Episode 165: October 28th, 2021
Agenda and Preamble
- Hello to everyone. Welcome to episode #165 of the Scientific Governance & Risk Core Unit at MakerDAO. My name is Payton, and I am one of the governance facilitators. I am happy to see everyone joining us live and later on Youtube. We got many awesome Maker people here, both those who work in the protocol and those interested in the operations more in general. This is our weekly meeting. We will discuss some key issues facing the DAO, governance updates, and other fun tidbits information. In terms of housekeeping, this is an open meeting. We will try to get to all people’s questions. The mic line is open if people have something they are curious about or would like some clarification. Feel free to hop on and ask. If not, feel free to throw it up in chat. Today, we have got a couple of good discussion topics. We might have some time in the end for a more open discussion. If you have questions that are not relevant to what is being discussed, save them for the end, or maybe throw them up in chat to follow up with them. That would be greatly appreciated.
- We added an anonymous question box to let people ask questions and give feedback without necessarily revealing who is doing the asking. It is a great tool. Please, do not talk over one another. We will bring in a lot of different voices to this call. Please be mindful of how much space you are taking up.
- Last Week’s executive - Parameter Changes, WSTETH-A Onboarding - PASSED (should be executed during this meeting)
- Executive proposal is up for vote tomorrow. Will include:
- D3M Onboarding
- Data Insights and Growth Budgets
- 1 Weekly Poll Passed
- Recognised Delegate Compensation Trial
- 1 Weekly Poll was Rejected
- Raise the ESM threshold and Increase the Governance Delay
Clean Money Sentiment Poll runs until Monday
- 3 Ongoing Polls Greenlight Polls (vote ends Monday):
- Community Greenlight Poll - OFH (Security Tokens Refinancing)
- Community Greenlight Poll - TM2-DROP (Technology Metals Market)
- Community Greenlight Poll - CSC (Curio Stablecoin)
Weekly MIPs Update #59
Forum at a Glance
Post: Forum at a Glance: October 21st - October 28th
Video: Forum at a Glance
- Eleven people from the team joined us. We had great time bonding. Several team members had never met each other before. The team members previously introduced met about two years ago in Osaka. We had great time sightseeing and having discussions. However, it was not all fun and games as we did technical deep dives.
- We booked a meeting room for the week. We had the L2 War room. It was a deep dive into Layer2 Strategies. There will be memes and more to come soon for the community.
- Meetings were not only limited to us. We had lots of meetings and discussions with others.
- L2 War Room Meeting. Ecosystem Awareness. Team Alignment for Q4.
- SamM: We had a few meetings with various teams. We met with the Aave team in preparation for the D3M launch tomorrow. We met Danielle from MIM; she is the king of the degens. It was fun to meet and see what the degen side of things are.
- Nadia Alvarez: We met Klima and talked about credit carbon tokens and how we can start working together and understand them better. It is a new world for us. We need to learn how to integrate these tokens and their practical effect on the Maker protocol. When I read Rune’s post talking about climate change and how to create clean money, I do not know who else is doing these kinds of things. Klima people are very into that. There are many people on DeFi thinking about what they call ReFi, like regenerate finance. If we ever start doing the Clean Money initiative, we are not alone. Other teams are also thinking about that.
- SamM: A lot is going on. I have a reading list of deep dives I need to do and other protocols to figure out what is good. I will probably be launching into some of those. After the meetings, there are lots of exciting projects. We will see what is suitable for Maker. Maybe there are some partnerships there.
- Nadia Alvarez: Thanks to Nick and Sam for our conversation with Wintermute. We explained to them why the community, in general, was not very comfortable with the terms of their proposals. So they have improved their proposal and updated it in the forum. Having Wintermute will be very helpful for us. We need a lot of Dai liquidity not just on the main net but on all these other L2s and the different chains. If we want to be on n Arbitrum and all these other chains, we have to have someone helping us provide liquidity. It is important to have them not just with Dai but also with MKR. If you check out markets of MKR, the MKR/Dai pair does not exist, and it does not seem well. Now that we will start with the Clean Money initiative, the idea is to start conversations with new investors interested in Maker because of this new mission. It is also essential to show them that they will find enough MKR liquidity in different markets. Their proposal that I invite everyone to check out includes decentralized markets and centralized exchanges. We have difficulty deploying liquidity because those exchanges usually have Dai or the Maker paired with Fiat currencies, such as dollars and euros. Unless we have an entity, create a bank account, and provide the other part of the market, we cannot do that. You also have to provide the other side of the market in addition to the Maker or Dai. This partnership is intriguing. It is good that they want to buy MKR and good to have a new MKR holder around. Wintermute working for and with us will be a good signal for the market.
