This is a recent innovation coming from some of the food token projects, but I think it is worth considering and could have wide implications for MakerDAO and other on-chain governance based projects.
The idea is to change governance votes so that instead of just using MKR tokens to vote, you use an AMM Liquidity Provider (LP) token where MKR is one side of the market. Examples of this would be Uniswap and Balancer.
This has a few interesting effects on the project:
- It provides market liquidity for MKR which is good for holders of the token
- It makes governance a yield generating asset, which can help offset costs for voting as well as capital opportunity costs.
- Better aligned incentives between MKR holders and DAI holders
- It creates some positive feedback loops for the protocol
- Improved market liquidity for DAI which helps maintain the peg
- Improved market liquidity for the protocol to exchange DAI->MKR for burning
- LPs get extra income from the protocol for providing liquidity
What are the cons?
- “Impermanent Loss” risk of being a market maker
- More expensive to achieve the same voting power since you have to provide DAI liquidity (same relative to everyone else though)
- Contract risk of the AMM
You’ll notice that the most popular AMMs right now for MKR are MKR/ETH markets. This makes sense in the current environment, but I think for the purpose of the protocol, we would want to create incentives for MKR/DAI markets to get the positive feedback loops.