A word on the PSM concept and next steps for the Foundation

Over the past months, Maker governance has matured at a rapid clip. From collateral on-boarding to formalized MIPs, there’s been more activity on the forum than ever. Incredibly, we continued this progress in light of unprecedented exogenous events, both in crypto (yield farming, the market collapse of mid-March and exploding Dai demand in Argentina) and in the real world (global pandemic and near world-wide economic recession). The Community’s and the Foundation’s efforts to deal with these issues and find the policy “sweet spot” for keeping the peg tighter to $1 has weighed on everyone but also driven innovations, like the Peg Stabilization Module.

The Foundation only began developing the PSM concept after seeing a number of community ideas that proposed variations of the basic design. It was an exciting potential development, and was seen as a powerful tool the community might urgently want to use in the context of defi yield farming impacting the Dai peg.

Since then a number of factors have pushed back against the PSM concept being urgently implemented:

  • The community voted against rapidly onboarding a PSM, instead choosing to allow more time for discussion and understanding of the risks.
  • The impact of yield farming on the Dai peg turned out to not be as severe as some had predicted, and Dai generation started picking up.
  • A lot of forum posts suggesting different variations, indicating that it might make sense to do a deeper review of the core idea, and the crypto-economic implications of different design variations.

After weighing these factors, alongside the recent changes in the evolving regulatory landscape, the Foundation has decided to stop building, designing or technically supporting the PSM. While it is an exciting idea, and potentially a powerful tool for Maker Governance, we believe that the unique status of the Maker Foundation in the ecosystem (as the leading entity that developed and launched the Maker protocol), means that it wouldn’t be worth the risk for the Foundation to develop new features for the protocol that weren’t part of the already completed development plan (SCD and MCD) and aren’t part of the long-established roadmap to dissolution (Self Sustaining MakerDAO roadmap).

Rather, we believe that the best use of our efforts before the Foundation dissolves is to focus on the final roadmap and problem spaces outlined in MIP1. This both includes supporting growth by enabling real world assets as collateral for Dai, and it also means supporting the community with the governance tools and frameworks it needs to become fully self sustainable and self reliant.

In particular, solutions related to funding from the protocol and community controlled protocol development will help the community achieve full control over what features it wants to develop and onboard to the protocol.

What can we do about the peg without PSMs?

PSMs could be a powerful tool for Maker governance to directly onboard stablecoins as collateral for Dai, but just because the Foundation will not develop or support PSMs doesn’t mean that there aren’t tools available to deal with the peg in the short term. Governance may consider setting high debt ceilings and low liquidation ratio risk parameters for stablecoins after the auction 2.0 redesign is released, for instance. The Foundation also is accelerating the liquidation redesign, which should provide the community with more options when it comes to stablecoin risk parameters.

Of course, the community can also consider and determine its own path of action regardless of what the Foundation says or does.

Does this mean the Foundation decides what the protocol can do?

No, not at all. The Maker Foundation doesn’t control the Maker Protocol or the Maker community (remember: the Foundation is legally prohibited from ever voting its MKR). Nonetheless, it would be silly to ignore the Foundation’s unique role in the ecosystem, given the successful launches of both SCD and MCD. Precisely because of that unique role, the Foundation should further withdraw from spearheading new features outside the existing and limited roadmap and the problem spaces outlined in MIP 1. Indeed, it validates the plan to do away with the Foundation and move to a new model where the DAO sustains itself and doesn’t look to the Foundation or any other external entity to advance the protocol.

Fortunately, the community is already quite self-sufficient. There are officially elected domain team members that do not work for the foundation, and the community continues to bring forth new collateral types through MIPs on a regular cadence. The community also has MIP13 - declarations of intent - as a tool to signal for bounties to develop features that the community wishes to implement.

What will the Foundation do next?

As noted above, a key short term priority will be accelerating the liquidation redesign to give the community more options for stablecoin collateral risk parameters. Additionally, the foundation will speed up the release of frameworks and MIPs for domain teams and community-owned resources, to build further on the self-sufficiency that already exists, and enable the community to move quickly and take over any remaining responsibilities that presently lie with the Foundation.

In the longer term and until its dissolution, the Foundation will focus the vast majority of its resources on bringing real-world assets as collateral to the protocol. We believe that this is still the only long-run solution to the peg, and, like the Ethereum Foundation with Eth2.0, we are determined to see this new revolutionary project through completion.

We will soon follow up this post with a description of potential specs for bringing on real-world asset collateral and questions we think a prudent issuer of real-world asset tokens should ask themselves to prepare for review by the MKR Holders and potential inclusion into the Maker Protocol. I’m sure though that the community can and likely will develop its own approach to real-world assets as well.

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Glad I’m not trying to short DAI anymore. :crazy_face:

OK, so no PSM.

What’s plan B for getting back to $1?

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Slight correction - the foundation isn’t going to build it

If we want it, we’d have to find non-foundation smart contract friends, which are like a dime a dozen :roll_eyes:

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As I also wrote in the post, not having the PSM immediately doesn’t mean governance won’t have the option to onboard a lot of stablecoins to help with the peg.

