MIP39c2-SP23: Adding the Deco Fixed Rate Core Unit

DM me if you need names.

Hi Wouter, I agree, in principle, that some development needs to go forward despite legal and regulatory ambiguity or lack of a clear answer. But that’s not the case here. The Deco tokens (Interest Only and Principal Only) are securities modeled on a financial instrument traded and regulated since 1985.

That’s great that Deco is bringing somewhat of a ready-made solution to the table (though their representative seemed to contradict that position on an earlier call). If they were launching as a standalone product, like Yield or Element, that would be great, too, and I would cheer them from the rafters and use their product. Yet integrating with Maker such that the DAO and MKR holders issue the Deco “Interest Only” and “Principal Only” securities is unacceptable. Vamsi and Co. put nearly all the risk on us and get paid a healthy sum of Dai and MKR to do it, while the DAO has to deal with the inevitable US regulatory fallout. That’s unfair.

The Deco team is trying to execute a clever ploy here. They know the institutional inertia with Maker governance is such that if they are onboarded, the likelihood of them being offboarded is low. Moreover, even if we offboard them, Deco will still get paid for months until the offboarding process is complete. Why go through all of that trouble when Deco tokens are clearly securities and onboarding them places a target on our backs? It makes no sense.

Also, you do not have to be a former SEC lawyer or securities expert to figure this out (I’m certainly neither of those things). I googled “interest tokens," "principal tokens” and “zero-coupon bonds” and stumbled upon STRIPS. A few hours of reading later and I came to the conclusions you see above.

And lastly, hand-wavey “of course there aren’t legal/regulatory/structural issues” answers are what got us into bed with a certain RWA provider who shall go unnamed in the first place (I wrote about them many moons ago). I’m adamantly expressing myself here in hopes of heading off another one of these “own goals”.

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Just to be fair … I don’t think there are amorphous “legal concerns.” It’s clear as day – the interest-only and principal-only Deco tokens are securities and Vamsi’s proposal will have the DAO as the issuer of those securities. It’s not a debate and it’s telling that the Deco team’s only response to these issues (and other ones) is “we’ll address this after you onboard us and pay us.”

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Is it? Would it still be a problem if the Deco tokens are only used for internal accounting and the way they are presented in the UX is as a way for users to chose where on the fixed to floating spectrum they want to pay for loaning themselves DAI from their own deposit of collateral?

Yes, it is. Anything where the DAO is issuing the Deco IO and PO tokens, in my opinion, puts us in bad stead as described above. Better for Deco to be a standalone product and UI outside the control of MKR governance.

Not to be harsh, and I apologize if I came across that way, but I would happily use and even engage in “governance” for a Deco protocol. It just needs to be done the right way.

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But you voted in favor of the Nexo institutional vault (as did @PaperImperium). How do you explain that? Am I wrong in seeing a contradiction there?

Nexo – a one-off fixed vault for one institutional and accredited player (easy to defend). I would not vote in favor of this development as a general trend beyond institutions (and perhaps beyond the special long-term relationship with Nexo).

Deco – a fixed income offering soon-to-be available to every retail user under the sun, that is, issuing illegal securities to retail users. Indefensible.

(edited for my being a smartass)

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Hypothetically, suppose Deco was limited to vaults with notional value of 1 million USD or more (i.e., an accredited investor)?

I actually like the Deco product. It’s just the very clear regulatory concerns

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That’s not going to happen and, frankly, anything beyond a one-off situation does not assuage the concerns re STRIPS that I raised above. Given that we know how this will play out and how the DAO will pressure for a more general offering, the best way to protect Maker is to have Deco as a standalone project. Let Vamsi and the Deco team bear the risk of launching the project since they stand to massively benefit from its success. And they should be able to raise outside capital – hell, I imagine DAO members would kick in Dai through a LAO or some other vehicle.

I agree with Paper that Deco is a compelling product. But the clear regulatory issues are such that I do not find the risk worth the squeeze.

