MIP13c3-SP3: Declaration of Intent - Strategic reserves fund (SRF)

MIP13c3-SP3: Declaration of Intent - Strategic reserves fund (SRF)

Preamble

MIP13c3-SP#: 3
Author(s): Sébastien Derivaux (@SebVentures)
Contributors: n/a
Status: Formal Submission (FS)
Date Proposed: 2020-08-21
Date Ratified: <yyyy-mm-dd>
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Declaration Statement: Creation of a Strategic Reserves Fund to have a financial power and autonomy
Declaration to Replace: n/a

Specification

Context and Motivation

  • Maker will need at some point financial resources to pay for its own expenses (observers and staff). Currently, the foundation is providing for that but it isn’t expected to last forever.
  • DAI is insured by the surplus buffer (owned by MKR holders) and MKR issuance. The DAI surplus buffer can be redeemed by DAI holders with an ES. MKR issuance in time of crisis is detrimental to MKR holders as it can come with a low issuance price (Maker buy and burn MKR when the price is high and issue MKR when the price is low).
  • Maker doesn’t have any financial resources to encourage DAI usage or enforce the peg.
  • The strategic reserves fund (SRF) intent is to provide financial resources and processes to MakerDAO in order to address those 3 concerns.

A poll on such idea gained support with the Maker community: [Poll] Creation of a MakerDAO strategic reserves (solving the peg). This Declaration of Intent is the next step.

Declaration Detail

  • The overall intent is to raise and manage Maker funds by defining a new component of Maker Protocol : The strategic reserves fund (SRF)
  • Main goals of the SRF are:
    • Allows MakerDAO to cover operational expenses in the future and stop being dependent on the foundation for that.
    • Increase DAI product utility by conducting operations in the open markets (DAI product utility should be correlated with MKR price)
    • Provide a revenue stream uncorrelated from DAI stability fees
    • Provide funds in case of DAI subsystem failure to avoid issuing MKR at a low price and dilute existing MKR holders
    • Due to the novelty and the complexity of the task, all implementation details provided here are only tentative and the final implementation can deviate. All details are provided for illustration on the intent.
  • There are 4 subcomponents in the SRF intent: Fund raising, Strategy, Tactics and Gouvernance.
  • The Maker Protocol is currently composed mainly (only?) by the DAI Credit System that contains all the vaults and the surplus buffer. The SRF is not connected to the DAI Credit System. The failure of one doesn’t impact the other (in case of ES, SRF is not affected). The net asset value of the SRF belongs to MKR holders with no recourse from DAI holders or vault owners.

image

Fund raising

This intent recognizes that strategic reserves can’t be minted. The SRF will start with MKR tokens as assets. Those will be sold on the market as needed. A floor price will be decided by MakerDAO governance under which MKR can’t be sold in order to protect MKR price.

3 sources of MKR are considered:

  • Issuance of a fixed amount of MKR tokens (e.g. 20k) at the creation of the SRF
  • Transfer of some MKR tokens from the foundation in exchange of taking some foundation expenses (using a net present value of future expected expenses)
  • Issuance of MKR tokens when MKR tokens are burnt through flap auctions (keeping the MKR outstanding amount fixed). This is the most likely way. An alternative would be to suck() DAI from the Surplus Buffer to the Strategic Reserves.

Strategy

MakerDAO governance will set the strategy of the SRF as general guidance and operational boundaries with an on-chain vote.

Initial guidance can be:

  • Main objective: Buy and burn MKR tokens when the price is cheap
  • Secondary objective: Generate yield by providing liquidity to pools that improve DAI usability

A boundary framework can be set as follow to begin with:

  • Allowed assets:
    • MKR
    • DAI
    • USDC: max 50% of assets
    • PAX: max 50% of assets
    • TUSD: max 50% of assets
    • ETH: max 10% of assets
    • Uniswap liquidity pools: max 50% of assets, with underlying assets limits
  • Allowed smart contracts:
    • Maker Vaults
    • Maker Oasis
    • Uniswap trade: only to sell MKR tokens above $500 or to buy MKR tokens below $300
    • Uniswap liquidity pools
  • Allowed external wallets:
    • None
  • Maximum amount per transaction: $110k

Tactics

MakerDAO governance will also set the tactic that should be used to implement the strategy. While strategy contains broad objectives, hard boundaries and is not expected to change frequently, tactics are like a script to follow. The tactics can be changed more frequently depending on the environment while staying within the boundaries of the strategy. There can be many concurrent tactics.

For instance, here is some tactics:

MKR price protection

  • If net asset value of the reserves are > $10M and MKR price below the boundary framework ($300)
    • Buy up to $100k MKR tokens per day on Uniswap

DAI peg enabler

  • Sell up to $100k of MKR tokens per day to USDC on Uniswap with a selling price above $600.
  • Add the proceed to a USDC-A vault
  • Generate the maximum allowed DAI
  • Sell those DAI to USDC, PAX and TUSD on Oasis.
    • The selling price should be between 1.005 and 1.015
    • Inside this range, it should be the price obtained on coingecko for the previous day minus 0.1%

The scripts are executed by the SRF gouvernance. The SRF governance is mandated to follow the script. It is nevertheless expected that unexpected circumstances will override the script by doing nothing and asking for MakerDAO to update the tactics. For example: strong suspicion on a USDC issue, USDC $ price outside of [0.995,1.005], …

SRF Governance

While tactics are implementations of the overall strategy, they are set in motion by the SRF governance. The SRF might be implemented as a multisig wallet that will require 4 out of 7 validators.

