Episode 160: September 23rd, 2021
Agenda and Preamble
- Hello, welcome to the MakerDAO Scientific Governance & Risk Meeting #160 on Thursday, September 23rd at 1700 UTC. My name is Payton Rose, and I am one of the Governance Facilitators at MakerDAO.
- We like people to get involved and ask questions or comments, so please, do not be shy if you have something to say.
- We have our newly improved agenda, which will open to discussion around certain topics following our general updates.
Weekly MIPs Update #54
Forum at a Glance
Post: Forum at a Glance: September 17th - 23rd
Video: Forum at a Glance
19:37 - Planet X
- It should be fairly doable to change MIP54 to drawing MKR from the leftover pool left by the foundation, and there is still so much MKR left in it that it should be doable. How does everyone else feel about that?
20:22 - David Utrobin
- Are we kicking the problem down the road? Although it is a large amount of MKR, 84000, at some point, either the protocol will have to re-up on its MKR treasury to continue paying out, or it will have to mint.
20:53 - Planet X
- I do not think it is kicking the can. In crypto, the planning horizon is very short, and we cannot plan three, four, or five years ahead. We are avoiding increasing the number of MKR, and we are avoiding minting. It is the same result, and you get your MKR from another pool.
21:33 - Christopher Mooney
- I spoke with an attorney on this. It does seem that the least risky legal move is to pull it from the reserves that we have in the pause-proxy and not to mint it. There are mechanisms in the protocol that end up minting, and we want to keep that minimum. There is the challenge of deauthorizing the old module and adding a module that pulls from the reserves.
- On your last slide, there was an idea about more technical detail in the MIPS, and I have some musings on that.
22:44 - Wouter
- I do not mean more technical detail. I mean a more explicit expression of the next steps. That was the confusion. Brian notes in the side chat that minting was mentioned multiple times, and it is true. The way that the module is described has the mint method. However, the introduction says that the module supports multiple options to source the Dai and the MKR that it can payout. I assumed there would still be an opportunity to switch the implementation from minting to taking it from the treasury.
23:38 - Brian McMichael
- There are three different implementations of DssVest. One of them does a strick Token transfer. We already have that capability. It will be easy to deauthorize the old one, add the new one, and reset the streams. I want to clarify that nobody was trying to hide anything; I do not think there was any lack of clarity in the governance process. We attempted to put our exact intentions in every step of the way. As Christopher mentioned, we have some unofficial legal advice that maybe we need to go the other route. I do not know what the next steps are in terms of governance for that.
24:32 - Christopher Mooney
- As Wouter pointed out, getting more legal expertise on MIPS would be a really good idea. The PE team cannot provide that other than whatever tangent to the legal system we have all had throughout our careers. However, a specific legal CU or crowdsourcing legal opinion on a myth would probably be good to get a step of the review feedback. I like that proposal letter.
25:08 - Payton Rose
- Can we mention the governance side of things. No minting has taken place. It cannot occur until May 1st, the first eligible contract that can mint a new MKR. If this is something that the community felt should be changed that would need to happen, it would be a proposal put up to do so. A signal request is probably sufficient to do so. We are essentially asking the community if they would like to switch over the MKR minting side of the DssVest instead of using the ERC20 stream with the protocol treasury MKR. Typically, our signals go on for two weeks in the forum before bringing them to on-chain polling. And then to an executive. The process would look like in terms of governance, changing how this has been implemented so far.
- Wouter: I will use that process to get this started.
26:34 - Payton Rose
- A good call up on the sidebar. We express our individual opinions, take our knowledge and expertise, share it with the community, and discuss this. We are discussing the situation and what we, as a community we would like to about it.
26:55 - David Utrobin
- Sebastian wrote in the chat that by deciding to take instead of minting, are we agreeing that MKR is a security? What are the implications of that? Is it better to be careful? I do not think we are making this decision. First, there will be a signal process, and voters decide whether or not Maker is a security at the end of the day. They are deciding on where to draw the MKR from. Both options have a certain perceived legal risk. I think the voters, as a governing body, are doing their best to make the wisest choice. I do not think they are making any positive affirmation of the definition of what MKR is as an asset. As Christopher points out, both options have a public relations perspective too. People see the protocol as minting MKR that is different from incentivizing people from MKR already in our coffers.
