[Discussion] Core Unit Budget, Incentives and Vesting

Given Smart Contracts team were the first to suggest vesting and minting MKR, there were a lot of really great discussions in the Smart Contracts Budget Proposal. I’m bringing this into its own thread so we can talk beyond smart contract core unit. Below is a summary (but not exhaustive) and collection of some points brought up in forum threads and Smart Contracts Core Unit Presentation. Please discuss perspectives in this thread.

Generally, budget discussion encompass a few areas

  • Salary
  • Incentives / Vesting Amount
  • Incentives Structure (Vesting, performance bonuses)
  • Sourcing MKR and its Mechanics (minting, buy off market, etc)
  • Social contract about MKR & minting
  • Consistent approach across core units or unique per core unit

Discussions points on MKR Mechanics

Social contract about MKR & minting

Minting

  • MakerDAO to make a strategical (long term) choice: how much do we want to send to the burner (qq), how much of the burner we want to re-direct to the Core Unit (pp) and how much we want to keep for growth/salaries/etc (1-q1−q).
  • MKR should be minted (as long as approved by Governance), regardless of the total supply
  • Minting as a more efficient mechanism and is not exposed to fluctuations of surplus buffer or price of MKR
    - If MKR price climbs fast, we may not definitely burn the required amount.
    - We might be incentivizing the burning of MKR tokens (compared to a more generic approach where growth is the overarching target).

Maker Burn

  • We can’t intercept MKR going into the burner
  • Buybacks are a vector attack by front-runners
  • Burn in an auction and mint immediately
  • MKR should be set aside for vesting at the onset of a core team forming

Vesting Parameters

  • Cliff (at least 1 year)
  • Streaming after the first year
  • Weighing the vesting towards the end (10-20-30-40%) to retain for the full term

Other considerations for incentives

  1. Options (purchase price)
  2. Prediction market (Creates shares for goals)
  3. Performance based to tie into vision/strategy to set goals (Group effort focused)
  4. MKR vesting tied or similar to Sourcecred framework distribution
  5. Governance distributes set MKR rewards to groups / core units. Core units can then resolve vesting within their teams

Other questions to consider

  • Do we and if so how do we scale/standardize for other teams, can there be a framework?
  • What happens to contributors jumping between core units?
  • What happens with contributors joining later?
  • Fast forward, what does it look like for a new generation of people / governance?
  • What are the plans for Maker Foundation MKR and could that be used for this?
  • Is it feasible to build performance measures within the team or across teams?
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Thoughts re: Vesting parameters…

Firstly let me just recap the ‘why’:

  • Ensure sustained productivity over the long term
  • Facilitate the retention and attraction of staff
  • Tie protocol success to team reward

And why is 3-4 years a good timeframe:

  • 1 or 2 years incentivises short term goals over long term priorities
  • 5 is too long in the Crypto space - businesses need to evolve
  • 4 feels right by incentivising long-term value add

And what about the mechanism design:

  • A traditional higher value cliff is not beneficial because it front loads token ownership making people question later commitment. Linear vesting solves this.
  • Non-linear vesting weighted towards the end is not ideal because it incentivises unmotivated/unproductive talent to stay in the team longer purely for future financial reasons.
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I am of the opinion that salaries should be competitive enough to retain talent otherwise they will go to a rival protocol. How much of their compensation should be in the form of MKR I don’t know. I like what Elon did with Tesla options, but feel it would probably not be transferable to DeFi. I think that if we are going to pay people in MKR it should be taken from the supply of MKR that would have been burned rather than buying from the open market. I am leaning towards the idea of paying all core units more or less the same even though I know that some core units are going to contribute more or less to the earnings potential of MakerDAO.

Good stuff Amy. Not sure why folks are so worried about minting MKR. If we burn MKR, or we mint MKR–the value and price will be irrelevant. This is an irrational ecosystem.

So, if we mint another 100,000 MKR for vesting purposes, it won’t make a difference. MKR is what DeFi does, and DeFi is what Bitcoin does. That’s just the reality of it. What can you do…

What are you talking about? First you say you wouldn’t care if MKR went back to $200 and now you’re saying mint as much MKR as you want. Are you not invested in this token? Do you want your investment to plummet in value? That’s just super irrational thinking. We’re trying to come up with a system that fairly incentivizes all participants while also retaining the value of our investments. This shouldn’t be thrown together lightly.

