by LFW & Aes
We wanted to put out an alternative proposal as we were not fully aligned on the MKR allocations proposed in MIP53. The Working Group felt pressure to put something out quickly and some considered a different approach focusing on domain groupings and revising the initial distributions based on them. Changing our approach in the last couple days would’ve led to the working group missing our deadline to the community of May 10th.
According to numerous academic studies, companies where at least 30% of the shares are owned by a broad-based group of employees, where all employees have access to ownership, and where the concentration of ownership is limited, are more productive, grow faster, and are less likely to go out of business than their counterparts.
In Jeff Bezos’s first shareholder letter, he shared Amazon’s fundamental management and decision-making philosophy which included the follow regarding ownership:
“We will continue to focus on hiring and retaining versatile and talented employees, and continue to weight their compensation to stock options rather than cash. We know our success will be largely affected by our ability to attract and retain a motivated employee base, each of whom must think like, and therefore must actually be, an owner ”
To maximize the potential of the DAO, we believe everyone working in a CU should have governance rights. We believe that this will be a net benefit to all MKR Holders over the long-term - even if minted MKR exceeds burnt MKR over the next few years.
The quality of decentralization was what drew many to this project, and is a continued value proposition for the Maker Protocol that should be maintained and nurtured into the future. This value can be increased by spreading MKR more widely among the current and future decentralized workforce.
Our belief is that contributors who believe strongly enough in MakerDAO to be dedicating their working hours to the protocol are more likely to retain the majority of any MKR compensation they earn to use to direct the future of MakerDAO, rather than selling it immediately upon vesting. If this bears out, it means that the majority of MKR compensation is effectively removed from the circulating supply.
This belief has held up with many individuals from the projects history. Many of those whom worked in the Maker Foundation have gone on to continue to work for the DAO, in some part due to the MKR they have retained from their time at the Foundation. Smart, driven and committed individuals like these are a critical asset for the DAO and MKR Compensation is a great way to attract and retain these individuals.
At a traditional technology startup, the founders and later compensation committees play a large role in determining how much equity, if any, is given to new employees. MakerDAO is in a very unique position with the transition from the centralized foundation winding down by year end to a fully-fledged DAO.
Unlike a traditional startup, fully committing to working on MakerDAO comes with additional risks. It is our opinion that these risks warrant increased MKR allocations:
- Risks associated with the transition from centralized foundation to DAO
- Regulatory and compliance risk - do the same laws apply to a DAO as to a traditional company? How would these be applied or enforced? Are individuals potentially liable if they are compensated by the DAO in any way? Even if they are just shitposting?
- Political risk - countries outright banning cryptocurrencies or stablecoins
- Smart contract risk
- Risk of Ethereum not scaling successfully and competitors cloning the Maker Protocol on other blockchains (BSC, SOL, ADA, etc)
- Risks related to the PSM and over-reliance on stablecoins to maintain the peg
- Crypto markets have historically had multiyear bear markets followed by short bull markets - it took bitcoin 3.5 years after the peak in late 2013 to reach its prior ATH and 3 years after the most recent peak in late 2017. It’s very possible that any MKR contributors receive could be worth much less than today in a relatively short time period.
1. Domain Approach
These guidelines take a higher level approach than other proposals and focus on domains rather than individual core units. We’ve split core units (existing and potential) into both domains and subdomains and given each a suggested relative MKR amount.
There are four primary domains and these are as follows:
- Engineering - Technical development and support of the Maker Protocol.
- Risk - Management of risk in multiple areas.
- Growth - Encouraging growth of the Maker Protocol and the MakerDAO.
- Coordination - Maintaining effectiveness of MakerDAO, its core units, and its governance.
We believe that this domain-level approach is more scalable and future-proof than making guidelines for specific core units, and should highlight the inclusivity of the Core Unit Framework and MKR Compensation.
2. Social Leveling
These guidelines propose spreading MKR compensation on a ‘flatter’ basis than most traditional organizations would consider optimal, with the difference between the highest and lowest recommendation being only 3x.
As discussed above, we feel that greater ownership will increase core unit efficiency and increase the decentralization of governance power, both of which are compelling arguments. Additionally, we feel that it is optimal to maintain strong relationships between individual core units given how much their areas of responsibility overlap in the blockchain-industry environment. We feel its important to avoid unecessary stratification of the DAO’s workforce that could impact efficiency, or even cause very real dangers if core unit employees are not aligned with MKR Holders.
