Help us identify MakerDAO risks and opportunities

Hi everyone.

The key objective of the Sustainable Ecosystem Scaling Core Unit (SES) is to ensure the sustainability of MakerDAO and the Maker Protocol while we scale the ecosystem, avoiding critical failure of the project.

Therefore SES is putting together a registry of risks and opportunities for MakerDAO. This registry will be a tool that helps identify and prioritize projects that MakerDAO could work on.


Fig 1: Relationship between Risks, Opportunities and Projects

Risks
Identifying the risks (operational, technical, legal, …) that MakerDAO faces is important to ensure the robustness of the project as it scales. It can help the community to sufficiently mitigate or avoid issues before they materialize. We will rank and prioritize risks by scoring them based on their severity and likelihood.

An example of a risk could be “USDC blacklists the Maker Protocol, leading to a loss of collateral in the system”.

Opportunities
Identifying and listing the opportunities of MakerDAO is important to ensure the continued growth and upscaling of the project. We will rank and prioritize opportunities based on their potential growth impact and likelihood of success. This will help guide MakerDAO in prioritizing which opportunities it should pursue.

An example opportunity could be “Increase Dai adoption in Europe through a Euro-pegged stablecoin”.

Projects
A project is a body of work that either addresses identified risks, pursues high impact opportunities, or a combination of both. Identified risks and opportunities therefore feed into potential projects for MakerDAO, and they help determine the priority of the project. Projects can vary in size from a single task, to a project spanning months, or even enough work for a permanent core unit.

In order to get a full picture of the risk and opportunities we recognize the need for broad input from the community.

Therefore, as a starting point, we are reaching out here on the forums to gather initial input from all of you to crowdsource entries to the initial registry of risks and opportunities.

Our request to you:

  • List the top risks that are currently on your mind (for example top 3)
  • List the top opportunities that are currently on your mind (for example top 3)

If you have any projects in mind that would mitigate those risks, or act on those opportunities, feel free to add those as well.

We will then take the suggestions from this thread, combine them with our own list, and publish the risks, opportunities and potential projects with a lot more information. This will then also clarify the scoring, how the list will be maintained going forward, and how we will continue to collect feedback in the future.

Thanks in advance for your input :slight_smile:

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Risks:

  1. DAI does not scale quickly enough to survive an official digital dollar. We’re in third place in a race that can probably only hold one competitor to actual dollars, should the US government choose to pursue a digital currency that is compatible with blockchain.

  2. Lack of internal oversight. The diffusion of responsibility (thanks to @LongForWisdom for remembering the term) in the DAO means there’s no party on any given proposal who is guaranteed to weigh in on proposals – budgetary or otherwise. The lack of discussion on some upcoming proposals before being pushed into on-chain voting – regardless of your position on them – should worry anyone here.

  3. Lack of plans of succession or replacement of key figures. I know we’re a young organization, but if some key figure in the DAO retires, is incapacitated, or even ghosts on us (maybe they died in a car wreck or something but we don’t know how to contact them directly), we’re in for a world of trouble. We need our CUs and key community member participation activities to be robust to that. What happens if @SebVentures or @LongForWisdom or @hexonaut or one of many other DAO members fall down the stairs tomorrow? We need a way to ensure continuity of operations in all the areas that are absolutely mission critical.

  4. I added a fourth because I believe it to be important, though less urgent. There’s a fairly wide divide between the arm of the DAO that wants profits and the arm of the DAO that wants to more philosophically upend the way finance is done. Both have a stake in growing and securing DAI, so it’s not an issue at the moment. But I think we really need to discuss more openly what our priorities as an organization are. Is DAI a business that does good in the world while making us profits? Or are we willing to forgo profits to maintain a certain philosophical purity? Neither is the wrong answer, but I think the two different sets of expectations will have a collision whenever the course forward on both is no longer parallel.

Opportunities:

  1. Scale even more quickly by straddling the real-world-crypto divide. We already do this with the RWA CU. But given that we back DAI with a promise of at least $1 of assets, there is a lot of room for us to push out DAI as fast as the peg will let us. Instead of waiting for assets to come to us and then mint DAI, we can mint DAI and then buy/hold the assets that are worth (or are) at least $1 in value. We have already begun moving in this direction with the PSM and the Direct Deposit Module. We should continue down this road and be the bridge between real-world financial markets and crypto by effectively bringing dollars into the crypto ecosystem, which is starved for liquidity despite all the protocols that specialize in it. Yields are screaming for more stablecoin, and a bold move in this direction is the only way to surpass Tether and USDC as the reserve currency.

  2. More financial products. The physics of crypto finance operate differently than in traditional finance. Flash loans are a great example. There is a window for us to create more building-block, simple instruments that can be utilized by the various DeFi dashboards and aggregators. Even if we don’t want to build these ourselves, we should still think about what needs aren’t filled yet, and either seed projects interested in those or find a way to collaborate with the retail-facing tier of protocols to provide them. A more robust financial ecosystem will be a more secure one, and thus more secure for DAI.