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Exactly what I wrote

34-pages of TX sent to the IRS. A lot of voting bro. Yes, I am and will stay long MKR regardless of price.

Why? It’s Reality. are you afraid of failure?

I’m afraid of losing a lot of money. Being afraid of failure helps mitigate failure… I’m not sure how this pertains to this circumstance.

So under your logic we should have no problem minting 1 Million more tokens and essentially diluting the price by half which would destroy the social contract and ideology of the tokenomics and so everyone who bought above $1000 would be screwed. How do you think they would feel about this? Great that you bought in a lot lower so you wouldn’t be hurting as much but how do you think everyone else would feel? Maybe it recovers in the next year but how do we know we won’t just mint another million to do the exact same thing? Then whats the point of even owning MKR?

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Likewise. Losing sucks.

My analogy of MKR dropping to $200 was based on @MakerMan opinion of a doomsday scenario. If things fall apart–personally, I am willing to HODL and buy more. But like everyone I hope we never see three digits ever again.

Don’t think we are talking 1 million here–but even if we did mint 100,000 MKR–I don’t think the Market will care. As an example, if the Foundation burns their large position of MKR, the market won’t react positive, or negative. That’s just my opinion. I don’t think the Market worries, or thinks about the price of Maker. 99% mostly care about ETH price.

Edit: BTW – Maker is just a governance token :slight_smile:

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MKR is a liquid token so it makes sense to convert it to DAI to compare apple to apple. Stock is a good way to pay people when you don’t have the cash. But giving MKR or DAI is not a big difference (due to the liquidity). It’s not like a stock option of a private startup where there is no liquidity. You can use other assumptions, but intuitively, I would say that getting 250 MKR after 1 year of presence (the SC incentive) is like having 50-100% of the cash today. You have a risk of not getting it, but also you don’t have to pay for the carry. Maybe we can settle on 75% which means roughly $400k at the current price.

The difference would be that if MKR drops a lot, people would be incentivized to drop ship and go to the next fancy protocol.

Converting everything as a total compensation package is needed to have a good discussion. We have almost enough cashflows to avoid MKR dilution is needed (we can delay the SB increase).

On the other side, we are a startup with currently no workforce. Is the value of MakerDAO greater or lower if we add a full workforce by dilute MKR ownership by 10%? I would say it’s greater.

I would also highlight the alignment part. A lot of contributors in my team have started contributing without compensation, not knowing what’s next but bringing valuable expertise. The same goes for governance in general. Now, we want to pay top rates to attract people. And we are told they will probably not even stay 4 years. We might end up with mercenaries. Following many startups, I never saw any correlation between compensation, stock ownership, and performance.

Overpaying talent is not something that could kill MakerDAO. Breaking the culture (whatever it is) and the community is. Where is the limit? I have no clue.

Personally, I’m fine with anything that feels fair, seems good for MakerDAO growth and the MKR price.

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I would also add that I am against minting MKR, even if it seems like the market doesn’t care about the supply. The reason many investors got into MKR was knowing that the only case where its supply increases was if there was a protocol failure.

Breaking that social contract, even by a small amount, would be something that severely shakes the confidence of current MKR holders. It will almost certainly negatively affect MKR price and earn us some bad publicity for good measure.

I think it’s important to frame the idea of minting MKR within the grand scheme of MKR tokenomics. Having a framework for minimum viable issuance would probably be best. For instance, would you be ok with minting MKR if revenues kept increasing and MKR supply remained net negative? I think most people would agree this would be an ok compromise. What if there was 1% inflation per year but revenues increased 2-10x per year? These are nuanced discussions we need to have with more concrete data so that we can create a concrete proposal to vote on.

Here are some rough notes I took down on the topic:

  • Ensuring a defined amount of total MKR minted within a certain timeframe regardless of Core Unit demands. Don’t want to end up with 2 million MKR in 5 years because of not being planned out properly.

  • Core Unit incentivization is priority #1 but needs to be aligned with all MKR holder’s incentives.

  • Should we as a community allocate a pre-determined amount of MKR for employee incentives and then each Core Unit can apply for a % of that bucket? Number could be based on estimated yearly burn so that we don’t have inflation. Obviously we don’t want to get to a point where we’re micro-managing these rewards because that’s just not efficient use of our time.