3. Multi-phase Guidelines
These guidelines propose a multi-phase, ‘living’ approach to core unit MKR compensation. These guidelines are meant as an initial proposal that can evolve over time, perhaps revised on an annual basis.
The flexibility of modifying these guidelines in the future will ensure that MakerDAO can react to a changing market and industry environment.
4. Vesting Requirements
These guidelines propose a 1 year cliff, and vesting on a quarterly basis lasting for up to 4 years.
We feel that this schedule represents an approximation of the industry standard, and encourages the length of commitment that allows effective transfer of knowledge between personnel.
The more forgiving quarterly vesting intervals ensure that no individual feels ‘handcuffed’ to the DAO for a maximum of 3 months. We want to ensure that the DAO get’s each individual’s best and enthusiastic work - someone marking time to wait out their next cliff will not deliver their best work.
5. Limit to Inequality
These guidelines propose a maximum difference in MKR compensated within a Core Unit of 10x, limiting the extreme level of inequity that is observed in traditional organizations.
We believe that this guideline will help to prevent abuse of Core Unit personnel by Core Unit Facilitators in the long term. Due to the borderless nature of the DAO’s workforce, it will be possible for facilitators to economise greatly by hiring from locations with a lower cost-of-living. This is a key advantage of a borderless workforce. However, there are limits to the extent that this can be ethically pursued which we believe should be recognised by these guidelines.
6. Separation of Concerns
These guidelines propose that applications for Core Unit operating budgets be pursued separately from proposals for Core Unit MKR Compensation.
We believe that this separation of concerns encourages good-faith negotiation from both MKR Holders and proposing Core Units. It helps mitigate the impression that MKR Holders arms are being twisted in order to ensure the services of Core Units, and it gives the Core Units a chance to demonstrate their ability to the DAO prior to requesting MKR Compensation.
Furthermore, this separation allows for the discussion of a Core Units value separately from tangential concerns such as MKR dilution. We believe that this will ensure budgetary and MKR compensation discussions are less intermingled and more focused - hopefully leading to better outcomes.
Please Note - these MKR values are only to serve as a starting point for discussion and are NOT fixed - there is a massive difference between a team as talented as the '96 Bulls proposing a Core Unit and the '72 Sixers (who only won 11% of their games.)
Compensation guidelines should be flexible enough to accomodate both superstar teams and those with less experience but that have shown potential.
Ultimately, it is up to governance to evaluate each individual proposal on its merits and determine the appropriate MKR compensation.
|Domain||Suggested Multiplier||Average MKR / person / year||PE Submission Price||1y High Value||1y Low Value|
|Engineering - Protocol||1.5||120||270,000||720,000||50,640|
|Engineering - Oracles||1.2||96||216,000||576,000||40,500|
|Engineering - Frontend||0.75||60||135,000||360,000||25,300|
|Engineering - Integrations||0.9||72||162,000||432,000||30,400|
|Risk - Protocol||1||80||180,000||480,000||33,800|
|Risk - Real World Finance||1||80||180,000||480,000||33,800|
|Risk - Legal||1||80||180,000||480,000||33,800|
|Growth - Business Development||1||80||180,000||480,000||33,800|
|Growth - Marketing||0.75||60||135,000||360,000||25,300|
|Growth - Internal||0.9||72||162,000||432,000||30,400|
|Coordination - Governance||1||80||180,000||480,000||33,800|
|Coordination - Communications||0.5||40||90,000||240,000||16,900|
Should we set a fixed cap of MKR to be allocated across all Core Units?
We don’t believe this is the best approach, despite some advantages for the following reasons.
- We believe it will result in increasing centralization as existing Core Units will not want new Core Units within their domain, as it would mean sharing the MKR allocation. At the least, this is likely to inhibit knowledge sharing and will result in Core Units wanting to absorb new contributors ‘in-house’ rather than encouraging them to create new core units.
- We believe it will incentivise Core Units to fight over the fixed amount to be distributed (with all the contention, disagreement and conflict that implies), rather than limiting their arguments for what they believe is fair for themselves. EG: “We should get more of the pie relative to x because we do much more than them” versus “we deserve this much MKR because of x, y and z, awesome things we have done.”
- We believe it will be difficult to determine an appropriate annual cap without having full visibility of upcoming Core Units. While this visibility may be possible in the short-to-medium term, it’s unlikely to be possible in the long-term.