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I’ve been following the Deco governance poll quite closely and noticed that two delegates – Flip, Flap, Flop, LLC (@ElProgreso) and Feedblack Loops LLC (@twblack88) – voted in its favor. I won’t rehash why Deco, which is an exact copy of [STRIPS] with its “interest-only” and “principal-only” tokens, if onboarded will turn the Maker Protocol into an illegal issuer of securities. But I sincerely hope that these delegates – and those individuals, companies or both backing them with MKR – realize and accept responsibility for the likely government and regulatory pressure and enforcement action that will occur as a result of this product being integrated. In my opinion, we are discarding years of prudence for potential, but not guaranteed, short-term “gain.”

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@ElProgreso coinsidering you have over 71% of the current vote weight could you share your thoughts on this topic?

To those flagging, it’s not inappropriate to express an opinion or concern over a certain direction, and to request that delegates comment. The delegates have no obligation to comment or respond if they don’t feel it’s worthwhile, but we’re not going to moderate away disagreeing comments on that basis.

I also hope it’s clear to everyone that just because someone says ‘I hope you realize and accept responsibility for x’ doesn’t mean that anyone involved actually has or accepts responsibility or liability for x.

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Yeah, I mean, literally in the Delegate’s code of conduct we can read:

Good Faith: Delegates should act at all times with honesty, integrity, and transparency.

Best Interest: Delegates should operate and vote in what they believe is in the best interests of the Maker Protocol.

so it’s kind pointless to ask them to take accept responsibility. What does this even mean?

They do what they think is best. And of course they can be wrong from times to times. And MKR holders will eventually pay for bad decisions (so that, hopefully, they are incentivised to give their MKR to trusted/wise delegates). That’s it.

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Why Deco?

@Tosh9.0 Thank you for posting your opinion and voicing your concerns.

One thing that I am very grateful for, is that on any given day any human soul can come to MakerDAO and make a difference. Therefore I ask that you step-up and encourage the 850,000++ MKR that’s out there to Vote, “No”-- please go out there and have the largest Voter turnout in Maker History support your views.

In fact, I recommend you become a Delegate. After all, this is a DAO. And on any give day, ANY human in this world can make an impact on the future of MakerDAO.

As you and I personally share an interest in OHM (you stated you like Zeus, I’m just curious about innovative tech via DeFi 2.0), I’m surprised you’re opposed to a product that is controlled by Maker Governance, where MKR token owners control the parameters, USER BASE (Institutional Vaults via the Growth CU), DECO keeps vault collateral in the system, plays well in the sandbox with PECU, Risk, Growth, etc., and is composed of a homegrown team.

So, I think about the Game Theory. Usually when folks are against the possibility of an innovative new world order:

A. They don’t understand the concept of the innovation/product.
B. They oppose the confluence of sovereignty.
C. Or, they’re just talking their own book. (nothing wrong w/that)

Tribalist vs. Institutionalized Money

You have some traditional finance folks surprisingly believing that one day institutions will dump Bonds for Bitcoin. True, or not–I’m here doing the best I can with limited resources, an opaque future, and with the lack of guidance. Since 2018 I’ve been waiting for the guidance, playing a long-term game–with long-term people. You and I can sit on our hands and wait-it out–or we can make things happen. I choose the latter.

Also, I could have chosen tribalism and joined the next Hot DeFi project. Instead I decided to join an old grassroots community, like MakerDAO. Why? Because I believe together we can make a difference. This community has brilliant people who are full of passion and together I believe we can change the world, we can build cities, move mountains, and help humanity. Sounds cheese man–but the truth is, only focusing on making money gets boring pretty quickly. Personally, I rather do something compelling with the gift of time, then just sleepwalk through life.

Fiduciary Duty

As you stated above, MKR token owners who have delegated to Flip Flop Flap Delegate are 1000% welcome to un-delegate from our platform. I ask that if the performance of Flip Flop Flap Delegate is poor, please remove your MKR from our platform. Our fiduciary duty is to MakerDAO and MKR token owners.

Again, @Tosh9.0 I ask that you get out there and push for your beliefs. Because one thing that you must know about me, I’m not afraid of failure. I am resilient, and I know you are as well.