  • MIP that mints a yearly amount of pre-determined MKR into a vesting treasury which MKR voters then vote to dole out to Core Units after approved budget proposals. This doled out MKR goes into their own respective vesting contracts.

  • 2 seperate scenarios. One where Core Units propose how much MKR they want and we mint based on that or governance determines an amount every year/quarter that they are willing to allocate to Core Unit incentivization.

  • Is it possible to change the code of buyback and burn to buyback and redistribute? Or add a new function? Would be more efficient to distribute MKR that way.

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Sorry @ElProgreso this goes against the culture of MakerDAO.
We have been rational and serious so far.

This had resulted in a project that works well, although the MKR token has not pumped like many others.

We like it this way, so let’s keep reasoning in rational terms.

This. Not to mention that MKR needs to have value by design, to compensate for potential losses. It’s not just a way to “buy lambos”.

This.

Totally agree.

I think @Derek mentioned a few times that it is important to keep alive the narrative that MKR is a deflationary asset (1m at beginning, and then going down over time).

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I keep coming back to what I believe in:

“You are not going to get wealthy renting out your time. You must own equity, a piece of the business to gain your financial freedom." -Nivi

No matter how we slice it, or cut it–we need to give Core Units a piece of the business.

Obviously, we’re not denying that. It’s about building a sustainable framework that all vested parties can agree to long term. That is what this discussion is for.

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I have spoken privately with several community members over the course of the last month.

While the sentiment of these people (me included) might be completely different than that of big MKR whales (those who actually decide),

  1. We all appreciate the value of the teams, working for the Foundation, that have built Maker and lead it to be the n1 DeFi protocol by TVL in 2021.
  2. We all agree that they should be paid extremely well and should have stake in the game (MKR).
  3. We all think that MakerDAO has massive potential.

This said community members (that, again, are not necessarily whales…) also think that:

  1. Those who have held for years, have been rewarded (the average entry price was of 500usd, now 1MKR=2000usd), but not as much as many other protocols (including just ETH, BTC, or basically any other Defi project).
  2. They have taken a huge amount of risk in the last few years. Holding MKR is not like holding ETH, as we discovered after BT.
  3. The narrative of MakerDAO burning MKR… well, after >3 years, we have burned only ~0.5%. This is way the word ‘MKR minting’ is not well received…

So, while most MKR holders are good at strategic patience ™, we also expect to see some serious ROI in the next few years.

Early investors expects good returns for being early.

So yeah. We all agree in MKR minting (with some limits), growth of strategic reserves, rewarding valuable Core Units, and all. We all understand that:

growth should come first, dividends will come later.

But we are also worried that the early investment on MKR actually results in being way more risky and way less performant than many other crypto investments.

For example, now:

  1. Community members are rewarded with SourceCred a few 100s usd/month (the most actives). This is nice but, at the same time, I have earned about 10x from very superficial activity in other projects.
  1. small MKR holders are not rewarded at all, now. There is not staking incentives currently. And they have to pay high fees for voting. Even for onchain polls (not executives).

So, to conclude, and summarising my post about sentiment of community members (as I perceive it, of course):

  1. The discussion in the forum might not reflect the reality of MKR onchain voting: most community members are not whales.
  1. Small MKR holders are not terribly happy about the ROI of MKR in the last few years. They hope for better results in the future.
  2. All community members I have talked to, are very happy about the work done in the past by the people working at the Foundation. They have done an amazing job, and this is totally recognised. They should be rewarded well in the future too!
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Thank you for sharing this perspective. I have been here a long time as well and generally agree. Maker seems very undervalued for some reason, especially when you see Terra’s Luna at a 9B market cap. I looked into 95% of these other lending or stable-coin projects and when compared directly to MakerDao they are mostly inferior, yet nearly all of them have outpaced MKR token appreciation this bull market. It is shocking.

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Rather then intercept maker going to the burner could we create a new auction type (flap-b)?

X% of the dai issued to core teams would be sent to a flap-b auction. Maker would be used to purchase the dai offered in the flap-b auction. Rather then burn maker from the flap-b auction it would be held and vested until it is eventually distributed amongst eligible core team members based on a pre determined model.

I think we are beginning to see this discussion splitting in two.
There is the MKR vesting for the Smart Contracts Core Unit but separate from that is how we pay for it.