- SamM: These sorts of trips are invaluable. I was meeting everybody for the first time and after so long. There are many unique benefits of meeting in person.
- David Utrobin: I have two thoughts and questions about market-making Dai and how the protocol approaches expanding into other markets. Two markets might be DEXes, that we might not need a partner because everything is on-chain. Technically we do not need a Fiat, a third party, to do the market making. On the centralized exchange side, you need a third-party service provider to do the market making. Can we create a standardized deal for a reputable market Maker who wants to do a deal?
- Nadia Alvarez: We have to work on that. It will be the first time that in case that we approve something like this, that we, as Maker, will be giving an MKR loan without collateral and with that call option. We have to create a MIP for that. This will open the opportunity for other market Makers to present a proposal using that MIP. We see on the Growth team that when we start conversations with projects on other networks, like Solana or on Layer2s, and they do not see enough liquidity of MKR or Dai, they decide to integrate another stable coin. We have an excellent relationship with the Axie Infinity team. They were thinking in the past to have Dai as their main stable coin on running their new blockchain. But due to Dai’s liquidity, they preferred to go first with USDT. We need to improve Dai’s liquidity in all other networks. We can do that by working with the community. We need help. If not, it will be hard to convince all these other new projects and networks to integrate Dai. ElPro was surprised at the conference; he always tells me that everyone knows about Maker and Dai. They love us, but liquidity is the first thing everyone looks at when integrating us.
- David Utrobin: For standardizing the deal, we should be separating Dai market-making from MKR market-making. Also, if we are giving MKR to centralized market makers in an unsecured fashion, is it a secured loan? Are Maker holders protected in this deal, even if it is acceptable terms with regards to recourse?
- Nadia Alvarez: We have to create this new proposal, go to the forum, and have a community’s feedback. First, we could use the MKR that is on our treasury. We do not have to print new MKR for this. Second, we are talking about Wintermute. I am supporting them because of what Wintermute is for DeFi and because they work with the most prominent crypto companies in the world. I do not know if I would support a market Maker that maybe is a new one, is working with one or two protocols, or is working with DEXes.
- David Utrobin: There is reputational legitimacy with who is offering the deal. In an environment where Maker does not have a legal team and entity, they could turn around and screw us. I do not see a method for us to be protected. It is a handshake.
- Someone: We do not have that anywhere. We have to rely on reputational damage.
- Someone: Why not use the Real World Assets Foundation or some legal structure? We discuss how to do this with RWA and give a market Maker a handshake that seems counterintuitive. I know Wintermute. I am a Counterparty of theirs. I have traded with them. They are good. I do not want to discount them. This is a very different scenario than we are discussing anything else we have done in loan space.
- Payton Rose: This is a good topic. We should follow up on it. Was there anything you wanted to add before kicking it over, maybe to David?
- Nadia Alvarez: You can check the weekly updates from Growth that I posted on the forum. I posted some of the pictures that Burban took from last week. It was great to meet you all in person. There were almost 64 people in the Telegram group. It was a small conference compared to EthCC in Paris. However, seeing all these Maker people around it was awesome.
- Payton Rose: I am glad you got to connect with the outside parties. The only one I saw mentioning wanting to add to their time in Lisbon was David. I will kick it over to you now. If other people are looking to speak, drop a line on the chart. We will get you next.
- David Utrobin: I wanted to recap the highest level view of my team’s experience there. I did not go with my entire team. I went solo as a facilitator. I knew that around 60 different CU facilitators and members were going to be there. I treated it as an off-site. In my conversations over the seven days I was there, about 70%-80% were with Maker, DAO internal stakeholders. I heard that it is hard to understand the story of what each of the individual CUs is doing. It is hard when there are 17 or 18 CUs and doing something special or specific within each CU. I heard that complaint a lot.
- That is why we are working in GovComms to create an aggregated team update publications. Look out for that. Also, the other 20%-30% of people I spoke to were more external MakerDAO stakeholders, former investors, Dai users, Vault users, people who write great academic papers, guys like Dimitri Brinson, etc. They did not know anything that was happening at Maker. They did not know that the foundation dissolved, that we have 16 different ratified teams with another four or five in the pipeline, or about the diversification of the PSMs. All of them know Dai as a USDC wrapper in their head. The public sentiment is somewhat what people have in their minds when they think of Maker. Events like this are extremely important for teams, not just telling their own story at Maker, but telling the story of Maker.