- We believe an annual cap will restrict governance’s ability to onboard additional Core Units - regardless of how much value they could bring - due to the necessity to keep promises to existing Core Units.
Should we set a MKR cap per Core Unit?
We don’t believe this is optimal. Having a fixed MKR cap per Core Unit would disincentivise facilitators from hiring new contributors if it may impact the amount of MKR recieved by them or their long-standing contributors.
On the other side, a per-person cap does incentivise Core Unit expansion rather than division because it’s easier to join an existing unit than setup a new one. This could lead to larger core units, rather than more core units. However, in this case there are still incentives for enterprising individuals to become facilitators of new core units due to the individually higher rate of MKR compensation they might recieve.
On balance we feel it is better to err on the side of too much expansion than it is to encourage core unit facilitators to keep their employee count low.
Should we just give bonuses in DAI?
While this might seem attractive now, there is no guarantee that we are going to have significant amounts of surplus DAI when we operate in the future. Addtionally, DAI does not provide the same manner of long-term incentive alignment that vested MKR does.
On balance we feel that offering MKR incentives is preferable to offering bonuses only in DAI.
Should we just reduce MKR compensation for all units?
While some may view these guidelines as larger than they would have preferred to see, there are multiple good reasons to offer Core Units higher MKR compensation. These are covered in more detail in the second section of these guidelines, but to summarize:
- There are significant risks to working for a DAO.
- The strength of the DAO is the number and committment of those working within it.
- MakerDAO is still an early-stage project, despite its success thus far - this is reflected in the risks and environment in which the Core Units work.
Should we be concerned about members of the DAO receiving enough to retire / leave employment?
We don’t believe that this is a significant risk in the near or medium term. While it’s possible that this will happen on an exceptional basis, we believe that a majority of those working for the DAO do so for reasons that are not primarily financial, and that these reasons will remain regardless of compensation.
We also believe that ‘retirement’ for this reason is not necessarily a negative outcome for the DAO. Compensation given in MKR encourages on-going commitment to the protocol, and we expect to see some percentage of those leaving formal employment within the DAO to spin up complementary projects, take a more active role in governance or move on to something else that tangentially benefits the Maker Protocol and MKR Holders.
Is protocol alignment only necessary for ‘critical’ core units?
We don’t believe that this is the case. Any core unit employee has opportunities to operate in a manner which negatively impacts the DAO and/or enriches themselves at the expense of the DAO. For this reason alone, we believe alignment is critical for all personnel.
Even aside from this aspect, though, we believe that the benefits in terms of commitment and ownership of the protocol recommend the approach of spreading MKR widely among core unit contributors.
I’ve built a basic financial model for Governance to assess the financial impact of the MKR compensation under various market and interest rate conditions. I encourage everyone to adjust the inputs to what you feel are reasonable estimates.
- DAI growth moderates but continues and hits an all time high of $6.1B by year end.
- Interest rates increase modestly over the next couple years and peak at 2.5% in 2024, then decline to 2.25% in 2026.
MKR net income and cash flows grow to $534M and $587M by 2026. MKR compensation peaks in 2024 as the last portion of the initial MKR compensation vests (all MKR compensation in 2024 is worth $234M). Total MKR supply excluding the MKR transferred from the Foundation in 2023 is 931K and decreases to 910K by 2026.
- DAI growth declines to end the year at $4.65B and falls 50% in 2022 as crypto enters a prolonged bear market
- Interest rates decrease to 1% and remain there through 2026
- DAI expense growth is cut to 5% as costs are reined in to align with market conditions
MKR net income and cash flows in 2026 are 53M and $60M respectively. MKR compensation peaks in 2024 at $24.1M and dilution continues but moderates through 2026. Total MKR supply excluding the MKR transferred from the Foundation reaches 940K by 2026 (assumes the DAO uses the Foundation MKR to pay CUs).
- DAI resumes growth after a tumultuous summer to end the year at $11.09B and momentum continues in 2022 with DAI outstanding reaching $26.61B.
- Interest rates decrease linearly by 0.25% per year from 4% starting in 2024.
MKR net income and cash flows grow to $7.24B and $7.49B by 2026. MKR compensation peaks in 2024 as the last portion of the initial MKR compensation vests (all MKR compensation in 2024 is worth $1.41B). Total MKR supply excluding the MKR transferred from the Foundation in 2022 is 916K and decreases to 892K by 2026.