28:11 - Brian McMichael
- There were discussions about burning that whole 84k pot because the pause-proxy sitting in can also mint Tokens, and it is all technically a wash. By doing it with the Token transfer way, we tell the Dao that it has to leave those Tokens there for its other obligations.
28:39 - David Utrobin
- What can the Dao do to get more legal subject matter experts to participate? Like the old Maker Foundation lawyers and Juan Guillen on the SES Team, a few people are working on legal review. There are many legal minds around the Dao, and I am curious if people have ideas for attracting more.
29:10 - Wouter
- I can talk about the option that we are exploring. Still, it will be a while before it is in place. The issue is that you will have a hard time finding anyone with a serious legal background giving detailed opinions about the exact risks or engaging in this discussion fully transparently as we are used to with technical subjects. You should, in some way, think about anonymizing or pseudonymizing the feedback that is given. We are exploring collaboration with a project that implements crowdsourcing of legal opinions. I am not sure of the exact mechanics of how that would work. I assume that you would have several voters who are confirmed to have a legal background; I hope the relevant legal background would put up polls to ask certain questions. For example, rank these three options in the order of legal risk. Maybe have some kind of check-in process to ask the legal crowd if this is a risky legal move. Alternatively, if we are about to do something, how would you rate the legal risk. I am not clear on the exact details. We are still very much in the exploratory phase.
31:32 - Payton Rose
- If we were to have a legal CU, there would be some checks like our CUs. Facilitators can put the block on certain proposals for relevant risks within their defined CU. That would certainly help the governance process if we had a community-approved body that said we could not approve this, we can go forward with this, etc. CUs take time to set up.
32:19 - Wouter
- Can we be more strict about the different types of MIPs and require of technical MIPs? When I looked at the original definition, the technical MIP is supposed to have the exact instructions that would go into the executive vote and the spell. However, it is not always practical to do it. The next best thing would be to have a fixed section that would describe the effect we are voting on in English as clearly as possible. If this were flagged for this MIP that this section was missing, it would have been added, and I would have been very clear that the next step is when this goes into the executive, and these are the consequences. It is a formal technical review of the MIP, but you do not have to have any opinion on the content or judge it in any way to do these formal checks, which would already help a lot.
34:02 - Christopher Mooney
- Whatever we end up doing, we have to find a path that is not the extreme granularity of describing exactly what happens. I have noticed that when we are developing these things, people are voting on the MIPS and thinking it is a good idea. Then we get to the implementation phase, and we find little mistakes. There are subtle little changes, and some of those have legal implications. That did not happen in the DssVest case but more generally. With the Liquidation 2.0. we made the MIP be a living document, and we gave these updates about the edits, and it worked out. When voting on an executive, you also vote on the actual real instantiation of what is happening in the code, how it is written, and all of its bugs. That is the caveat; in the end, we are anointing that not everyone is a subject matter expert and needs these high-level descriptions of what is happening. The trick is to keep saying what the code is and show the places where it deviates from the original MIP and describe it. When the final executive happens, everyone knows that this is the original MIP and hears in the comments the changes that were made to accommodate technical considerations or risk and more. That is probably the right way forward. It is a theory versus practice thing. The theoretical version of the MIPs was a little bit more ideal than the reality of writing and publishing it.
35:54 - Juan Guillén
- We have the MIPs that are pure code and very technical, which might be the platform for those. The other ones are more procedural; I am not sure if, for the MIP writer, we should force people to say everything the way it would be implemented because maybe you do not care. For example, as a receiver for MKR, you can say: I do not care where you get them from. As long as I get them is fine. On the implementation, we need to have a process. I do not know if the MIP editors or someone from GovAlpha, or anyone have an opinion on this. We need to have a process where we say: this is ready to be moved forward because there is only one way to implement it to vote on this. Otherwise, we should say: we will not be able to vote and give the reason. It was mentioned that minting was the preferred mechanism, but also it was open to other mechanisms. Then, you would be like: here is what will happen; once that goes on, MKR will be minted. This has to be done for every MIP that is procedural, not only this one.