- What we have done over the last six months is impressive and wonderful. The foundation wound down ahead of time. We have 16 teams. We have come far, and we are continuing to grow. I am very thankful to have met so many of you, understood how the teams are structured, and learned who the point people are. We do not get a lot of these things in our online interactions because we are focused on whatever the agenda for the call is or whatever you are specifically DMing someone for. When you have off-sites like these, where we are all interacting with each other, we get a higher resolution of information. I highly encourage other CUs to prioritize showing up at some of these off-sites. The ones where many people are relevant to your CUs work are powerful. It is compelling to go in person, meet, co-work, and do working sessions around common projects.
- Katie: When is the next big event coming up that everyone is going to go to? I would love to participate and see everyone.
- David Utrobin: I would say ETH Denver happening in February has a lot of interest. Tickets are free.
- David Utrobin: I have one other thought concerning Wintermute about the idea that they did not know what was wrong with their proposal until Nick and Sam talked to them. They were reading the comments. They understood what people were talking about but did not understand what they should change. Interestingly, at the DAO, we do not have a formal process where a point person follows up on specific deals. Informally, that has been Nadia and the Growth team in various capacities. Also, others, like engineers, have specific conversations with other individual engineers and such. We need to focus on having a point person follow up on deals, summarize the sentiment on the forum, make that process more reliable, and ensure it happens.
- Primoz Kordez: I wanted to add that there were six of us, the Risk CU in Lisbon. To meet many people for the first time after two years was worth it. It was very productive at the same time. Regarding external meetings, we had a talk with Aave on D3M, which was helpful. The biggest impression I got was in Denmark two years ago; everybody talked about flash loans. Now everybody is talking about protocol, liquidity, or at least people I talk to. It is the concept that Olympus DAO introduced. This is becoming a thing. Many established DeFi teams were talking about it. It made me look more deeply into it. The concept is fascinating and could be very applicable to Maker. Maker liquidity is significant and especially when you potentially face delusion events. I talked to some bigger teams who are doing the liquidity mining 1.0, and they are desperate. They are spending a lot of money on liquidity mining. They are looking into discussing the concept of protocol and liquidity because it helps them with users who are currently dumping rewards after they harvest them. Plus, if they own liquidity, you start to create interest. Even Rune’s proposal mentioned this. We are looking into it because it is an exciting thing.
- David Utrobin: Primoz, can you give a high-level explanation of what does it mean protocol-owned liquidity?
- Primoz Kordez: You incentivize users with their tokens to lock liquidity. The LP, which in our case would be Maker Dai liquidity. They lock it into the protocol, and they get some benefits. Like Olympus DAO, which fundamentally, it is probably not the soundest thing, but you could do other stuff as well. You can start rewarding users for liquidity on their own, and their words are not dumped as they usually are through pool two, which was usually the case in classic liquidity mining schemes. It gets more complicated than that, but I do not want to spend too much time.
- Juan: It was great seeing everyone. I do not know how many people I met. We had the opportunity to put Maker into the dialogue. Also, I wanted to thank Nadia, Corine, and David. I think they were the main organizers of the Maker event on a super lovely terrace where we could meet everyone and mingle. I am not sure which CUs contributed financially, but the three were doing the heavy lifting. Thank you very much. It was very nice. In the name of all Maker, thanks.
- Payton Rose: Do we have any more comments or questions about Lisbon and what we discussed?
- David Utrobin: How do we organize as a DAO as part of independent CUs around events, sponsorships, etc.? I have been noticing teams can directly go and sponsor, teams can jointly sponsor, teams can jointly propose SPFs to sponsor. There are different ways to do it. Not every team goes to every event. Will there be, in 2022, a full Maker DAO off-site with all of the teams?
- Juan: It is decentralized, David. We could potentially coordinate something. You cannot force people to go. It will be a nice thing. We probably need some time and someone to take the initiative. If someone says in October, we are all going to X Y, Zed. I can see people organizing around that. And then network effects.
- David Utrobin: In this coming year, there will be a handful of popular events. And I want at least one where it is a Maker con. We talked about Maker con at least at the foundation for a couple of years. We are getting to a point where the size of the DAO and its external stakeholders is getting big enough. We should consider which one event we all go to versus the side events that some go to. Although we are decentralized, it would be great to be organized.
- Juan: As a British philosopher named LongForWisdom would say, you are hired. We will be waiting for your lead.
- David Utrobin: Is it part of anybody’s scope the events side of the DAO? SES has a budget for events. Our team also has some budget for events. I am sure others do too. To whom does the onus fall?
