Governance - the MKR lifestyle

Presently Maker governance is modeled on the role of shareholders in a private company. The MKR token is similar to a share, and with this you are allowed to participate in Maker governance voting, similar to the use of shares during the annual shareholders gathering.

This was the theory back when Maker was conceived, but experience has shown us that Maker governance does not correspond to this model. There are two major differences.

First difference - tokens have more use cases compared to shares
Shares used for voting are registered in a company share registry. You as a shareholder are listed and you vote with your listed shares, but what you actually do with your shares is up to you. This means you may hold or trade your shares and still vote with them, as it is the company share registry that matters, not your Etrade account.

MKR tokens are different, there is no registry you vote with what you have in the governance contract. The downside is that since MKR has several other use cases, some of which are quite profitable, this creates a competition for tokens and the token holder’s attention.


In addition to passive holding and governance there is also competition from market making, defi participation and active trading.

Holding - just buy and hold. The vast majority of MKR is in this position.
Market making - this can be attractive option as the MKR token has a tendency to vary in price from DAI 400 to DAI 800, practically no matter the internal or external circumstances. Mental effort is low, profit quite good.
DeFi participation - this option was not even on the drawing board when Maker was conceived. Mental effort is low to medium depending how hard you want to farm. Last time I checked MKR-WETH on Uniswap it had 18.4% annual return.
Active trading - nothing beats active trading. Picking up some MKR in the post Black Thursday fire sale and netted a nice 100% profit. The mental effort is however very high.
And finally Maker governance - high mental effort, significant weekly workload and 0% annual return. Basically hard work for free. Especially when compared to the DeFi choices available it is basically a small miracle there is any MKR voting. If Maker ever found itself in the situation where the efforts of the founders and one handful of diehards and early investors needed replacement, the entire Maker project could potentially be in danger of abandonment.

Second difference - the MKR lifestyle


In the above table there is a comparison of the respective situation of a shareholder versus a MKR holder. As you may have noticed the only similarity is that none of them are compensated for their effort. The similarities end there, otherwise every aspect of their situation is different. Fully submerged participation in Maker governance is in late 2020 very similar to being on the management team of a startup company. There is enormous energy, vast promise and interesting people, but also the feeling that Hell has fewer fires to put out.

I will hereby argue that change is needed.

Some notes on this article:
This is not a MIP.
It is not a pre-MIP or a poll.
I am not proposing anything.
It is a description of the as-is situation.

Feedback appreciated.

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Looks like we’re finally rounding the corner on new tokenomic/incentive ideas. I’m happy to see more argumentation/reasoning for these ideas. Great work. The more we can convince participants of these ideas, the easier it will be to pass and greater enrich the majority of users.

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Excellent analysis @Planet_X, continuing your efforts to reach a community consensus about the status of things.

This post (and your previous ones) are very useful. Hopefully we can soon agree on this common background and then move towards finding a solution.

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Thanks, I appreciate the graph, I relate to it well.

As someone with double digit quantity of MKR, I used to vote regularly, mostly out of novelty, but have since moved to LP on Uniswap. Economically it serves me better and my votes never really mattered anyways. The gas costs were an issue at times, why would I spend $10 to influence the outcome by .1%?

I’m torn, I think there are far too many polling and too many executive votes. In the past I think there would be 20+ polling questions at once. I value the speedy protocol enhancements and decentralization is paramount, but there has to be a better way than this. They can’t all be that important. Adding to this it’s funny that they’ll usually pass with something like 100% of the vote.

I would like to see: economic incentives for voting. Particularly for voters who voted correctly (whichever side wins). Maybe it’s as low as covering the gas cost, and maybe your votes cast has to be over a threshold of MKR (>1?) to make dust voting gas reimbursement attacks more difficult though it would still be a consideration. Some sort of economic incentive, to turn it into more of a game.

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We also need to consider the role of delegation. No company functions by having shareholders vote on every decision. The shareholders need to vote on a group of individuals to lead, compensate them, and empower them to make decisions on their own. Not realistic to have so many votes many of topics that the average token holder cannot be expected to understand or take the time to study.

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I haven’t seen this idea proposed before, but I think it is quite interesting. At least to discuss more extensively. Thanks!

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Great post.

I would say that the social component of MKR is important. While we don’t drink beers with each others, this is a tribe and I enjoy interactions with you.

For compensation, we have SourceCred.

