MIP49: Governance Rewards

prose11 · February 19, 2021, 4:19pm

MIP49: Governance Rewards

Preamble
MIP#: 49
Title: Governance Rewards
Author(s): Payton Rose (@prose11), Sam MacPherson (@hexonaut)
Contributors:@LongForWisdom, @JuanJuan, @Elihu
Type: General
Status: RFC
Date Proposed: 2021-02-03
Date Ratified: <yyyy-mm-dd>
Dependencies:
Replaces:

References

The initial idea for Governance Rewards can be found in this forum post
MIP49c2 - Setting and Adjusting Governance Reward Parameters Subproposal [Template]

Sentence Summary

MIP49 proposes the creation of Governance Rewards that would allow the Maker community to reward MKR holders for locking their MKR tokens in Governance.

Paragraph Summary

This MIP covers the creation of a Governance Rewards process for MKR token holders, distributing DAI as a percentage of protocol profits, based on the available liquidity of MKR in lending markets. There are limits outlined on how these reward measures may be changed by Governance actions in the future. Technical details would follow the approval of this MIP.

Component Summary

MIP49c1: Governance Rewards Structure

Defines the rules for implementation of Governance Rewards.

MIP49c2: Setting and Adjusting Governance Reward Parameters

Establishes a mandatory Request for Comments (RFC) period for implementing and revising Governance Rewards.

MIP49c3: Potential Risks

Defines potential avenues for abuse that should be considered if Governance Rewards are enabled.

Motivation

The main motivation for this proposal is to help secure the MakerDAO Protocol. The amount of MKR available to borrow on the open market remains a security concern. MKR token borrowers do not have economically aligned incentives with the Maker Protocol, and represent a danger even if there is not enough MKR available on the lending markets to pass a malicious action.

By offering incentives to MKR holders who lock their MKR tokens in Governance, this proposal hopes to encourage MKR holders to participate in securing the protocol. The following outcomes are also expected:

It should provide a more direct value accrual mechanism compared to the burner by distributing assets to MKR holders engaged in Governance.
It should encourage more members to participate in the governance process, as the opportunity cost from locking MKR tokens is reduced.
It should act as a partial subsidy to the gas cost of participating in Maker Governance.

Specification / Proposal Details

MIP49c1 - Governance Rewards Structure

Governance Rewards will be “opt-in”. Users locking their MKR tokens in governance will be able to choose to either receive Governance Rewards or not. The Governance Rewards will be distributed in DAI.

The amount of DAI distributed as Governance Rewards will be directly tied to the MKR burn, with a portion of DAI that would have been used to buyback and burn MKR being diverted to Governance Rewards. It will be up to Maker Governance to determine the percentage of surplus revenue to be set for rewards, with the strong recommendation that any system designed to divert DAI for Governance Rewards be based on available MKR Liquidity relative to MKR tokens locked in Governance.

Note: MKR holders should be aware of any tax and legal implications in their jurisdiction relevant to opting-in to Governance Rewards before electing to do so.

MIP49c2 - Setting and Adjusting Governance Reward Parameters

The Community desire for Governance Rewards must be carefully weighed against the risk of allowing a mechanism for MKR holders to reward themselves with protocol funds.

Proposed changes to the percentage of surplus revenue diverted from burn to Governance Rewards must be submitted as MIP49c2 subproposals and will be subject to the following parameters:

Feedback Period: 6 weeks
Frozen Period: 2 weeks

Note: Due to Governance Rewards proposal needing continual funding, MIP49c2 subproposals will constitute an application to streaming Keg payments, and will be automatically cross-filed upon proposal.

MIP49c3 - Potential Risks

Directly rewarding locked MKR in the governance contract introduces risks to the Maker Protocol that have the potential to result in a protocol shutdown or a fork in certain scenarios.

At the time of writing, actively-voting MKR comes to at most 10% of the total vote weight. The introduction of voting rewards encourages more MKR to be locked in the governance contract, which in turn reduces the barrier for that MKR to vote.

