Help us identify MakerDAO risks and opportunities

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.

yes you’re right, but still, I want to see more players in this present :slight_smile:

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Thanks @lollike for the encouragement to circle back to this impressive thread. Here’s a few things that have been on my mind as of late, a lot of this is informed by thinking of Maker as playing an infinite game, with all the weight of focusing on continuing to play and iterate rather than look for ways to “win” something that could all be taken away in an instant if we aren’t focused on building a resilient and versatile protocol.

Risks

  1. Tightly correlated revenue streams.
  • Most of the current Core Units are not profit generating, and thus depend on the protocol as a whole generating enough revenue to cover their expenses. This in itself does not constitute a major risk IMO, but makes the resiliency of the core revenue model incredibly important.
  • Our revenue streams are put at significant risk during a de-levering event, or extended bear market. When the broader crypto market crashes or declines continually there are less reasons to open and maintain a vault, meaning that a revenue haircut is likely.
  • As we build and iterate on our current revenue model, there is significant focus on adding more to what’s been done before. This is good and valuable, but does little to address finding non-correlated revenue models.
  1. Reliance on key contributors/mandated actors
  • @PaperImperium detailed this so I won’t go into it too much further, other than to say particularly on the dev side a Wrench Attack has the potential to do a lot of harm. I believe this is compounded by the liquidity readily available in the space and other competing protocols in particular. I believe our response to this risk must focus not only on decentralization, but on maintaining an attractive work culture within Maker.
  1. Regulatory Action
  • Part of this compounds with #2, as public figures within the DAO could be targeted by national governments and forcibly removed from the ability to contribute to the DAO. But there are other attack vectors regulators can take that would have high impact, such as focusing on Crypt <> Fiat bridges that make things like getting paid or incentivizing actors with DAI fair less effective.
  • Other regulatory vectors could simply remove participation from the Etherum network, causing a more essential risk to the broader ecosystem. I believe becoming multi-chain helps mitigate some of this risk, but trying to win a game of whack-a-mole with government regulators would surely stifle innovation at Maker.

Opportunities

  1. Growing NFT ecosystem
  • NFTs, much like cryptocurrencies themselves, have the ability to disrupt just about any traditional domain. We are already seeing NFTs used as proxy collaterals for NFTs as well as the explosion of crypto-native art.
  • Collateralizing NFTs is a hard nut to crack, with limited market pricing information for each asset the pricing risk for issuing any amount of DAI against an NFT is far from trivial, but with that said, NFTs are objectively assets and finding a way to tap into the market will result in great DAI expansion.
  • Additionally, I would like to see Maker pursue NFT issuance. As one of the oldest projects on Ethereum, our brand and history can produce several valuable artifacts that might be of interest to the broader ecosystem. It is my belief that NFTs could be used more broadly for revenue generation, as well as fundraising for projects within the community.
  1. RWA Expansion
  • I feel this has mostly been said, but worth highlighting as something I believe could take Maker to the next level of global acceptance and use. By diversifying our collateral polls and touching more traditional lending spaces we can envision much more DAI creation as well as a global reputation that extends beyond crypto enthusiasts.
  1. Tooling for decentralized decision making
  • By experimenting and improving processes we can make our governance process more efficient and allow ideas to be debated and polled in more effective ways. I believe this exploration will be internally useful and pay huge dividends to the DAO in the future, but also see how it can translate more directly to our financial books.
  • As, arguably, one of the more successful examples of decentralized governance around we have incredible institutional knowledge and experience that other projects could find valuable. Things like our experience with SourceCred and other open source platforms could be packaged and monetized. The story of MakerDAO is a real page turner and I believe there are plenty of individuals and organizations that would pay us for consulting and select publications detailing our experience.

Parting Thoughts

Many of the largest and most successful tech companies start to pursue different genres of business with their wealth. While Maker still has much to explore and improve in the decentralized finance space, I believe our frame work has already opened the door for using the Maker brand to fuel other related endeavors (think revenue sharing from CUs like the MakerDAO Shop). As a DAO, we are only as strong as the people we attract to contribute and protect the protocol. By expanding the space we are iterating on slowly and intentionally we can greatly scale our impact and find different ways to keep us in the decentralized game.

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From @Content-Production

Risks

  1. Access to governance/CUs/team members - As the “Simple Sabotage Field Manual” explains, instituting bureaucracy is an effective way to cripple an organization. I’m not saying we should compromise on our commitment to openness and transparency, but a real-life spam attack would likely be the simplest, most effective way to bring down the DAO.
  2. Complexity - We have a lot going on and need to stay focused on the productization of our core projects.
  3. Unfavorable regulation

Opportunities

  1. Much of our success thus far has been founded on innovation and our willingness to take calculated risks using the Core Unit model puts us in a good position to continue this.
  2. Brand strength. We’re recognized as an industry leader and that makes it easier for us to get attention from people and organizations with valuable things to offer.
  3. Expanding/diversifying the collateral portfolio in a way that allows us to develop the primitives necessary to serve B2C use cases in addition to B2B.
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Cross-referencing the proposed L2 Risk Framework here for later:

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