I spend also a lot of time on startups boards. For most, I own even less that MKR. There is no monetary reasons to do it. You just do because you want to do it.

We might want to reconsider the MKR vault type. As our loans are becoming larger than MKR market cap, it’s no longer that much of a risk.

Another solution is to use the Strategic Reserves to stack the cash during the year and distribute it only to MKR that are stacked on the gov contract. This can be in the form of MKR bought on the market. NEXO is doing that.

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This is really true. It makes most sense for most small time holders to put their MKR into a Uniswap liquidity pool rather than make a small difference in governance.

What if we allowed people who hold Uniswap (MKR/ETH pool tokens), Aave (aMKR), etc. to also vote on governance polls? Also, decreasing the cost (tx fee) associated with voting would probably incentivize more people to vote. I’m not sure of ways to do that…

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@hyman

Many of the proposals have indeed 100% of the vote. It could be a case of Maker being in an early phase or it could be a signal that not everything needs to go to a vote. It is definitely worth noting - thanks.

I suspect there is momentum building for this. Also I note that there are no real voices in opposition.

Yes. This plays a bit into what is proposed under the MIP structure. Maybe the Domain Teams could have some powers delegated to them and work more on their own.

Thank you. I must admit I feel the same. (But I could use a beer at times).

This is not a bad way of doing it. Worth noting.

Hi @thedstrat and welcome to the community. Yes - you are getting to the crux of the matter. I am beginning to think that Maker governance needs brains as much as MKR involvement.

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Thanks for the thoughtful post @Planet_X . I personally believe that this issue is entirely mitigated via vote delegation (delegates will be able to monetize their activities in a variety of ways), and MKR inflation for voting.

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Agree. I have been working for quite some time on work-rewards and how to couple this into voting power. I don’t have time to work up a diagram but basically it is a equilateral triangle with work in one corner, vote in another, and reward in yet another.

So to me your chart would be more of a 3-dimensional object where my work is your

  • your mental effort — work = human hours * value of that hour as a cost
  • your profit – reward = monetary and/or investment value

and the part in my triangle or 3rd axis that shares the same axis as mental effort in your diagram

  • ?? – vote - a combination of ‘work’ and ‘value’ that yields a ‘say so’ metric in the DAO.

In my own thinking on this ‘work’ as a time component encompasses voting as well as many other ‘activities’ - voting as a ‘kind of cred’ stands off on it’s own axis. But while I have some clean possibly very new directions for Tokenomics.

I am still pounding out my own version of this change as I have been working on ideas in this realm for more than 1/2 my life without success as of yet. I believe we are very close to the next transition and agree with @Planet_X that change is needed.

I also agree with:

and

I think we will find that delegation is critical to proper alignment of incentives and is probably the easiest way to implement kinds of reward models with vesting components.

I am generally against this as i have seen the same proposed in 1Hive for Aragon court and I believe that when it comes to decision making and particularly adjudication it is more important to fairly considered voting vs. voting that must seek to the majority. Now is this important to find reward. Maybe. But I don’t like the idea of any slashing component to wrong voting. Just a reward component for right voting. Honestly mixed on this one point and I believe we can achieve the proper balance of participation reward without having to reward ‘majority/right participation’.

In my review on DSSChief upgrades I have as a note that participation in sourceCred via forum participation AS WELL as voting critical to what kind of rewards your MKR can get.

Absolutely agree. It is also a bit off-putting for these smaller players to participate here. Nice to meet you @thedstrat and welcome aboard the Maker forum ship.

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OK. As you work for Maker I will say that if there are plans for vote delegation now is the time to come forward with them.
Vote delegation has been discussed and it did not end up with overwhelming support.

interesting. Please tell us more…

if you found a startup you’re likely to hold all the shares and be all or most of the ‘C suite’ yourself

maybe you get some early VC funding and they hold some shares, but early VCs are not expecting to sit back and yield dividends, there are no dividends from early companies, it’s all active, risky and speculative investment at the start

VCs and founders typically are not speculating on the early shares, and are expecting the shares to be illiquid for a long time, and to probably be reshuffled and redefined to respond to fundraising events etc.

