I think the verdict is in both from this thread and from various private conversations: this first iteration of a tokenomics redesign isn’t exciting enough to average MKR holders. MKR holders don’t want to borrow money, they want to get money. The most crucial aspect of a tokenomics system is that it is appealing and exciting to be a part of - so I’ve now started to design a v2 proposal that incorporates the feedback I’ve received. The main goal will be to provide a high real APY (of money you get, not borrow) for locking up MKR long term.
MakerDAO first introduced smart contract based tokenomics with token burn in the original Single Collateral Dai protocol in 2017. Since then, there have been numerous breakthroughs in the DeFi industry related to tokenomics, including concepts such as yield farming and rewards based on staking or locking. Notable projects that have innovated and showcased the raw power of tokenomics are Sushiswap, Curve and OlympusDAO.
Now that the Maker protocol is feature complete and ready to enter a new phase of scaling, it is the right time to revisit tokenomics and implement something that properly taps into this power.
I’m proposing something specific with the Sagittarius Engine, but before I get into that I think the most important thing to emphasize is that we should take this opportunity to rethink and reconsider how we can upgrade the tokenomics of Maker and learn from the innovation in the rest of DeFi. There is no better cause than climate action to direct the atomic bomb of financial gamification towards. We should not hold back on considering the most powerful forms of tokenomics that are working elsewhere in the ecosystem, that can maximize our growth and ability to have an impact on the world. My own ambitious proposal may just be inspiration for the community to come up with something even more powerful.
The goal of the Sagittarius Engine is to better direct the value flows of the Maker Protocol towards long term governance participants - the core of MKR holders that participate based on genuine interest in the project and its potential. In particular, a key goal is to help provide the push it takes to get a passive MKR holder to begin participating, by e.g. participating in sourcecred on the forum. By empowering the old guard and drawing newcomers into the core of the community, all other stakeholders will also see indirect benefits, including traders and end users, because the overall quality and value of the project depends on the core community members and good governance. Additionally, the Sagittarius Engine also has a powerful “burn-like” effect as it locks up and remove large amounts of MKR in a short amount of time.
This is achieved through a novel design that is inspired by the most successful tokenomics models in DeFi, including Curve, Sushiswap and Synthetix. The basic concept is that the Sagittarius engine gathers the cash flows of the protocol into a capital pool called a Bucket, which is then used to offer long term MKR holders the ability to borrow Dai from the Bucket using their MKR as collateral at a 0% rate, fixed forever, and with preferential liquidation (a very long grace period).
This approach to borrowing Dai from Maker based on MKR collateral does NOT create solvency or collateral risk issues for Dai, because the Dai is NOT “freshly generated”, but rather it was previously generated and then accumulated into the Bucket (The protocol owned capital pool) and is thus guaranteed to be overcollateralized by hard assets just like any other Dai. The locked MKR that is used as collateral is not being used to back the Dai.
To be able to access this benefit MKR holders need to lock up their MKR between 1-4 years, where a longer lockup gives access to a proportionally greater share of the benefit of being able to borrow Dai at beneficial rates - manifesting in a higher Debt Limit Growth rate which has some similarity to an APR by determining how much cash the user can borrow per day at the beneficial rate. Additionally, locking up MKR this way also increases the voting power of the locked MKR by up to 2x, helping to better align governance decisions with the will of voters that are verifiably exposed to their consequences for the long run.
The primary advantages of the design:
- Direct Cash Flow with minimal capital leak. On one hand The Sagittarius Engine allows the maker protocol to provide cash directly to core community members and committed MKR holders, but at the same time no capital ever directly leaves the protocol, and the protocol will simply continue to gather a larger and larger capital pool over time, with no outgoing capital flows through burn or dividends.