The PSM is a different, and potentially more efficient way to onboard more stablecoins as collateral, but when it comes to getting the price back to the peg, the most important question is how high of a debt ceiling are MKR holders willing to allocate to the different stablecoins - whether it is done through the PSM or through a stablecoin collateral type is less important in the short run, although I would argue that in the long run it would be more efficient and better to also have PSMs available.

The other minor point is that it isn’t safe to give a stablecoin collateral type a very low liquidation ratio with the current auction mechanism, but once the new auction mechanism is implemented that will make a low LR for stablecoins a possibility. Having a low LR on a stablecoin collateral type makes it more similar to having an actual PSM implemented, as an example, if you set the LR to below 101%, users could have a vault where they put 101 USDC in and get 100 Dai out, providing an upper limit to the peg as long as there’s debt ceiling available.

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In addition to publishing information related to how the community can move towards onboarding real world assets as collateral, we’ll also provide updates about the framework for domain teams and protocol funding/development tools, which is another top priority of the Foundation.

So very soon this answer will be that the community will have its own developer resources on stand by, and will have procedures for scaling them up or down as needed.

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Well. We wanted to be Decentralized, so here we go. Now we must learn how to walk without the Dependency of the Foundation. Hope we are ready

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IMO, adding a support for real world assets at this time is a waste of (precious) time. Locking 10% of all ETH (about $2.7B today) in Maker should be the goal for the short term.

I welcome the liquidation redesign - that is important provided it fixes the holes that were found during the black Thursday.

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The foundation isn’t responsible for increasing the ETH DC or minting DAI based on ETH vaults - we already have the power to do those things ourselves.

I’d hate to see 10% of ETH in Maker, but if the price doesn’t appreciate, it could very well happen :slight_smile:

Bear in mind that to date, MKR voters have yet to approve funding for any project/expense. There seems to be a lot of aversion in the community to MKR dilution and capital investments. I feel like MKR burning at this stage is the equivalent of WeWork doing share buybacks - totally wasteful and counterproductive.

I’m also continually surprised that I never see any large holders take ownership of and explain their voting behavior (as opposed to Compound where voting weights and history are largely public). I want to advocate for less buybacks and more CapEx (so we as a community can afford to drive projects forward), but I have no idea whose concerns I should be addressing given that nobody speaks up.

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Onboarding stablecoins isn’t the answer. Other protocols are onboarding stablecoins too but they are paying rewards for them and Maker is not.

We have to do something different. Now. The peg is blowing out today on the news of Maker throwing in the towel on the PSM.

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I’ll just drop a quick plug for MIP 14 here

Currently accepting feedback!

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I just want to say that if there is no alternative to PSM, it will cause losses to our MAKER community.

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I’m sorry but I do not find this serious at all. The PSM agenda was heavily pushed and a lof of time was dedicated only to be taken out of the equation roughly 2 weeks later? Yes, it’s up to the community to push it forward but the timing ,know how and current market conditions?..Honestly shocked. I’m glad the foundation is pursuing real world assets, I would not put it first in the pipeline but that’s just me. On increasing the supply side helping the peg via DC increases or lower liquidation ratios if it’s only going to be minted to be deposited in compound not quite sure it will have a significant impact and meanwhile we keep increasing our risk exposure.

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This is completely insane. The support for the PSM was overwhelming. Why are you bailing out on the community before giving it the tools to implement the PSM ?

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So far, DAI has reached 1.028USDC. I don’t know what the emergency measures of the risk team are. After the announcement of the suspension of PSM, the exchange rate of DAI relative to the US dollar rose rapidly, and the loan interest rate of DAI on other DEFI platforms (AAVE) exceeded 40%. I think DAI’s madness is because after PSM stopped, DAI lost its psychological pressure.

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Agree with latetot. Dropping PSM displays a fundamental lack of understanding of the urgency of this situation and has lit the peg on fire.

I am in favor of emergency actions to try and save this project before emergency shutdown - at this point I think buying ETH with newly created Dai directly is the right answer. I don’t know what changes are needed to make that happen.

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The majority of DAI has actually been removed from Compound (peaked at 90m, now 28m and dropping). Most DAI is now in the Balancer pools (107m). Sounds like Binance might have sourced a bunch of DAI as well ahead of them listing MKR/DAI markets there. Honestly, I consider this a very positive development of DAI moving to exchanges - both DEX and CEX where it can more easily be arbitraged against. It is obviously not helping in the short term as demand is even higher, but at least its not being minted and immediately put in the DSR to game ill conceived incentives.

(https://defipulse.com/ -> Click on DAI in the graph)

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Problem is, most of the DAI in balancer is in a useless DAI-YFI pool that isn’t really providing liquidity to anything. So the DAI being in balancer is much worse than it sitting in Compound where it at least drives down interest rates.

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Yeah, you are right about the YFI pool. It is still is being publicly traded against, so I consider that better than Compound locking it into the DSR, but I didn’t realize how much was tied up in that one pool.

From a broader perspective, a token that launched 5 days ago is consuming 45% of all DAI in a single DEX pool. What will the ecosystem come up with next week and how can we meet this kind of demand?

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