MKR Compensation Financial Model

The linked model was created to help understand the financial impact of different MKR compensation plans under various market and interest rate conditions. There are multiple key inputs (adjustable), assumptions, and calculated fields which drive the net income and cash flow in the model, listed below.

The future in crypto is highly uncertain and I encourage everyone with an interest in how the MKR compensation plans impact MKR’s profitability and cash flows to adjust the inputs and make their own assumptions about what could play out in the future. If you have any questions, please feel free to reach out on the forums or RC.

Inputs

  • YoY DAI Growth
  • Net Interest Spread (used with DAI growth for revenue calculation)
  • Initial MKR Compensation
  • DAI Expense Growth (assumes we cut costs in bear market scenarios and re-invest aggressively in bull market scenarios)
  • MKR Expense Growth (80% of DAI expense)
  • CET1 Ratio - Surplus Buffer / Risk Weight Assets (determines how high the Surplus Buffer will be and therefore how much MKR can be burned)
  • % of Risk Weighted Assets - impacts requisite Surplus Buffer

Assumptions

  • 84K transferred from the Foundation assumed to effectively be burnt
  • 4-year vesting for every CU
  • No income from liquidations or PSM fees
  • No income from investing stablecoins held in PSM
  • No MKR burn in 2021
  • MKR price is estimated as 40x PS (Price-to-Sales) ratio on 1 year supply lag (due to circular reference)
  • Only includes CU’s approved on chain - +25% buffer included for new CU’s

Other Calculated Fields

  • YE Surplus Buffer - Gross = Surplus Buffer at Year End excluding burn
  • YE Surplus Buffer - Net = Surplus Buffer at Year End including burn
  • Capital Available for Burn = if CET1 % above input ratio, excess cash flow / MKR price = amount of tokens burned

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10 Likes

Thank you for putting this together. Although I support the principal of Maker vesting it’s extremely eye opening to see the cost dwarfs all other expenses combined. As a result this situation really does merit the most scrutiny.

This whole situation reeks of a huge conflict of interest. I understand we have a need to attract top tier talent and pay accordingly however it seems strange to me that to protect existing maker holders we have not sought independent third parties to review, substantiate and justify these models against crypto industry standards

7 Likes

I think this is more the standard than the exception - if we had access to other project’s books I would expect to see token-based comp greatly exceed any of the MKR scenarios in the model. Part of that is due to the bull market we’ve been in but traditionally companies are dilutive for a very long time. Look no further than Amazon for example. There are even public companies which have higher dilution due to share-based compensation.

I posted about engaging an independent third party in the PE budget proposal and lobbied for doing so inside and outside of the MKR compensation working group but that direction was not supported.

This is a top priority for me. Dilution is a means, not an ends, and to be used sparingly.

As far as other protocols though, just anecdotally I would say we are far and away the most conservative with our governance tokens. That’s good! Note that we’re also far more profitable than other protocols and so don’t need to pay as much with equity. Many protocols even pay their customers with their governance tokens. Talk about a bad capital structure.

While I’m not fully on board with all of the MKR compensation proposal being made, I will say that I cannot think of another person in the DAO I’d rather have than @Aes seeking out an appropriate balance.

3 Likes