- The cash flow is represented as a continuous increase in the amount of Dai you can borrow with your locked MKR at preferential terms. It is not an APY, but it will feel like it, and it will be quite high:
- A limited amount of MKR will be locked into the Sagittarius Engine
- anyone who exits will have to return their borrowed Dai, boosting the Debt Limits of everyone else
- we can use MKR issuance and yield farming to massively boost the cash flows that run through the system
- Because the Sagittarius Engine doesn’t leak much capital, it is a lot less risky to do aggressive token issuance, and there is much less risk that it just causes a short term pump and dump
- Because Sagittarius users have their MKR locked up, and also have an increased voting power with their MKR, they are more motivated to spend a little extra effort to intelligently participate in governance, by e.g. delegating their MKR, so that they can ensure their MKR remains safe and grows over the period of their lockup.
- The Sagittarius Engine is easy to enter, hard to exit. It encourages MKR holders to keep their tokens forever, and never leave the community, both because the barriers to exit is high (you have to pay back your entire loan, and then wait the lockup duration), but also because the benefits of staying locked up comes in the form of a high, direct cash flow, so it negates much of the downside of having your capital locked up.
- To prevent users from getting stuck with their assets in the SE, the design also allows for a “fast withdrawal” which means users can leave at any time if they really need to, it just requires them to pay a penalty which then benefits other, more patient users (The loan still has to be repaid as well).
- Because the Sagittarius Engine design doesn’t leak capital over time to a specific group of users, it is not benefitting one group over others. Even though the value flows are directed towards the long term, locked up holders, regular MKR holders also benefit because the capital ultimately accrues inside the Maker protocol and permanently is deployed for the benefit of MKR holders as a whole, by incentivizing long term lockup by core community members.
- This also means that theoretically the Sagittarius Engine could be turned off again, and all users could have their lockups removed and their positions unwound. Maker would then be able to recover all of the capital gathered in the engine and spend it on something else.
- The Sagittarius engine means that now MKR will finally be considered a token that you can use for some sort of benefit, which matters a lot in a DeFi landscape where many users have become used to always using or deploying all of their tokens in some way. Instead of just being a token that you hold, and vote with (for no direct benefit), with Sagittarius MKR would be known as a token that holders acquire in order to use it for something: locking it up to access preferential borrowing terms.
Governance Lockup Vault (GLV): Special vaults that are available to Sagittarius users, that enables them to lock up their MKR for between 1-4 years and get access to Dai borrowing on preferential terms. Users can always increase their lockup period instantly, in order to get more benefits, but cannot decrease them without unwinding the GLV completely and making a new one.
GLV Debt Limit: The personal debt ceiling available to each GLV, which increases over time as the Bucket fills up with Dai. Each GLVs Debt Limit increases with a proportional share of the Buckets increases based on the amount of MKR locked * the lock duration.
GLV Max Collateral Ratio: The Max Collateral Ratio of a GLV is the highest LTV it can be drawn to. The GLV Debt Limit also stops growing once a GLV hits its Max Collateral Ratio, which results in higher Debt Limit growth of other, newer GLVs.
GLV Unlock: GLV Unlock the standard way to withdraw MKR out of the Sagittarius module, and works similarly to withdrawing collateral from standard Maker Vaults, except when the GLV has been made, the MKR is then transferred into an unlocking state which lasts for the duration of the lockup period.
GLV Fast Withdrawal: It is also possible for users to instantly withdraw MKR out of a GLV, but this then incurs a fast withdrawal penalty, which is significant, but still less than the liquidation penalty. (e.g. fast withdrawal penalty could be 15% if GLV liquidation penalty is 20%). MKR that is withdrawn this way is then sold through flop/clop auctions and the proceeds are funneled to the bucket buffer to benefit other GLV users.
Bucket: The “reserve” account of funds that are used for the token mechanics of Sagittarius. GLVs only get access to borrow at most the amount of Dai that is available in the Bucket - meaning Sagittarius cannot generate unbacked Dai. It’s called a bucket rather than reserves to indicate its unique economic impact on the protocol, since while on one hand it accumulates capital, on the other hand this capital is made available for MKR holders to generate with MKR as collateral. As such the Bucket can’t be considered true reserves that directly contribute to the stability of Dai, but is instead value and tokenomics drivers that benefit MKR holders.
Bucket buffer: a transitory account that receives Dai when the surplus buffer is full (less the Surplus Cut), and distributes it smoothly to the Primary Bucket to smoothen out the Debt Limits accruing to the GLVs.