37:25 - Christopher Mooney
- We need to find certain categories of legal risks or things, create icons for them and add them to them. Like does or does not mint MKR, or something like that.
37:43 - Wouter
- This was part of the issue. It was not understood that it makes such a good difference from a legal point of view to mint the MKR versus taking it from the treasury. There was a line that was crossed without realizing it. I am thinking about which permissions to put in that way, permissions that the MIP would use, and have a list of permissions that need very explicit confirmation. MKR minting will be high on the list, and that would be a good idea. I do not know how realistic it is, but it sounds like it will be very useful if we can do it.
38:37 - David Utrobin
- At the moment, the MIP editor has a checklist that they go through when a MIP is submitted for RFC. It should be trivial to get Pablo to expand that list to include some seek-out or an extra opinion or services.
39:00 - Pablo
- We should reach a consensus around what these points are going to be. One of them is going to be MKR minting. We should reach our consensus about that list; it should be very trivial to implement.
39:16 - Juan Guillén
- But also Dai payments. Someone could come up and say: I want a third of a multiple of the logarithm of whatever number, and I want that Dai every month. Then Pablo would need a team of mathematicians to help him figure out how much Dai needs to be paid out. All these things are much work, and they need to be checked before we move on things. We need to put the mechanisms there, and it is not an easy thing to do.
39:52 - Sébastien Derivaux
- I wonder on this MIP if the problem was that it was not written or a bit hidden. You can summarize and try to explain things, but you will never explain everything, and there will always be room for interpretation on what is not code. I looked at MIP58 RWA Foundations, and there were only five click-throughs. That means that only five people, and I was one of them, clicked on the link to see what was in the legal document. Some things are complex, and no one will look at and what it does. We need to find ways to solve it because not everyone will look at the code and how it will compile. The result might be something a bit different because there was a bug, and they fixed it, and they do not implement the strict MIP version because it does not make any sense.
41:13 - Wouter
- That is the last point I added to the slides, which is the most fundamental one. The model where we rely on MKR holders and the community to review these MIPs without specifying how it will happen is not very scalable. We will need to change that. That is a very different discussion, and I have many ideas about it. I did not want to make this a three-hour call. We will return to that point. However, those are the three things: there was a red line that was not understood. We can clarify these red lines. Formally speaking, the MIP missed the next steps made me misinterpret it. The third element is that we do not have the time and the expertise to review all the MIPs that are up for voting, even if it has been sitting there for months. It is not that the timeline was too short, but we do not seem to have the bandwidth; with all the other work going on, do it, and it is not clearly defined who should review what and for which points. You end up with things not being reviewed and passively being confirmed. That is the most fundamental issue here.
42:58 - Payton Rose
- Perhaps it is difficult to write the next steps for a tool like this. For instance, DssVest is also used for a lot of our CU Dai streams. It was set up to be a tool for us to use so we could cut down on the number of superfluous governance votes and that we approved something, and then we had to approve it every month again and again and again for Core budgets that CU have already been promised. Not to say that it would not be better with the next steps, but when you are writing MIPs for general tools, it can be hard to think of the next steps and write them in a way that does not limit their use to the full functionality of what you are building.
43:51 - Wouter
- That was exactly the confusion here. This was not a MIP for a general tool, and this was a MIP for the implementation of the deployment of the modules. This one could very easily have had the next steps, and they were not made explicit.
44:20 - Nadia Alvarez
- Can we talk about the legal expertise that we need when we are reviewing the MIPs? I like what Wouter proposed about this group that anonymously can answer our legal questions. I would like to know when this is going to be available. If it is not immediately, most of the CUs are working with a legal firm, and we could work together and use these lawyers to review some of these things that we do not know what to do with. Maybe they can meet together, discuss all these things that we do not know, and post a review in the forum.
45:23 - Wouter
- You highlight another problem, and it is a principal-agent problem. We are missing the legal expertise, but we are also missing the legal insights to know which lawyer to ask and who has the relevant legal expertise, which is sometimes unclear.
- Nadia Alvarez: At least now we have some questions to ask. That is a good starting point.