as a founder holding all or most of the original shares you are making all decisions and more! you are also doing! actively working to drive the project forward, if you pause for a moment or stumble everything quickly falls apart

the perception that shares are simply abstract rows in a ledger somewhere comes from looking at publicly listed and/or mature companies that have already gone through their early growth stages and are now ‘light touch’ enough to be ‘safe for the public’ to be shareholders (assuming the general public is broadly apathetic, emotional and incompetent) - by definition, this is the bar that a company must pass legally in order to list publicly in the first place

in the middle of being an early startup and a listed company, there are several common phases of increasing scale, diversification and delegation of responsibility that a company must achieve - for example at some point a board may exist, and these board members may appoint their delegates as directors/executives - exactly how and when this happens is also a function of the legal structure, e.g. an LLC vs. a non-profit entity

most companies never list publicly, either because they don’t survive, don’t scale, or it simply doesn’t make sense to the private shareholders or business model - in this case the shareholders are indefinitely active, either directly or indirectly via. trusted delegates

MKR DAO is an early growth ‘startup’, so holding ‘shares’ comes with heavy responsibilities, with the expectation of significantly more potential growth than a listed company, provided those responsibilities are taken seriously and the protocol is governed effectively

perhaps as it crosses the 1 billion DAI mark MKR has shown product/market fit but the protocol is still a small fish in a big pond facing several existential challenges to be overcome (centralised collateral, peg issues, auction liquidity risk, etc.)

providing liquidity on AMMs or doing nothing with MKR is dangerous to the protocol, which is why we see discussion around burning MKR involved in hostile flash loans - [Signal Request] Should the Maker Community burn attacking borrowed MKR in the event of a governance attack leading to protocol redeployment?

in the mid-long term future i expect to see increased delegation and ossification (less liquidity of MKR) of responsibility and roles as the protocol scales up, and also more active measures taken against MKR holders who are playing fast and loose with their responsibilities from the MKR holders who are more dedicated

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No plans that you wouldn’t know about…

I say the latter as someone who owns a bunch of governance tokens. I’d easily pay a small fee to have someone adequately represent my interests.

Amen :pray: to that :point_up_2:statement.

For sure–this is a long-term game we are playing here. With little short-term satisfaction. I guess Warren B. was not kidding when he said that investing is a device for transferring money from the impatient to the patient…

Indeed–I would say most of us here hold governance tokens and can barely keep up with anything outside of Maker. One thing–as someone who has recently looked around at other L1’s that do PoS–and have professional Staking Facilities, I don’t believe the delegators pay the Staking Facilities a Fee–its the other way around. I have doubts that ETH heads would pay even a small fee to someone who can represent them… but I could be wrong.

To show the usefulness of posts like these, @Planet_X’s Maker governance overhead post was what inspired SourceCred to approach Maker. Since then, ~$38k worth of DAI has been distributed to contributors via SourceCred.

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Has there been any discussion around delegation involving a fee (potentially coupled to quadratic voting rights)? I’m envisioning something like this:

I advertise myself as a potential protocol governor and invite MKR delegations. For my service I would charge a yearly fee of say 10bp accrued every month as my salary. So if I receive 1000MKR in delegations, I would receive 1000*0.001=1 MKR per year in salary. That fee would be freely choosable and subject to competition, where as a delegator I would look for the most governance performance per fee.

I for one would be happy to delegate my MKR with a nice fee to someone like @Hasu if that would lure them into becoming active governors of the protocol… :wink:

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Not sure where to post this so I’ll add it here. Could delegation also help against MKR lending through a 2nd-order effect? Suppose there is a large vote delegatee who issues tokens against delegated votes – all of those are fungible. They have a price, they can be lent, used as collateral, etc. So you get part of MKR available as “already-voted” tokens, but in a form more fungible than the voting receipts that already exist. People could delegate their vote and still get economic benefit from the underlying MKR ownership.

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Maybe that would work. There is also another way. Sorry to bring up Tezos again but they have focused on governance from the get-go. In their system you can store your tez in a ledger and assign your delegate from there. You do not have to ship it off to a smart contract. Nothing against smart contracts except I if you are a whale right? I mean there is a certain amount of money that probably no one is comfortable sending to a smart contract (varies for everyone) but if you can keep control of your funds and delegate that is a different story. Tezos gets 80% participation through a combination of delegated voting and self voting.

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The Tezos functionality you are talking about is part of the protocol, right? Technically speaking any functionality that’s not native to Ethereum would have to go through a smart contract – so there is some irreducible risk here. If most of non-voting MKR abstains due to smart contract risk, indeed delegation will not help. But I believe apathy & cost are much larger causes.

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