There has been significant debate around an under-recognized aspect of DROP token assets – namely that the Issuer of the token may, with two weeks’ notice via an email, change terms in the Executive Summary of its issuance. This can include, but is not limited to, what metric is used to measure collateralization within the Special Purpose Vehicle (SPV) that is the Issuer, the rate of return of DROP token holders who represent an equivalent seniority in the debt structure, size of junior tranche, and anything else stated in the Executive Summary for that DROP issuance.
As is currently structured, the Issuer only has to send an email, and all parties are considered notified. After 14 days, the Issuer may then enact these changes.
- This power to change terms is clearly stated in the DROP token subscription agreement under section 4.F
- This has already occurred within the first month of our only DROP asset collateral (New Silver),
- The notice was not received by the DAO at large until June 10th, despite being sent on/around May 21st,
- There is demonstrated opportunity for the notice to become lost or delayed before the DAO at large is notified, thereby lessening time to react or – as was the case with New Silver – even be informed until after the changes had gone into effect,
- It is difficult for the DAO to discuss, vote on, and enact a response to any changes that it feels negatively impact the DAO’s position in such a short window,
- Public debate about liquidation of a DROP asset will likely allow other DROP investors to front-run Maker, leaving the DAO to wait for even an unimpaired debt pool to mature before recovering principle,
- No offer to remove this power to unilaterally change terms was forthcoming in a lengthy call with Centrifuge and New Silver yesterday,
- All DROP assets through Centrifuge share this power for Issuers to unilaterally change terms,
I propose that upon public acknowledgement of notice on this forum, notice provided on this forum, or implementation of changes – whichever occurs first – Maker automatically authorizes and compels a 3% (300 bps) raise in the Stability Fee for that DROP asset’s vault. This could be avoided by the Issuer communicating early with the DAO, and getting a vote to override an automatic raising of Stability Fee. Should it be consistent with our governance process, this can be a simple on-chain poll, otherwise it would follow the standard track of poll and then executive.
This action would be applicable each instance an Issuer utilizes their power to alter terms, and has no upper limit to the cumulative Stability Fee.
- Maker is no longer at a disadvantage when terms are changed but no evaluation or response is able to be organized.
- This does not liquidate – and thereby end – the relationship of Maker and the Issuer of a given DROP token.
- This puts the burden upon the Issuer to communicate clearly, fairly, and early, rather than burdening individual Maker representatives with collecting and disseminating notice of change, particularly as the number of DROP vaults grows.
- Demonstrates to current and future Issuers that Maker is a serious source of financing that will protect its interests.
- Provides additional yield to compensate for the risk presented by Issuers unwilling/unable to secure a vote to override this provision.
- Risks alienating Issuers who wish to retain and utilize the power to change terms of their Issuance without approval from Maker.
- Issuers may prefer not to change terms that would be beneficial to the underlying debt pool in order to avoid the burden of gaining the approval of Maker.
The poll will run until July 3, 9:00 am EDT/13:00 UTC ; this will result in on-chain-polls assuming the outcome of the poll is affirmative