46:05 - Wouter
- Publishing a review is not going to happen. We can do now that we have delegates with a lot of voting power; maybe these legal recommendations or thoughts can be conveyed in private until we can do it more openly with a crowdsourced solution.
46:38 - Nadia Alvarez
- We have a lawyer, and he is very into crypto with all the securities laws in the United States. We can work with him and also work with Layer Zero from SES. Meanwhile, we are waiting for a better solution. We can organize meetings with the delegates to share these legal opinions, and I do not know if any other CU is working with lawyers. Let me know when we can arrange a meeting with all of them to review these topics.
47:30 - Wouter
- We have at least one lawyer in RWF CU not acting as a lawyer. We have three law firms on a retainer. One is in the comments. It is not very useful for these topics. The problem is that it depends on how you phrase the question. If you ask, is it riskier to mint MKR or use MKR that are already minted? It is less risky to use something that is already minted. That is level one of the answer. Level two of the answer is: maybe it is riskier, but it does not make any difference in the end. Another answer could be: you have a big problem because of x and this problem choosing between the two is not your biggest problem. When you give me this problem, I can tell you that your problem is way bigger. It is more of a discussion, and I do not know how you can frame it. It is not easy. Just asking one question will not give you the answer. It will give you one answer but not the context of the answer.
- Government and regulators fall into a class of stakeholders that is very important to MakerDAO. For our desire to be a global protocol that is allowed to exist globally, we want to do what we can to be above board top tier as an organization.
- It is important to have good relations with these stakeholders: nation-states, governmental publics, people who are writing laws about blockchain, about DeFi.
- Government relations is a subset of public affairs that organizations typically do. You interact with the most outer layer of your stakeholders: governments, legislators, interest groups, the media, and government relations are specific to the Government.
- For example, PaperImperium had a meeting with advisors of a specific lawmaker’s office, so you can go and do that with specific lawmakers. You can attend, speak, network at governmental conferences. Some lawmakers have done this with regards to representing crypto and DeFi. There is also Financially supporting pro-crypto lawmakers.
- Organizations do Government relations to prevent unwise regulations and reduce political, regulatory risk by educating crypto regulators, bringing them open-mindedness. Often, regulators will not have a very open line of communication with what it is that they are regulating. Breaking down those barriers is important. Also, to uncover nuance that regulators might not understand. They are not subject matter experts. We are, the people in the DAO are. Whom do we send? How does MakerDAO do Government relations? We send qualified individuals, subject-matter experts, recognized delegates (like PaperImperium). People are willing to share legal opinions. The CU might also do governmental relations for the DAO. Generally speaking, there are a ton of things to bring up with regards to MakerDAO. Maker does not have a very small range of topics.
Updates on Senator Warren Meetings:
- Even by lawmaker standards, we are uninformed and under-informed. Most of the people I have talked with are very agnostic about crypto and not very interested. There are a few who have developed strong opinions. However, you do not have to get into technical details to hit some major misinformation for most of them.
- We are years behind where we should be. Getting people familiar with the real basic crypto information, never mind MakerDAO specifically. For example, the idea that every token is not its blockchain is widespread.
- Securities issues are heavy on regulator’s minds. As far as MakerDAO, we have two specific and related issues. The one that vexes most of crypto is the securities issue. I am not a lawyer, but I think we have a lot more breathing room here than most protocols have. We are not selling interest-bearing tokens and interest-bearing products, which seem to be drawing much attention because you have the expected return.
- When you talk about stablecoins, they are envisioning Tether in USDC. They hold a dollar that is, in some ways, a deposit that is expected to be withdrawn at some later date. In traditional banking, insurance, or other forms of finance tradition, they live off the interest, so they get on that float.
- Our biggest problem that we need to solve before moving on to any of the other ones is: where our regulatory touch lies? This is a big problem, and it is also easy to relate to. To get across to lawmakers, perhaps it should be one of the things we focus on first.
- We had discussions like what would happen if someone wanted to sue the DAO or subpoena the DAO? Send a letter to the DAO about anything? Whom do they call? Senator Warren’s advisor was clear that consumer protection and getting crypto inside a regulatory ring-fence as much as possible are their top priorities.