If enough MKR becomes active in governance solely due to the governance reward incentive, this introduces the risk of successful proposals that increase the governance reward beyond what is beneficial for the Maker Protocol in pursuit of immediate, short-term gain for MKR Holders.

This outcome could happen gradually or more quickly, and could take a number of forms. It is strongly recommended that MKR Holders that wish to ensure the long term growth and stability of the Maker Protocol view the following types of proposal with skepticism:

Proposals that increase the percentage of surplus revenue that is diverted from MKR burn to Governance Rewards.
Proposals that detach Governance Rewards from the surplus revenue generated by the MKR Protocol.
Proposals that mint MKR for distribution as Governance Rewards.
Proposals that by other means increase Governance Rewards in an inflationary way.

It is essential that the Governance Reward mechanism maintains the incentive alignment between MKR Holders receiving the reward, passive MKR Holders and the Maker Protocol as a whole.

ElProgreso · February 3, 2021, 3:10pm

Nice! Is this based on a Weighted Average? Also, retrospective to previous lock-participation, or irrelevant?

What is the opinion of the Working Group? What numbers were spoken?

prose11 · February 3, 2021, 3:37pm

So the idea here is to let the community debate having Governance Rewards and then if it is approved, have the community propose the specifics. There are a lot of potential implications so I don’t want to get too far ahead of myself and start throwing out numbers that may or may not make sense by the time we are able to implement them.

With that said, the general discussion has been around utilizing something like the Keg to stream rewards based on a percent of the “profit” (really excess revenue to operational actions) that would otherwise be headed to the Flapper. With the intention that the rate is proportional to the amount of MKR on the borrow markets. That way when the Hat is potentially vulnerable (ie there’s a lot of MKR out there to borrow from) MKR holders are fiscally encouraged to deposit their tokens in governance, and that incentive would decrease as the MKR on the borrow markets dried up.

All just hypothetical at this point, but I thought that was a good question and that it might inform votes to know how this is being thought of in terms of utilization.

prose11 · February 3, 2021, 3:45pm

Also I’m still not always entirely sure what I’m doing with markdown so I’m sorry the tags went away when I edited the preamble. Huge thanks to @hexonaut for proposing this idea and writing potential code for it! Sam helped a lot with the editing to this proposal and it would not have been possible without the feedback and suggestions from @LongForWisdom, @juanjuan, and @Elihu!

I hope it goes without saying, but just to be clear any mistakes are my own and this would be a mess of a MIP without all these fine, smart people taking time to help improve it

Elihu · February 3, 2021, 3:53pm

The proposal is great and offers a very tangible way of encouraging people to participate in Maker Governance. I’m hoping to see some interesting discussions in this thread.

Thank you for your work, @prose11!

ElProgreso · February 3, 2021, 4:20pm

Votes Weighted by the Number of MKR Tokens Voter Holds (X) Voting Weight of Voter Increased by Time Lock of MKR since the Inception/Release of Multi-Collateral DAI.

(VW = T) x (TL) = Rewards

iammeeoh · February 3, 2021, 7:42pm

I think this is a great proposal, thanks!

I have a couple of doubts though:

What about tx-fees for ‘streaming’ the DAI to the active MKR-holders? Are these paid by MakerDAO? Is this really scalable? One of the reasons for the MKR-burning mechanism was gas efficiency…
Tax-efficiency. As you observe, there are some countries where these rewards could be taxed (more than the MKR burning mechanism). It seems kind of unfair to design rewards if we know from the beginning that they will not be very valuable in certain countries.

Regarding both (1) and (2): might it be possible, instead, to give MKR-holders other types of incentives (and not streamed DAI?)

One thing that @SebVentures has proposed a few times (in a different context) are, e.g., MKR CALL options (e.g., "MakerDAO gives you the possibility of buying 1MKR for 1600usd in the next 24 months). These CALL options might be redeemable by the user (so that they pay the fees, not MakerDAO) so this would fix problem (1).

Question for our american friends (@ElProgreso): how would this Call Options distribution work tax-wise (point 2)?

Thanks again!