- Prose11: This is a good time to transition to our separate second discussion topic. Burban brought this up with many others; the B protocol, this idea of a WBTC-B vault. We also had a post from the risk core unit on how we could be utilizing the WBTC-B versus a B protocol, WBTC-B vault. So we wanted to give some time today to discuss the risk concerns about this. We are presented with another situation where we have declared that we want to do a B protocol back vault. Yet, we also have our needs for acting quickly and not missing out on the opportunity for WBTC-B. Primoz probably has some thoughts on this; please kick it off for us.
- Primoz: So everybody is aware there is a bull run. So there was a lot of minting on wBTC. We reached the debt ceiling, but it is getting increased in one or two hours. Burban made the post already to onboard lowered liquidation ratio for Bitcoin Vaults.
- We can see in this bull hype a demand for more leverage. If you are on board the regular wBTC-B Vault, Oracle does not require much work on B.protocol. It is on us to prepare and currently work on a risk assessment. This poll should be live soon. Sean from our team posted how to proceed because there was already a vote on B protocols implementation, a similarly low liquidation ratio vault. However, we believe some time will be needed to onboard it because it requires a new Clipper contract.
- B.protocol needs to get involved, and this could take some time. In the meantime, this massive growth could end. The other question with B.protocol is its scalability quickly because it is an experimental implementation with a low debt ceiling. Another limiting factor is the number of committed liquidators. They need massive capital of committed liquidators so that we can scale the debt ceiling of such Vault.
- That is why we just proposed to release a wBTC-B, the regular Vault, as soon as possible. In the meantime, we will work on the B.protocols proposal, which means we have two similar vaults. Similarly, a low liquidation ratio should be around 130%. Why can we not offer any lower liquidation rates, like 120? The issue is that we are using OSM, and there is a one-hour delay. There is also the risk of uncollateralized Dai. If Dai drops too severely, there will be a market risk in auctions if a delay is one hour or greater. The B.protocol itself would not increase our ability to offer more risky vaults or more leveraged vaults, but it does have its upside. Having committed liquidators is good because the more capital we know can bid to prove it is on-chain, the bigger auction throughput we can enable.
- The current auction throughput is limited due to reliance on auction cycles. If you need to liquidate, for example, a few 100 million, every 30 minutes, there will be approximately 40 million liquidated. It would take some time. You have committed liquidators. Again, if they have this amount of capital committed, you can increase the throughput. So, this is possibly the biggest upside. The only probable downside is that we will lose some penalty fees. This is something that some people do not like. We should just proceed with regular B.protocol BTC, do this experimental Vault simultaneously, and then see how it goes from there.
- Kirk: I would like to give a little bit more color on the B protocol. I may be the most familiar person with this on the team. The new Clipper is not that complicated from a technical perspective, and B.protocols has already been written. We could have that reviewed within a couple of weeks, assuming no problems are found. And then on the subject of committed liquidators. We could do something if the market were not putting a lot of liquidity, and it was just very similar to D3M. MakerDAO could mint Dai and take the B protocol LP shares onto its balance sheet so that Maker itself provides liquidity into the B protocol. That could allow us to grow it, perhaps independent of market interest to be an LP and B protocol.
- David Utro: Does that make the protocol the end liquidator? Do we become our keeper?
- Kirk: Yes. We are providing immediate liquidity there and purchasing out of the auction. Then the way B protocols new BAMM works is effectively a stable swap pool. However, it is scaled, a fixed discount is offered on the collateral, and it sits there. It is the open arm for the market to take. MakeMakers that initial purchase with Dai for the collateral. Then, over time, the market will see that and rebalances back to Dai.
- Prose11: In terms of WBTC-B, before liquidations 2.0, it was too risky to have a lower CR for rapid coin. But we are much more confident in our auction system now. I was curious if we had any sort of indication. As Primoz mentioned, we have a one-hour delay in dealing with what will probably be the most limiting factor. Do we have any auctions data? Is there an ideal number we can get to with the current setup? Is 130 the lowest we can go?
- Primoz: On our dashboards, you can see how the auctions are performing. On the risk model tab, you can also see what the risk premium is. We could probably go below 130 for wBTC. From the volatility metrics, the severity of the most severe crashes is smaller for a wBTC. Of course, you could argue that Bitcoin is centralized, so it carries its own risk that needs to be accounted for as well. We usually treat it similarly. Even though it is less volatile, it has its own risk. It is also less liquid which is counterparty risk.
- I could see liquidation rates going to 125, for instance. Then, the issue becomes this OSM and delay risk. People could meet on uncollateralized Dai. This now becomes a problem from the instant access module because we have started limiting the depth growth to mitigate this risk. It will get constantly hit, and this is one downside as well.
- Prose11: We did talk a little bit about maybe offering a lower Oracle delay or different things we can do with Oracle to provide larger margin loans. I was curious if you want to speak to that.