- Even if there was something specific that we wanted to comply with because the protocol lives on the blockchain, how would we do that? Because we are decentralized to the point where we do not have a legal entity. As a result, we do not have individuals who can sign binding agreements, documents, representations, and disclosures.
- We have another meeting in a few weeks (date TBD). I asked for this to be the only agenda to find a way to devolve legal tax reporting, all the compliance, and legal issues. Find a way to decentralize those burdens down to CUs because some CUs may or may not be engaging in regulatory behavior, regulated activities. Even if we have two that are, they might not deserve the same regulatory treatment. Then, different CUs are in different jurisdictions. The details would have to be carefully thought out. If there were a way to register as a decentralized entity, it would potentially remove the ambiguity about Maker being decentralized. All of these reporting requirements and obligations will have to be met at some point. Right now, it is not clear who should, what they are. At some point, it may become clear. We need a way to interface with these regulators in the largest financial market in the world. Otherwise, it is going to limit our ability to grow.
- Decentralization is not a crypto-specific problem, although it is mostly seen in crypto. That is our first battle. The good news is that nobody says: “You are decentralized, and you will go to prison.” It is not a crime. Our worst-case scenario is that we pile up a lot of fines, which we do not want. We lack legal expertise, friends in the legislature. If neither of the republican or democrat senators I have reached out to about this is interested, I will start reaching out to people in the house to see if we can move on our side.
- I have also reached out to folks at other regulatory agencies that would not get us the broad brush across all US regulations.
- Issue number one is decentralization: How does the DAO even file paperwork? How would we file a disclosure?. Another issue is securities laws which seem very open to interpretation. We do not have legal counsel looking into this, and we need to fix that. It is related to what we talked about in the first hour about MKR. My non-lawyer thinking of why it would be better to draw from the treasury makes no difference economically. Securities actions seem to be brought against issuers. All MKR in circulation today was minted. Probably safe to say it is all under the Foundation. The DAO did not mint it, so we are not the issue.
- David Utrobin: Minus the black Thursday minting that happened to cover the seven and a half million dollar plus or so.
- Those were privately placed with VCS.
- David Utrobin: Not privately, and it was done through a public on-chain auction.
- I do not know enough about that and the specifics of the Foundation’s involvement at that point. This is exactly why we need to hire somebody whose job is to figure this stuff out.
- David Utrobin: Do you think that the role of government relations lies with a specially equipped delegate, like yourself? Should one of our CUs seek to hire a government relations officer? Somebody senior who can represent the DAO, aggregate everything you have said, and start working through all the senator offices.
- The DAO should probably be agnostic about in which direction it gets outsourced. The benefit of having a delegate is that you can not agree to anything, but you can know what is likely to float past a vote.
- A CU that engages external help might be the best solution. Some professionals do this. Unfortunately, they are not cheap, but you need people who have these personal relationships which are non-transferable. We do not have that. Some people in the Foundation do, but it will not be around much longer, so we need to spread our wings. I am not a lobbyist. Lobbying, trying to draft legislation, give to people, and perhaps make donations, come with reporting requirements and a certain level of discretion. It may or may not be compatible with our transparent method of governance. It is a moot point because there is a deficit of basic information.
- During the Gensler hearing last week, Senator Warren asked about decentralized exchanges and transaction costs. He said that would be a function of their user agreements. UniSwap and SushiSwap do not have user agreements that determine gas fees right. That is where we are at, and everyone was happy with that answer. There is a complete lack of understanding. I asked Senator Warren’s banking advisor if I was the first person from crypto talking to them. He mentioned they had some lobbying people talking to them occasionally. Their job is to talk to people that do not like us.
- David Utrobin: There is a distinction happening. There is education about the general crypto truths and nuances and the Maker specific knowledge that regulators would be interested in knowing at the latest stages of lawmaking.
- In regards to any stablecoin regulation, we are built differently. Our end product looks very similar to USDC or Tether from the user perspective. Still, just like a bank and a credit union look the same from the parking lot, we are built differently on the inside. We have different risks, and we deserve a different regulatory touch if we can find a way to get into these technocratic details.