Thanks again, and say hello to the OHMies for me :))

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Thanks, Frank. I’m not interested in becoming a delegate because of time demands and a day job though I appreciate your message. I have to note though that neither you nor anyone else has addressed the particular issues I and people like @PaperImperium have raised regarding how Deco is a copy of STRIPS or how by integrating Deco into Maker and placing it under MKR governance, Deco will convert the Maker Protocol into an illegal issuer of securities.

While I share your sentiments about being “[unafraid] of failure” and “doing something compelling with [one’s] life” the only issue for me here is how Deco imposes immense regulatory risk on the Protocol at an inopportune time. Indeed, it’s the control over Deco by Maker governance that is the entire problem. If they were independent, then it would be fine, as I stated above. Pointing out problems with projects that want to deeply integrate with Maker, like Deco, to supporters of those projects is a healthy part of governance and not something to be discouraged. And yes, I’m protecting my “book” – the MKR that I hold and vote, like anyone else here.

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Assuming that you and I share the definition of “STRIPS” (Separate Trading of Registered Interest and Principal of Securities) as zero-coupon securities issued by brokerage firms and based on receipts for Treasury securities–is it your opinion that ALL crypto collateral is comparable to zero-coupons and Treasuries? If so, please provide the write-ups that explain, interpret, or advise about rules, laws, and procedures related to Crypto policies and the public dissemination of such interpretations. TY in advanced.

Fun Fact: STRIPS have No call risk and virtually no liquidity risk, event risk or credit and default risk. I wish we could say the same about DeFi :))

Another Fun Fact: Pricing of STRIPS is disseminated and traded over-the-counter. Very opaque. No automated quotation service available. I believe Ethereum can help solve this.

I absolutely agree with you and thank you for your diligent commitment to governance, and for expressing your believes.

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I am not in a position to judge “ALL crypto collateral.” What I am focused on here is how the mechanism by which Deco’s function mirrors the STRIPS market; how regulators who are investigating our industry (and think most if not all crypto collateral are securities) may view the product; and how they will see the Maker Protocol through that Deco lens.

Anyway, I have voiced my concerns and stated what I believe the consequences of onboarding Deco may be (though I hope not with fingers and toes crossed). People can take that info in their voting calculus as they wish.

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Just as a point of clarification, I did some weeks ago (under Field Technologies) approach a securities lawyer who follows Maker and used to work for the SEC, and they are the one who said it was an interest only strip. Another delegate also told both you and I today they got an informal opinion from a crypto lawyer very familiar with Maker who also advised this was likely to be a problem.

I’m not sure why you’re giving Tosh such a hard time about definitions when the de minimus legal advice made available to delegates both raised red flags.

If you simply think that’s unimportant or offset by something, that’s fine. But I think you’re not being very charitable in your response by insinuating @Tosh9.0 is playing lawyer when this is literally an opinion that comes from lawyers (who weren’t paid, so the advice is informal, but I don’t see a general counsel for the DAO to fill this role).

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Regretfully, your superficial analysis demonstrates a fundamental misunderstanding of the difference between traditional finance STRIPS and the proposed Deco implementation. A STRIP bond is a debt obligation whose principal and coupon payments are removed (“stripped”) and sold separately to investors; an investor may also purchase the separated principal of the bond - the residue; both the strip and residue can be openly traded. The distinction: a Deco Zero is always locked as collateral within the Maker system and is not openly traded; in the Deco fixed-rate vault, a Zero is never held by a user - only by the Maker system. A user never has access to Zeros and Zeros never leave the system. Zeros are simply used as accounting placeholders internally within the Maker protocol for Dai.

We find your public post, suggesting that Maker and community members are moving to become involved in “illegal securities” trading by favorably viewing Deco, both inappropriate and irresponsible. We are MKR holders and prioritize the safety of the protocol in our design; we do not hold tokens in any other lending protocol, whether governance or LP, and so are committed. We are conscious of the regulatory environment and are sensitive to regulatory requirements. We will legally address all potential regulatory issues which may arise prior to deployment. Note the reply to your post and Wouter in Post 55.

We find it necessary to respond to your post because it demonstrates a very superficial understanding of Deco and its relationship to “traditional finance”. Your superficial commentary has now reached the level of misinformation which is damaging to both MakerDAO and MKR holders.

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