[Discussion] Modify MakerDAO governance to use MKR/DAI Liquidity Provider tokens

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:

  1. It provides market liquidity for MKR which is good for holders of the token
  2. It makes governance a yield generating asset, which can help offset costs for voting as well as capital opportunity costs.
  3. Better aligned incentives between MKR holders and DAI holders
  4. 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.


Not sure the system would work currently. I’m for adding any LP tokens having MKR (except those using the gouvernance token to vote obviously). Maybe not aMKR? Not sure.

Still, MKR/DAI is strange as we want to increase the DAI velocity, not to have DAI stuck in a LP.

That’s not good. We want MKR locked up securing the hat, not floating around in the market at high velocity.


One reply saying its bad because it increases velocity and one saying it is bad because it decreases velocity :slight_smile:

I don’t think it necessarily changes the velocity, it provides more liquidity which is slightly different and more agnostic. With more liquidity you can get more trade volume, but you also provide incentives to provide assets to the liquidity pool so they offset in terms of velocity. The market will determine the velocity based on other factors.

More liquidity in markets gives people more confidence to hold/use both assets because they know the prices of each will be more accurate.

In general there are issues with MKR velocity. There is/was so much concern that I even suggested that we put a kind of delay mechanic for MKR to enter governance.

I think that is a bit short sighted to be honest. Low liquidity results in the token trading at a discount, which makes it cheaper to accumulate enough tokens to mount an attack.

As we speak the market cap for DAI is higher than the market cap for MKR. I think this is absurd and makes the entire system vulnerable.

MKR is actually already quite liquid. If you want to provide MKR liquidity, there’s a good incentive on Balancer.

This is an interesting idea, but I’m going to have to agree with Joshua_Pritikin (I don’t know the rules on mentions, so I’m playing it safe):

I don’t think MKR being more liquid is good. MKR equates to voting rights, and voting rights equates to power, however small a measure. MKR should not be considered in the same class as Dai, or BAT. Those are assets which are intended to be used as a medium of exchange, a currency, and so high velocity for them is a very healthy thing. MKR is a governance token, and if I saw a lot of people trading away a governance token, it would indicate to me that there may be a problem that governance can’t fix, and that I might want to avoid that system.

Aave is planning on having part of their security module/insurance scheme be held in a 80/20 AAVE ETH balancer pool. The advantage of doing this is that in a black swan event, this would theoretically increase the amount of funds recoverable by minting and auctioning new MKR (because the LPs would be effectively posting bids with their LP tokens). Perhaps rewarding users who stake the 70/30 MKR ETH balancer LP token may help with maker’s loss capacity, but the LPs would need to have an unbonding period so they can’t withdraw their money selectively during loss events.

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