  3. While it’s not why any of us are here, we are absolutely carrying forward the flag of dollar supremacy in the crypto world. We are as a byproduct doing the job of the Fed, the Treasury, and large financial institutions that benefit from a dollar reserve currency. We desperately need to have regular, standardized communications with some of these entities so we can be treated as partners and not merely affected bystanders by anything they do. The Fed and Treasury in particular can benefit from a closer relationship to us, as a way to both place debt and prevent an unfriendly currency from undercutting a cornerstone of their operations. There are lots of ways to imagine partnership with these entities that both reduces regulatory/legal risk and increases profit potential, all without giving up our independence.

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IMO, these are the top-3 Risks to MKR:

  1. Black swan event based on SEC decision to label DeFi Tokens as Securities:
  • “To the extent that something is a security, the SEC has a lot of authority. And a lot of crypto tokens — I won’t call them cryptocurrencies for this moment — are indeed securities” –Gary Gensler
  1. We are not prepared to implement KYC/AML. Imagine the SEC starts fining each Protocol that does not implement KYC/AML, say something like $50,000 per day—do we have a plan in place to get such done quickly?

  2. The Risk of loving Ethereum too much and not looking/taking serious other innovative Blockchains

IMO, these are the top-3 opportunities in the entire crypto ecosystem:

  1. Integrating DAI via Solana—has grown their TVL from ZERO to $1.6B in less than a year—but I think that TVL has ZERO DAI in it. Raydium protocol has quietly attracted a lot of small participants similar to what Binance has done loudly with BSC. More hackathons than any other Layer 1 in the last 3-months—the projects are coming.

  2. Polkadot’s Acala.Network will be a force to be reckon with, the Team has already reached out to the Compound folks and will build a Starport on Acala as a gateway into the Polkadot ecosystem. We should be exploring if we can do the same with Oasis.

  3. Sports Marketing. If you can’t be seen, or spoken about—then nobody out there knows who you are.

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Great, thank you, that’s the stuff… keep 'm coming :).

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Many thanks for starting this thread @wouter. I will only make one point for now.

I believe that there’s a warning sign that’s being ignored right now but might come back to haunt us in a few months. In a bull market, DAI supply should easily outstrip demand resulting in a DAI that is below peg. The fact that this is not happening right now has resulted in the PSM filling up with USDC. This is a warning sign that the upcoming bear market will result in one of the following

  1. PSM fills up extremely rapidly with USDC forcing the debt ceiling to rise by orders of magnitude over what it is now or

  2. PSM debt ceiling is hit and DAI goes significantly above peg.

When ETH crashes, DAI demand will go through the roof and vaults will close choking off supply. I have some mitigating actions (however, none are even close to sufficient in my opinion)

  1. We need immediate action to get the USDC out of the PSM. The tout fee should be set to zero. There might be some hope that DAI drops below peg as ETH continues its run and every opportunity to remove USDC from the PSM should be taken.

  2. Set the surplus buffer to a much larger amount e.g. 10% of outstanding DAI. This should be thought of as strategic reserves of DAI, much like the US does with oil. During the bear market, outstanding DAI will decrease and the surplus buffer will then release DAI into the market. This would soften the supply crunch a little bit. The 10% number is just an example but I think the exact number can be worked out with some simulations of ETH price.

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Thank you for the great input - it’s been very useful. I’ve incorporated the suggestions so far into the registry, and I’m looking forward to sharing the work with you very soon. In the mean time feel free to continue to add your input in this thread :slight_smile:

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Risks :
1 / Lack of clear directive from holder to CU which will lead to an empty shell Dao.
2 / RWA Insolvency / liquidation.
3 / Liquidation v2 during black swan event.

Opportunities :
1 / Increasing the task force and velocity via the Dao - More people basically
2 / Better integration on-chain with the defi ecosystem such as aave/compound/… and “middle-chain” such as coinbase/kraken … (mainly due to a lower risk than RWA) - I can see an opportunity for them to use dsr or the PSM to maintain the peg on their side. They also have assets.
3 / RWA in general due to the high volume.

All points are ordered.

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Thanks for your input @alexis !
Can you perhaps elaborate a bit on opportunity 1 and 2? I just want to make sure I capture them correctly. :slight_smile:

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Since you seem to be involved in the ecosystem, have you considered floating this idea around the Solana community? Maybe you could put out some feelers and then work with the growth CU to get a deal done.

I am in agreement than Solana is an important ecosystem that we shouldn’t sleep on…

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Totally–I did speak to Solana co-founder Anatoly about such–I got the idea that they were even willing to fund the entire project via Gitcoin Grants. And I mean whatever it took–maybe even a Grant for six-figures via a Solana Grant. But when I ask if any Community Devs (Not PE) here wanted to go along with such–I go no takers.

Maybe @wouter and @lollike are already in talks with them? Not sure, but let me know if Y’all want to connect. :pray:t4:

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@ElProgreso Wouter has indeed briefly looked into it not so long ago, and I’ve added it to the list of opportunities.
In terms of engaging with external teams on potential integration deals (as Greg mentioned) I believe the Growth Core Unit might be more suited for that. In fact I believe they are already in contact with them :slight_smile:
In terms of grants or incubating a team that can build external integrations, or if appropriate something Solana-specific, that might definitely be something SES can help with, depending on our priotization framework.