- This is a golden opportunity for us to differentiate ourselves from all the other major stablecoins. There is also the danger of getting swept up with onerous requirements laid upon these other ones because they are susceptible to bank runs, and we are not. Some are concerned about neutering the fedge because stablecoins are getting too big. We are naturally suited. We make the natural partner because, by our design, we have to accept the fed policy as it transmits through the economy. They will ask what we feel about CBDCs as competitors. They would make great collateral, but unless they are on Ethereum, they are probably not competitors. These are new ideas even for “crypto-knowledgeable lawmakers.”
- MakerMan: I agree that the space where Maker interacts with politics is important. Still, it is not only about Maker. There is a whole bunch of decentralized DAOs out there. If we do it in a Vacuum, it can have implications for a ton of other DAOs. Maybe we can start the path, but what needs to happen here is a greater effort. To be a good DAO citizen, we have to think about the larger stakeholders and the implications of dealing with legislators and educating them about bringing legal online. We should be looking at forming a DAO of DAOs, some organizations of DAOs. We can get input and construct documents that educate these people about what a good collection of DAOs would like to see. Bring greater brainpower, greater funding. This is not just a Maker thing. We can do it together. It will take longer, but we cannot do that in a vacuum. We need to pull other minds and funds together to create an organization to push through this stuff.
- Juan Guillén: We are working on an L0 from the SES CU leading this initiative. This is one of the grants that we have given, and it is our research on many legal implications. We will be giving updates about this soon.
- David Utrobin: MakerMan’s point about make a more broad legal effort along with our industry to engage with nation-states, governments, and regulators. It is a powerful idea for potentially getting everybody to agree on a list of pertinent points that regulators should understand about our industry. Beyond that, protocols should make an individual effort. Each one has so much nuance that the legal questions they will be asking will be a very broad range. Who will lead the charge?
- Brian McMichael: There are some general lobbying organizations in the industry. In New York, doing lobbying, there is the DeFi Education Fund put on by UniSwap. The new LeXpunK DAO is being funded by Curve and YFi. If we wanted to pull our resources with some or all of the other protocols, these might be some options. We feel strongly about it.
- Juan Guillén: In this initiative that I mentioned - UniSwap and Compound were there, there are a couple more projects. I read the proposal some weeks ago, and I do not remember fully, but L0 will update soon.
- David Utrobin: Do we know if any of these groups have been doing targeted outreach to specific lawmakers similar to the example of PaperImperium and Elizabeth Warren’s office? I feel skeptical about these groups creating educational initiatives if they never reach out to any lawmakers.
- PaperImperium: I have been extremely overwhelmed with them. Perhaps many things are not visible, but I have never met someone at this point who does more than merely knowing some lawmaker people. They will struggle for the group names, all blockchain associations, or whoever. How do we get to this point where even our friends run into the staff - that has been serving under people that are very pro-crypto. Forget smart contracts. Forget Maker. In their defense, they are not trying to be domain experts. They are thinking about Afghanistan, tax policy - we are not the front of their thoughts. I give them the benefit of the doubt to newer organizations, but for some of these established organizations, where have they been?
- MakerMan: That is the nature of lobbying. They will not announce whom they are talking to, the conversations they have. It makes me wonder if we are going in the right direction by having these discussions in the open.
- Someone: At the end of the day, the ultimate objective is to have a collaborative and positive interaction with a Government and a government regulator. Anything that advocates and pushes that forward is positive. Many could go down this path of rage against the machine as if we were in a bubble. We will go 100 times farther the more that we can have a constructive tone always.
- Payton Rose: A lot to reflect on and consider. I appreciate the high level of participation today.
Common Abbreviated Terms
CR: Collateralization Ratio
DC: Debt Ceiling
ES: Emergency Shutdown
SF: Stability Fee
DSR: Dai Savings Rate
MIP: Maker Improvement Proposal
OSM: Oracle Security Module
LR: Liquidation Ratio
RWA: Real-World Asset
RWF: Real-World Finance
SC: Smart Contracts
CU: Core Unit
- Artem Gordon produced this summary.
- David Utrobin produced this summary.
- Gala produced this summary.
- Kunfu-po produced this summary.
- Andrea Suarez produced this summary.
- Everyone who spoke and presented on the call, listed in the headers.