Funnel Rate: A parameter that determines how fast Dai moves from the Bucket Buffer to the Bucket. Possibly calculated as a % of total per day.
Surplus Cut: A parameter that determines how much of the surplus cash flows are sent from the surplus buffer to the Sagittarius Bucket system, and how much is sent towards
The Sagittarius Engine “starts” at the point where the surplus buffer is full and Dai from stability fee income or other income sources would today be sent to buy and burn auctions. With Sagittarius, most of this surplus cash flow is instead sent to the Bucket Buffer, which holds Dai temporarily and smoothly funnels it over time into the Primary Bucket, where it then becomes available to use by the Governance Lockup Vaults.
The part of the cash flow that doesn’t flow into the Sagittarius Engine is called the Surplus Cut, and represents cash that can be sent to other things, such as a burn engine or long term reserves.
MKR holders will look at the current cash flows streaming into the Primary Bucket to decide if they want to lock up their MKR. Once locked up, every time the primary buffer increases, the Debt Limit of each GLV also increases proportionally to the amount of MKR they have and the duration they are locked up.
Example: Assume there are only two GLVs, GLV 1 with 1000 MKR locked up for 4 years, and GLV 2 with 1000 MKR locked up for 1 year. The Maker Protocol then earns income from stability fees that result in the Primary Bucket increasing by 1000 Dai. This results in the Debt Limit of GLV 1 increasing by 800 Dai (as it has a relative weight of 4000), and the Debt Limit of GLV 2 increasing by 200 Dai (as it has a relative weight of 1000).
A GLV doesn’t have to use its Debt Limit, but if it uses it, it may have to pay a stability equal to the DSR, or a one-time up front cost of e.g. 0.1%, or some other cost that the community decides. The community may also decide that it should simply be free to use the Debt Limit.
A GLV has a max collateral ratio which is determined by its lockup duration. The max collateral ratio doesn’t just determine how much the GLV can borrow, it also determines how high the GLVs Debt Limit can grow. Once the Debt Limit of a GLV hits the max collateral ratio it is hit, the GLVs Debt Limit stops growing and other GLVs that have not yet hit the limit will grow faster instead.
1-2 years = 20% max LTV
2-3 years = 30% max LTV
3-4 years = 40% max LTV
4 years = 55% max LTV
(These are just some example parameters, the community will need to decide the actual numbers)
There will need to be decentralized, incentivized keeper functionality that turns GLVs “on and off” based on whether they have hit their max collateral ratio yet, which also requires an anti spam cooldown to minimize gas costs. This shouldn’t be a big issue assuming that it will take many years for a GLVs Debt Limit to hit its max collateral ratio.
All GLVs regardless of lockup period have a liquidation ratio of 150% (66.7% LTV), however the liquidation terms are very lenient. If a GLV falls below the liquidation ratio, the user has a long period to recover (1 week or maybe even 1 month), but also a very high liquidation penalty (e.g. 20%). This way there is no stress or real risk in using GLVs, it really is mostly a benefit with minimal drawbacks other than the lockup period. Again, the community will need to decide and fine tune what the sweet spot is for these parameters to achieve the desired outcome.
When a user wants to unlock MKR from a GLV, they can only withdraw MKR until they hit the max LTV of their collateral ratio. If they want to withdraw more than that, they have to pay down their debt first to hit the desired collateral ratio. If they have remaining free Debt Limit that hasn’t been used, then if they withdraw MKR, their available Debt Limit is reduced to the max collateral ratio based on the amount of MKR that remains locked up.
MKR that is being unlocked goes into a special unlock state, where it is frozen and can’t be accessed (other than for voting), until the lockup duration has passed for that specific block. (so a user could also be in the process of withdrawing two blocks of MKR from a single GLV, one that was initiated a year ago and still has 3 years left, and one that was initiated 2 years ago and still has 2 years left, for instance)
Fast withdrawal is another option, but it has a penalty of e.g. 15%, the proceeds of which goes to the Bucket Buffer to benefit other GLV users. The high fast withdrawal penalty and high liquidation ratio is necessary to make sure it doesn’t just become the standard way to exit the Sagittarius Engine, but is only used in exceptional circumstances.