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That’s good news! Thanks Lolli!

Understood. I will say–it sounded like he was asking that they can Grant a lot of money to a team looking to deploy DAI and also Maker Vaults on Solana–so, yeah–might be something the PE CU and Risk Team won’t approve as Ethereum is the most secured (at least in my opinion) – but I could be wrong-- you would know more Lolli

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RISKS

  1. KYC/AML Regulations as mentioned by @ElProgreso
  2. Inadequate Surplus Buffer - Governance has chosen to burn 25% of the increase of the SB when the SB is already lower than what @Risk-Core-Unit recommends. Now that we’re onboarding CUs and pulling funds straight from the SB buffer, we are at risk of destroying capital (burning at high prices and diluting ourselves at low prices) when the bear market comes around and potentially having inadequate cash reserves to pay CUs
  3. Lack of common goals and vision across the DAO leading to inefficient capital allocation.

Opportunities

  1. Balance Sheet investing - @SebVentures has made some great posts about how we can potentially leverage the $1B+ in stablecoins on the BS
  2. Debt financing - @MakerMan had an excellent idea that got buried about MKR offering a debt instrument that would offer a stable yield and allow us to raise DAI instead of having to issue MKR to cover bad debt
  3. Continued RWA expansion - how we can scale this new part of the business quickly and safely? How can we build a moat? Generating cash flows uncorrelated to crypto will allow us to weather multi-year crypto bear markets and re-invest while competitors tighten their purse strings
  4. Oracles as a service (OAAS) - I’m sure @NikKunkel will cover this in his onboarding CU MIP but the market believes there will be a massive TAM for OAAS as evidenced by Chainlink’s nearly $50B fully diluted market cap
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Risks
Poor UX - using official tools can be cumbersome and unintuitive. I and I suspect many others rely on 3rd party DAPPs such as DEFISaver, and dashboards such as Makerburn, to interact with the protocol and I worry that a competitor with a slicker interface for non-technical users may steal market share from us in the future - while acknowledging that we are in a strong position at present. An opportunity for a UX CU perhaps?
Along with this - the high Dust parameter is frequently mentioned as a barrier people are encountering on Reddit and other forums when trying to open vaults, preventing potential users from opening up vaults. Perhaps lowering this may be possible with the advent of liquidations 2.0.

Opportunities
As above OAAS and RWA expansion are key opportunities for MakerDAO moving forwards and will hopefully open lucrative new revenue streams

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@Aes Personally, I think this is one of the biggest long-term risks. Up until this moment, MakerDAO was dealing with crypto-native assets only, market risk was the only core risk to manage (okay, some liquidity risk too). And the level of overcollateralisation and automation through sc execution, keepers, liq 2.0 etc mostly covers those risks. With the move into RWA, market risk reduces somewhat but credit risk and operational risks increase significantly. For that we need capital provision to keep the ecosystem healthy, which the SB is supposed to provide. The full consumption of SB for operations, or even 50% of it, is not warranted at all imho. The whole leverage ratios and risk-weighted assets calcs done by RWF are there for a reason.

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Since Nikolaj shared already, yes, hopefully soon (can’t confirm nor deny how soon) :slightly_smiling_face:

The RISK that MKR is a SECURITY :thinking:

ARCA’s CIO Jeff Dorman when describing the four (4) types of Digital Assets:

( #1 is cryptocurrencies like BTC, #2 is Platforms/Protocols like ETH, #3 is described below, #4 is Pass-Thru tokens like Rewards programs, and quasi-equity with revenues and profits being passed on to Token holders–pretty much what has driven DeFi)

#3: Then you have Asset-Backed Tokens. You know there’s not as many Asset-Backed Token, but these are regular securities—maybe not in the eyes of the issuers, or by the SEC, yet—but these are securities, these are Tokens backed fully by either equity, or debt… but you know Asset-Backed tokens can be model and value based on what the underlying asset is—it has nothing to do with crypto, money, or macro.

COMMENT: I guess what I am asking, is MKR an Asset-Backed-Token, or a Pass-Thru Token (Governance Token)–and how much longer do we wait to DECENTRALIZE 1,000X? With MIP49 failing how much longer do we wait to PASS-THRU revenue to MKR token holders in a FAIR manner, and more importantly is a decentralized environment?

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Risks

  • As a DAO is hard to coordinate efforts and have clear objectives that help us to prioritize what we do

  • overspending without clear results

  • there aren’t new players participating in the DAO, proposing CU

  • regulators and being left behind because we can’t provide a product for institutions with KYC

Opportunities

  • Investment opportunities with the surplus? USDC?

  • create new Dai-centric products: Aave by Maker (a MakerDAO lending pool), Lido by Maker (a MakerDAO smaker-eth that also is used as collateral)

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I know I already said this earlier this same week, but Growth really is like Santa Claus with the presents you drop on us.

This is a great idea! What do you need from us? I love both the business and branding implications.

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Is this present, or future? Because SES solves this.