ElProgreso · February 3, 2021, 7:59pm

Not Legal or Tax advice for my American brothers an sisters, but since Tokens are taxed as property–a $1600 MKR option would mean a short-term capital gain taxed at 45%. Even if you don’t exercise it–once it hits your Ethereum address, IMO you are liable to pay that 45% short-term capital gain. Assuming it goes down to $1,000 you can also sell and deduct the $600 loss from your total yearly gains.

Again, I am no tax expert–but it seems & feels like the IRS is nowhere near thinking about ta Crypto Token “Call Option”, can be treated the same as Company Stock Options( incentive stock options & non-qualified stock options)–which are more advantageous for tax purposes.

Ain’t no love for crypto. Not yet. Hopefully soon.

Joshua_Pritikin · February 3, 2021, 8:14pm

Yeah, I’m not happy when airdropped tokens cause tax liability. Taxes are bad enough when you can control when they are assessed.

SebVentures · February 3, 2021, 9:36pm

For this very problem, my solution was to weigh the voting power by the time spent in the voting contract and/or the number of votes you made in the past. It’s a real-world problem and real-world solutions already exist. I understand it requires a new chief.

I also hope that people coming for the reward will not vote at all. Like if all the new ones vote for the hat of the day then disappear taking their rewards we will be in a trouble, how do we move the hat forward? It’s already painful currently.

Nevertheless, the proposal is well written and might solve the problem without modifying a core component of Maker which is always a good thing.

My MKRs are in the chief and I live in France, so all is good. And I don’t think we should buy & burn at all for the next 5 years.

g_dip · February 3, 2021, 10:06pm

This is a good point. I also think there could be some attack vectors where voters start to automate their strategies to follow the “right hat” and a malicious entity takes advantage of that. We want real votes not just idle MKR. I like this whole idea as a concept, but think we should carefully scrutinize the potential impact.

alexis · February 3, 2021, 10:15pm

Sound amazing, this is probably the best MIP proposal.

There are a couple of catch with farming or no voter as said but overall it is definitely better to have it than not having it.

Regarding taxes, I believe we can’t please holders from 195 countries with each of them having a yearly change on taxes.

Aaron_Bartsch · February 4, 2021, 1:48pm

So would this be the MIP where we would discuss adding veMKR or would that be separate. I think adding a timelock feature like Curve or Aave have would help price appreciation/stability greatly as well as committing users to actually stay participating in the ecosystem.

Having the ability to lock anywhere from 7 days to 3 years (or some time in the future) would go along way towards backstopping the price during a collapse (in theory).

iammeeoh · February 4, 2021, 2:21pm

Good point! Perhaps one idea is to have a ‘withdraw delay’ when unlocking.

15 days might be sufficient (although I think it took some times after BT to mint and sell new MKR, I am not sure how long it took, actually).

Aaron_Bartsch · February 4, 2021, 2:31pm

Giving users a choice to lock vs having some arbitrary unlock time period makes more sense in my opinion. Tying the amount of time you want to commit to being locked in with how much you get rewarded proportionally to everyone else makes a lot of sense.

Some examples of this working effectively can be seen here:

https://dao.curve.fi/locker

alexis · February 4, 2021, 2:35pm

I would say the main problem here is that we can’t get it right at the V1.

So the question is, can we apply some modification/update/upgrade easily?
I would say yes, as far as it is outside the main components. Last code I have seen from sam looks easily upgradable. If that didn’t change we can accept a less perfect tool.

mrabino1 · February 4, 2021, 2:44pm

curious if there is a way to have “rewards” that are allocated but not claimed… (think UNI release)… the user had to do something to get ahold of it… but technically (s)he could do so at any point in the future…

alexis · February 4, 2021, 2:49pm

It is how the last version I have seen worked - long time ago- . It was based on uniswap reward actually.

Interestingly as you meant that fixed the taxes issue so.

mrabino1 · February 4, 2021, 3:00pm

I wouldnt say “fixed” as much as probably “deferred”…

ElProgreso · February 4, 2021, 3:03pm

Good point. That could be an option. But personally I would like to see folks use their MKR token rewards to govern and secure the protocol—which as we all know is the main purpose of MKR.

After all — we are all guaranteed death and taxes