The current MKR holders (~$500M) are directly exposed to:
- additional risk of ~$100M in outstanding DAI.
- additional incentive of stability fee accrued of ~$5M DAI.
Of course Indirectly MKR holders face the standard crypto macro economic risks, like any other tokens holders, and have strong vested interest in the overall success of the project as measured by success of the community, stability of DAI, precision of the peg, size of the DAI market, and so on. MKR holders are currently rewarded or punished by these factors indirectly through free market mechanisms.
Moral hazard due to low MKR voter turn out.
Assuming 1% voter turn out, at current evaluation levels, less than 0.5% of MKR ($2.5M), can manipulate the DAI market of $100M , for a few percent $1- $3Million, without adversely affecting the MKR owners holdings.
Although I don’t believe such activities have taken place, and the proof or disproof of them will always remain controversial, this is equivalent to a financial system where a small hedge fund runs FOMC and can manipulate LIBOR, as an analogy with respect to the US capital markets. These ratios, (the percent of stake required to manipulation returns) would increase an order of magnitude if DAI is increasingly embedded in DeFi lending products, derivative platforms, and modern structured finance.
Parameterization for an automated quantitative solution:
In order to introduce viable, automated, transparent solutions there is a need for standard quantifications. I like to propose two examples, but these are arbitrary and are only meant as examples:
Example 1) Stability Index (DSI). On a periodic basis (for instance daily, as a short term incentive) we could measure the standard deviation of DAI/USD from a set of reliable exchanges, using Maker’s existing oracle technology, and calculate sigma. We can then set reasonable target of x sigma as the goal then:
a) If sigma = x do nothing
b) If sigma > x penalize
c) If sigma < x reward
Example 2) DAI Growth Index (DGI). On a periodic basis (for instance quarterly, as a long term incentive) we measure the moving average of quantity of DAI in circulation, and penalize/reward based on a set of governance success criteria.
Once the appropriate metric(s) are defined, exact mechanisms are required, before implementation. There are two considerations here:
a) Who do we reward/punish?
There are various levels of responsibility with pros/cons for each:
Example 1) All MKR Holders
Example 2) MKR Holders in the voting contract
Example 3) MKR holder responsible for the vote outcome
Example 4) All to different degrees.
b) How do we reward/punish?
Similarly there are various methods, with various scope:
Example 1) Mint/Burn MKR
Example 2) Distribute to/from accrued stability fee, or create a separate pool.
My goal here is not so much to provide the specific details for a specific solution. All these aspects should be polled and voted on. It is more important to get a dialogue started, and to get ideas brewing.
For example we could on the short term, execute large interest rate moves incrementally, rather than abruptly to minimize the threat.
However, I consider the problem of moral hazard as a serious threat to the long term health of the project, if voter participation remains low, and the market size continues to grow.