- Niklas Kunkel: I see a big slide of WBTCB here that sets the stage. We need to offer higher leverage options in terms of ETH and WBTC. That means much lower collateralization ratios. In the past, the limiting factor was the Oracle Security Module delay; If you cannot liquidate for at least an hour, you are taking on price risk during that hour. This limits the right amount of risk that we can take. We have to account for an extra hour of movement. There have been 20% blips in an hour before, for example, Black Thursday.
- If we are going to offer these higher leverage options, we need to either reduce the delay or get rid of the delay. I was talking with the mandated actors about this. Now I wanted to present this idea to the community. What if we offered degen vaults? Not degen in terms of the shitcoins that you can use to generate DAI, but rather in terms of the amount of kind of protections you have.
- Why is the delay there? The delay is there to protect against an Oracle attack. If a quorum amount of feeds were to launch an Oracle attack saying ETH is $10, then every ETH Vault would get liquidated. So instead, you can use the Medianizer price instead of the Oracle Security Module price, so there is no delay on the price. This enables the protocol to liquidate instantly if the market moves. From a protocol safety point of view, this is fine. But from a user point of view, you lose the Oracle attack prevention ability to cover your position. Normally, you have an hour where you know you will get liquidated or payback or add more collateral.
- From a protocol perspective, it is safe to do this. It is just that the user loses a lot of the guarantees. If we make it very clear to the user that these are very high-risk vaults and they are choosing to do this of their volition, we can do this. But it also goes against the super safe narrative that we have built. There may be some value in that brand that the community sees as more valuable than the possible revenue we would get by offering much higher leverage.
- Primoz: It would be interesting to offer such vaults depending on how you communicate with the users. They need to know it is not an OSM Vault this time. In terms of auctions, would the Dutch auction system be appropriate for this kind of Oracle setup? Should we instead use a similar setup to other lending platforms, with a fixed discount when liquidated? Maybe we could even do it with current Dutch auction parameters.
- Niklas Kunkel: That is a valid concern. You have the OSM delay. Then you have the latency of the auction completing, during all of which we are taking a lot of price risk. If we want to offer super high leverage, we should look at a discount to the Oracle price, for example, 3% to spot. This would be a lower latency mechanism.
- Prose11: I see Mio bringing up in the chat this idea of the upside. That is a pretty good question. Do we have any sort of idea of what demand for a lower liquidation ratio wBTC Vault might look like?
- Niklas Kunkel: If you look at something like ETH-B, there is not even high leverage, but the leverage is higher than what ETH used to offer. There seems to be a lot of demand for ETH-B. Presumably, if you offer even more leverage, there should be some demand for that as well. I want to be clear here, we are not just talking about wBTC-B, but we are also talking about ETH. There is a demand for leveraged ETH or high leverage ETH.
- Primoz: There is also one other consideration. If you use ETH-B at 130 liquidation ratio and also use the Defi Saver, you could essentially always be on the limit. You have one hour to react. In contrast, you would not have enough time to act if you offered a medianizer based on a 20% liquidation ratio. You would always need to ensure enough buffer, which could be higher than 130. So, in the end, is 120 much different with medianizer than, for instance, 130 with OSM? From user experience, they might just use the same level because everybody is protecting it one way or another.
- Niklas Kunkel: I believe ChrisB bought this up in the chat just now. It is not one hour or nothing on the delay. We may have a shorter delay, say 10-15 minutes. In that time, Defi Saver automation would be able to save you from liquidation. While you do get that protection back, you do not get any Oracle attack protection. The one-hour delay time is one hour is because that is the Chinese fire drill time to rally the troops, get in the War Room, and get a spell pass to shut the Oracle down before the price takes effect. In a 10-15 minutes timeframe, you are not going to be able to do that. So, you do not get the Oracle protection back. However, if people are concerned about managing the risks through Vault saving infrastructures, such as Defi Saver or their flavors, we can get those protections with small delays. In regards to the pricing risk, an extra 10 minutes should not matter that much. The auctions would last longer than 10 minutes. In that scenario, the auction is the limiting factor for the amount of leverage that we can offer, not the delay of 10 minutes or whatever it is.
- Primoz: I agree here; good point.
- I did not see any other topics for discussion pop up in the sidebar. I appreciate everyone coming in and participating today. I would like to see these discussions continue on the forum as well as in our Discord chat. Thank you, everyone, for attending. Go ahead and shut this meeting down.
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
- Alefcripto produced this summary.
- Artem Gordon produced this summary.
- Kunfu-po produced this summary.
- Larry Wu produced this summary.
- Everyone who spoke and presented on the call, listed in the headers.