were put in the forums, we have been working with the law firms that would be issuing these opinions to get their input and suggested modifications. We do not expect issues on getting the opinions.

As I am still waiting on a couple of admin. items and the transfer instructions from the broker/dealer, the opinions are in a holding pattern pending the closing for the above reason.

From a smart contract perspective, it is similar to asking a firm to issue their code audit opinion on code that isn’t finished yet. While I have never hired a code auditor personally and just speculating, I have to believe they would reserve their final report until the code was finished and published.

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This is actually how governance already works today. Before an executive includes anything an inclusion poll is first run the week leading up to it. That’s defined here: mips/mip3.md at master · makerdao/mips · GitHub

If a proposal does not pass the inclusion poll it is not added to the executive.

Yes. And then it has to be passed again in the executive. Nothing says executives are automatically passed.

Especially given the different levels of participation in polls and executives, people shouldn’t assume something that passes a poll will necessarily pass in an executive— particularly if more information is given to MKR holders that they had not seen before a poll. It could also occur if a poll happens before the community has an in-depth discussion.

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Heads up gents, MIP3 is obsolete.

It has been replaced by MIP51: Monthly Governance Cycle

Now there are Ratification Polls for each MIP/MIP-set/Subproposal, no Executive necessary unless it’s a technical upgrade or something that affects the code or parameters within.

@spin @PaperImperium

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@Davidutro , would a change like the one discussed by @spin and @PaperImperium go through an executive?

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Each RWA Vault would go through its own Ratification Poll, and in the current process would be bundled in the next possible Executive (assuming the Vaults are technically ready to go) with whatever else.

The discussion I’m reading above is about having separate Executives for RWAs in order to avoid a blocked vote. What exact change are you referencing @juan?

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