@iammeeoh is fully correct is his assessment of the social contract around MKR printing. Printing MKR for vesting (or any other expense) is not what MKR holders have been told since 2016.

Siphoning DAI from ongoing operations and buying MKR with it is tempting, but on closer inspection full of problems as the future price of MKR is highly uncertain. You could end up spending all the DAI that should have been in the buffer.

The problem with allowing MKR to be printed is that once you allow for printing for one reason you allow printing for practically all good reasons as well. Once one group consider themselves so valuable as to deserve a print, other units are bound by human nature to try the same. The net result could be a flatlined status for the MKR token.

But there is middle ground here which I think is worth taking into account, mainly concerning the unspent MKR in the Foundation. The Foundation MKR is a bit of touchy subject, so I will just tell you what I think. I suspect the Foundation MKR cannot be spent due to regulations and upon the Foundation dissolving will either be burned or left to rot. Either way they are off the table, removing a huge source (100k++) of future supply from the market. This should appease even the most diehard print resistance fighters. The only slight problem is that we will probably get no confirmation of this.

Outline course of action is then as follows:

  1. Get the proposal from the upcoming Oracle Core Unit on the table as well.
  2. Modify MIP42 so to include a clause of why specifically MKR is printed and include a selfdestruct clause that invalidates MIP42 after a specific amount has been printed.
  3. Execute, print and vest MKR. MIP42 is null and void.

This course of action both vests the teams and puts a decent moat around the rest of the MKR supply as MIP42 will have to be proposed, discussed and ratified all over again if anyone else for whatever reason wants to print more MKR for purposes other than holding the protocol above water.

Feedback appreciated.

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Yeah it seems to me that two comment here are very important.

together with a comment made in another thread:

It seems indeed to me that the best solution, really, is not to mint MKR as vesting, but to offer Core Unit teams buy-options. Example.

Option to buy 995MKR in 2025 at price 1MKR = 10k DAI.

It seems to me that everybody would/should be happy with this.

  1. Devs believing in this project, should project MKR at >10k in 4 years time. So this will turn out to be a profit for them: for instance if MKR=12k, they will get 2k*995 ~ 2 mUSD of profits.
  2. Current MKR holders should be happy with this arrangement. The contract is valid only if the price goes up at lest 5x in the next 5 years. So yeah, it might turn out as a huge payment to Core Unit developers, but MKR holders should consider themselves happy anyway.

MKR holders are taking all the risk of the Maker protocol. It seems fair that Core Units member are given the opportunity to become big MKR holders: but this indeed means taking also some risk.

EDIT: the numbers above (4years, 995 MKR, 10k DAI, etc) are just examples. Nothing concrete.

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The community should look at things from a budget planning perspective. MKR vesting is not really more MKR minting than a DAI compensation. For a given level of risk (stable SB), if income < workforce expenses, you need to mint MKR (or decide to increase risk by sucking from SB which would be unfair for DAI holders).

Obviously, expressing compensation in MKR, and more precisely in future MKR, bring some uncertainties. It is my perception that this might be the core issue.

One way is to convert everything in cash. For instance, giving $500k of MKR each year as vesting. Or maybe more to compensate for the expected increase of MKR.

No more than 9 months ago we were generating almost no income. It is likely that we end up with $30-60M yearly expenses, i.e. around 2-3% MKR minting by year. You can guess the MKR price would be lower as well. In such a case, compensating people in MKR would less costly and less diluting.

This can be softened by adding rules to the incentives. For instance, giving $1M after one year and MKR price above $3000. Or DAI issued above 5B DAI.

Another way is to convert the vesting to token options instead of tokens as suggested by @iammeeoh. Obviously, having the option to buy 995MKR in 2025 for 10k DAI a piece is way less attractive. You can use a Black–Scholes model (or anything else) to compute the value, but it would be (pure guess for the sake of the discussion) 10x less than giving 995MKR. If that is the case, it would be like giving 9950MKR options.

In short, one thing is the amount you want to spend on the workforce (15M, 50M, 100M, 200M a year? as a % of income?), the other is how to bring alignment between MKR holders and the core units (by paying in MKR, MKR options, by adding rules, …).

I think the first issue is the most important one. Currently, MakerDAO is not having a lot of expense creativity, but that will come. As @Planet_X said, once you start to spend, it’s hard to stop (true for DAI and MKR minting). There is always a good reason.

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