GLVs also have increased voting power depending on their lockup duration. A 4 year lockup GLV has 2x the voting power, so 1000 MKR can vote as if it was 2000 MKR. Other lockup durations have proportionally increased voting power (1 year 1.25x, 2 years 1.5x, 3 years 1.75x)
As stated multiple times, all of the example parameters I’ve written here need to be decided and justified by the community in a public process.
Ember is the Sagittarius burn engine, which is meant to run with a lot less capital available (funded through the Surplus Cut), but produce more efficient results and more burns in the long run, as well as boosting MKR liquidity instead of reducing it.
It works by holding a reserve of Dai, and then activating MKR purchasing “sprints” when the price of MKR falls below a level determined by a valuation model based on things like dai in circulation, income from stability fees, assets held in saggitarius and in reserves etc.
The MKR purchased this way is then used to provide uniswap style liquidity in the MKR/DAI trading pair, and burned. The ratio between burning and liquidity would be set by governance to be e.g. 50/50
Ember can be developed separately, after the main Sagittarius deployment as it has no short term implications and only plays a role in the longer term.
In the edge case where all the GLVs in the Sagittarius Engine have reached the max collateral ratio, there would be no benefit to funnelling more capital into it. In that situation the system should then enter a “Full burn” state where all cash flows that would normally go to the Sagittarius Engine, instead go straight to buy and burn in Ember, boosting it significantly. This should then help drive the price of MKR up to a point where Sagittarius Users can again begin to accrue debt limit, and this way it is guaranteed that money accrued in the system directly contributes to the value of MKR.
The Sagittarius engine provides a strong platform for Maker to unleash the power of yield farming and MKR issuance in a way that builds on top of what protocols like sushi have achieved, but with the new benefit that all tokens issued ultimately result in profit accruing, and accumulating within, the protocol. That’s a separate topic which I’ll expand more on later but there are some extremely powerful synergies that create the possibility of “having your cake and eating it too” in terms of both creating clear and direct value and benefits to MKR holders, and also removing all constraints on resources available for e.g. core units, and safety buffers and capital reserves the DAO can build up for other needs.
The MKR issuance will be tightly coupled with the vision, and be designed to last for the entire Age of Sagittarius, acting as a force of economic gravity that drives the direction of the community, increasing governance stability. In total I propose that it will last over a period of 50 years, with an initial boost phase, followed by a ramp-up phase and a long tapering phase.
This corresponds to the critical decade in the 2020’s where fossil fuel emissions must peak and then begin a period of rapid decline, followed by several decades where the impacts of global warming will be felt strongly in the global economy, while global infrastructure must still continue the march towards full electrification and decarbonization.
In total I propose that 2 million additional MKR gets issued, bringing total supply to 3 million, and where it can potentially be restricted from further changes due to governance initiatives that use bureaucratic and political means to lock down the ability to propose MKR issuance. (the Ice Age concept)
Maker Governance should experiment heavily with different ways to distribute the new MKR, and figure out the ideal mix that provides the desired results. There are many options, including:
- Providing MKR as standard yield farming rewards for users who have specific flagship collateral vaults, such as ETH, or ETH-LP tokens
- Providing flagship collateral vaults a special “discounted option” to purchase MKR pre-locked in Sagittarius at a steady rate, on e.g. a weekly basis, with a discount equivalent to the fast withdrawal penalty.
- Directly selling MKR for Dai using dutch auctions
- Directly selling MKR for Dai at a discount using “bonds” (A recent innovation by OlympusDAO)
- Directly selling MKR pre-locked in Sagittarius at a discount
Experimenting with these different options and figuring out which ones provide the outcomes we are looking for will be key to making the overall project a success and giving Maker the momentum it needs to grow to the next level.
The final option for yield farming I think should be considered, is the ability for Sagittarius users to also benefit from the “discounted option” yield farming plan. This means that once you lock your MKR into Sagittarius, you also have the ability to continuously purchase more at a discounted price, increasing your stack of MKR further. However, this needs to be used very carefully since it puts the user in a position where they don’t have liquid assets to pay off their debt again, making it very hard to exit and comparable to entering a “black hole” of long term MKR exposure (and Sagittarius benefits).
