MKR loaned out for interest. What are the implications?

[PaperImperium]

So as a small holder who has been accumulating MKR, let me go ahead and show my hand while asking a question.

I park most of my MKR in an exchange that offers me about 2% yield paid in more MKR, compounded daily. I also buy MKR weekly in small increments.

What is the effect on MKR from people like me, offering our tokens to lend? Am I providing liquidity to traders (benign in my opinion), or does this pose a risk to the best investment I’ve seen since I got AAPL at $6/share a decade ago? How much of a risk, if so? Are enough long-haul whales around to hold off any malicious borrowing of MKR to vote on governance? How quickly could I know if large holders dumped their tokens?

I should note that I am one of those small holders (<100 tokens) who has never voted, mainly due to opportunity cost. I’d happily stake my MKR for a stream of more MKR or even DAI, even if it was less than the 2% I get now.

I should also note I’m a classic, old-school value investor. I’m not a rah-rah crypto advocate and MKR is my only substantial crypto investment, as I’m here for the fundamentals. It also means I’m fairly crypto-naive (but not tech naive in general), so don’t feel like you’re mansplaining if there’s something obvious I’ve overlooked or not considering with regard to crypto. The governance is a bit different from the boards I’ve sat on in the past, so also chime in if there’s something I’m overlooking in that arena as well.

[Aaron_Bartsch]

As a fellow MKR lender there is a tragedy of the commons/bystander effect situation happening right now the way the tokenomics are currently implemented. As long as the system is not in grave danger (and arguably even if it is) there is no motivation to vote as the opportunity cost is too great. It’s hard to say how much lending is happening in Ce(De)Fi but there is a known/non-minimal amount happening via mainly Aave.

With initiatives such as MIP49 (Governance Rewards) and other such ideas coming down the pipe (DSSGov/Vote delegation) hopefully some of this behaviour will change. I have personally written a proposal to see whether the community would like to approach Aave and ask/pay for them to disable borrowing so that that avenue for shorters goes away but have not yet had the willpower to act upon it.

In summary, the implications are that if we continue to all have this mindset and don’t do anything to fix the incentive structure, long term this could/will cause serious problems.

[ejbarraza]

@Aaron_Bartsch

ask/pay for them to disable borrowing

Yearn has already gone down this road and AAVE citing risk management recommendations from Gauntlet said go kick rocks (i.e. no!). I suspect they will not change their opinion on disabling shorting MKR.

ARC: Deepen cooperation with Yearn

[Planet_X]

@PaperImperium you are asking some important questions

@PaperImperium

Are enough long-haul whales around to hold off any malicious borrowing of MKR to vote on governance?

Yes. Barely. But the situation might not remain so if continued disappointment in the token value persists. Right now the Maker ecosystem is still an unfinished product and major tokenholders will simply have to deal with that mentally or look elsewhere for profit. Some of them have done so already.

@PaperImperium

How quickly could I know if large holders dumped their tokens?

A dump you would notice right away. What you will not notice is gradual easing out of positions such as the one a16z is doing as we speak with MKR moved onto Binance in batches as low as 20. Polychain exited a 45k MKR position over approx 6 months.

@PaperImperium

I should note that I am one of those small holders (<100 tokens) who has never voted, mainly due to opportunity cost.

Can’t really blame you. I am doing the opposite out of sheer stubbornness.

@Aaron_Bartsch

tragedy of the commons/bystander effect situation happening right now the way the tokenomics are currently implemented. As long as the system is not in grave danger (and arguably even if it is) there is no motivation to vote as the opportunity cost is too great.

Yes.

@Aaron_Bartsch

proposal to see whether the community would like to approach Aave and ask/pay for them to disable borrowing

I think we should take the hits defi throws us directly on the chin and instead reform Maker governance to be robust against this sort of gaming. Asking nicely is never going to last.

@Aaron_Bartsch

if we continue to all have this mindset and don’t do anything to fix the incentive structure, long term this could/will cause serious problems.

We have dssgov, then gov rewards and if that fails even multiple options for governance redesigns to better align with crypto reality. We will win this.

[PaperImperium]

@Planet_X

We have dssgov, then gov rewards and if that fails even multiple options for governance redesigns to better align with crypto reality.

I imagine a number of us has sat on boards (be they large, medium, or small, they’re all mostly the same beast). Given that any MKR holder is something more than a shareholder and less than a director, perhaps some thought should be given to some kind of actual buyback (rather than burn) where a reserve of MKR can be given or sold cheaply to those active in governance. There would have to be very careful thought about how to structure the incentives, though

[Aaron_Bartsch]

I did not realize they had advisement from risk. Thats good to know. Thanks!