Those 7 validators will represent the SRF governance. They are elected or removed by an on-chain vote by the MKR holders.

The SRF Governance elect a Treasurer that will report each week the evolution of the SRF. A template report will be defined.

There might be a need to create a Treasury domain team in the future, espacially when the Strategic Reserves Fund will be used to pay for MakerDAO expenses (staff and oracles). This will also require work on MIP14: Protocol DAI Transfer.

Relevant Links

12 Likes

Hey @SebVentures, I’m glad to see this proposal come in! Can you please also submit a Pull Request (PR) to the MIPs Repository’s conception branch with the exact same content as above? It’s a requirement in order to start the RFC phase of the MIPs lifecycle. To read more about the criteria and requirements of the lifestyle stages of a MIP, check out this link. Thanks!

3 Likes

I’d like to suggest that there are additional ways to raise capital.

For example: Contingent Convertibles,

MakerDAO issues bonds (“Cocos”) to outside investors which is convertible to MKR contingent on the condition of excess system deficit. If Maker does well it will enjoy the excess capital. If it does not do well it will not need to worry about paying anything back.

To some extent this solves the buy high sell low problem.

5 Likes

I really like the Coco idea because it’s what makes the most sense in TradFi. If we look further, I’m not sure it makes sense in DeFi now. Cocos exist because of solvency requirements for banks. There is no such issue for Maker.

We could issue long term debt it would do the same. We will be able to repay with future SF. No need to dilute existing MKR holders. SF are giving us future cash flows so it would make sense to borrow against.

There is something to explore here. Thanks!

3 Likes

I created a pull request here (not a git expert, hope it’s fine). I had to remove the image but the rest is the same. Thanks for the help.

1 Like

Woah… Never thought about the debt financing angle

Hi,

I know this proposal has been put up for discussion for some time now, hope it is not too late to have some opinion on it.

In my humble opinion better solved by diverting parts of the continuously generated funds from the Stability Fees to a specific purpose when this is needed.

Timing the buys of MKR?
I think it has been pointed out by other forum members that none of us will be able to time this correctly.

The idea that Maker will be a trader of its own currency is maybe not the best. To outright speculate in DAI in order to enforce the peg - I do not think that is going to work. You either trust the markets to work or you do not. Trying to enforce certain market outcomes is only going to leave Maker frustrated and broke. Fiat central banks, with vastly more resources compared to Maker, gave up on hard long lasting pegs decades ago. One nice example is the British attempt to protect the value of GBP in 1992 - the Black Wednesday episode.

If anyone out there has ideas for a Marketing Plan I think they would be welcome. This could be financed as a standalone effort, no need to create a strategic fund for this purpose.

2 Likes

The issue with MIPs is that they don’t move as fast as the market.

This Treasury (a better term I think) is still very much needed. As of today, we can guess it will be feed by DAI from fees and not MKR minting (the peg is no longer such a big issue, we have some time).

We need to have reserves to pay for domain teams. You can’t tell your workers that they will not be paid because there was an ES and the surplus buffer is empty.

This proposal is not timing MKR purchase. It just says that having reserves avoid to mint MKR at the wrong time. Increasing the surplus buffer is not smart but we still need to be able to have a bigger buffer when DAI outstanding will be in billions.

There is an illustration that we can buy MKR when it’s really cheap and when we have too much reserves. Not sure that was too aggressive. It doesn’t say we can’t continue to burn MKR from the surplus buffer.

The bigger issue with this MIP is the SRF governance, it should use the Chef contract construct like the executive vote. But that’s more of an implementation detail, it doesn’t change the overall idea of having a Treasury.

1 Like

Just to answer that, we are compliant with impossible trinity as we don’t need a sovereign monetary policy. That was the limit for the Bank of England.

The fact that we speculate for ourselves or set the framework for arbitrageurs to speculate for us (setting USDC-A LR at 101%) isn’t relevant. It’s the same. The only difference is who push the button and who take the profit. The risk always remains at Maker.

1 Like

No it is not the same. If Maker is going to actively trade its own asset the organization will have to be set up in an entirely different way compared to an organization that is limited to setting the framework for traders. Trading own asset will require a huge fund (which you are proposing) as well as traders, bots and strategies that are just as cutting edge as what the rest of the market can provide. This again will require both manpower and brainpower, likely to such an extent that it will hinder Maker to develop towards a protocol-type structure. (Where I am convinced the real value lies as it is the only way Maker can really scale).

Maker (as-is) is already falling behind on core tasks such as staffing and collateral onboarding and now you want to add more tasks? While I value your input I respectfully disagree with your proposal.

3 Likes

I’m not arguing about speculate in this declaration of intent. It can be one use. One that was making sense at the time of the writing. Speculation for the peg required just a USDC-M vault and a flash loan. Hardly something insane. But it wasn’t voted by the governance so speculation isn’t a followed path anyway.

Does that render the whole declaration of intent of putting money aside useless?

For your Maker as a protocol vision, please put more detail in the Maker in 5 years thread. I fail to see how RWAs (as they are worked and their legal implications) are compatible with a protocol vision.

1 Like

@SebVentures just a small comment on this point: it’s quite tricky for a smart contract to trade on Uniswap without opening itself up to a risk of getting sandwiched and receiving a bad price. So to execute such a tactic safely, it will probably be necessary to develop some sort of oracle-protected trading strategy, or to go through the usual flap auction mechanism. The same applies to open market operations with DAI, including on other AMM venues.

This point isn’t really crucial to the spirit of the Declaration of Intent, but I wanted to flag it to make sure you everyone is aware that this is non-trivial.

6 Likes