Such users will likely become active contributors and participate in the project for the long term, and to further boost this we could have an early boost phase where extra yield farming incentives are allocated towards black holding.
The overall schedule of yield farming that I have considered would consist of 3 phases.
Boost phase year 1-4
- 100k MKR per year towards general yield farming:
- MKR rewards on flagship collateral
- Discounted sale of pre-locked MKR for flagship collateral
- Open dutch auctions
- 100k MKR per year exclusively for black holing
Ramp up phase year 5-10
- 80k MKR per year towards general yield farming
- 20k MKR per year for black holing
Tapering phase year 11-50
- The remaining 600 MKR would be distributed at a linearly decreasing rate over the remaining 40 years.
If MKR price is stable at 2000 USD during first year of boost phase
100000 MKR is sold to the market for 200 million USD
100000 MKR is sold to black holers for 170 million USD (15% discount)
The surplus cut is at 15%, meaning 85% - 314,5 million is funneled to the SE (for simplicity we’re gonna say 860000 Dai per day)
The SE has 300,000 MKR supply locked up, 15% of that is black holing
On Day 1 both the normal and black holer GLVs get 2.86 Dai per MKR (equivalent to a debt limit growth of 52% per year). Black holers also get a value accrual of 0.52 USD from their discounted MKR (equivalent to a value growth of 9% per year)
Towards the end of the first year, black holers would get a larger share of the debt limit growth as they would have more MKR in the pool. Haven’t done the detailed calculation but my estimate is that they would get a debt limit growth of something like 3.5 Dai per originally locked MKR, or equivalent to a debt limit growth of around 65% of the value of originally locked MKR.
I could have easily made some mistakes on the math, so it would be great if someone else would check the numbers and assumptions. The compounding effect of the black holers would become more significant over the full 4 year boost period.
This example suggests that the Sagittarius Engine users would quickly hit their max collateral ratio, regularly putting the system into the full burn state. In practice this would probably also be balanced by attracting more new users into the Sagittarius Engine, increasing the amount of MKR that’s locked up and drawing more users into becoming long term contributors.
Impact NFTs are the concept that intangible artistic, historic and social value is created when a DAO executes on a vision of public good, and achieves results that directly relate to the vision and create public good. To help make the creation of positive externalities and public good profitable and more self-sustainable, this intangible value can be tokenized in the form of NFTs that reference the real world achievement, while also adding a layer of art and “bragging rights” (such as statistic relating to clean energy created, carbon equivalent offset etc). Because of their direct relationship to positive social impact, society as a whole has an incentive to make this kind of NFT valuable, as that will further drive the public good created.
Maker can use this principle by tokenizing the “bragging rights” of each flagship project it finishes, such as wind turbines, solar fields, battery stations, carbon sequestration projects and more. Once tokenized, the NFTs are then distributed to Sagittarius users in a lottery model, meaning that when you lock up MKR in Sagittarius, you are continuously competing to earn these NFT’s, and if you get one, you can then use it as a profile picture or similar to signal your involvement in climate action, potentially encouraging others to action as well. Beyond that, gamification features can be developed for the NFTs, and third parties might be incentivized to develop on top of Impact NFTs to support their own positions on climate action.
These characteristics of the NFTs also make it possible for them to become liquid and have market value which can then be sold and speculated on, and to further incentivize active trading of the NFTs by climate supporters, while capture some of the value, the NFTs can have a royalty fee that goes toward charitable climate action which can then produce even more rare impact NFTs, such as tokenized mangrove forest or rainforest.
The most powerful effect a tokenomics design can have is to synergize with a broader vision and narrative. The Sagittarius engine is well positioned to be presented alongside a new vision for Maker returning to its root principle of Sustainable Finance and rebuilding its core around that. This narrative will then help drive the excitement for people to engage with the tokenomics beyond just for the financial benefit, but also to be a part of the movement and share the community values that they agree with.