Signal Request: Should MKR be added as collateral?

Overview

Due to current market conditions and the state of the peg, I thought it might be good to start a discussion on whether the community would have any appetite in adding MKR as collateral to the system. I know this is, and will probably always be, a contentious topic but I know a portion of the community is open to this idea and is worth exploring if it can be done properly. Here are some pros and cons that I can think of. I look forward to adding more as the community weighs in. If the poll gains traction I can take it to the next steps.

Pros:

  • High market cap collateral option
  • Takes MKR away from secondary lending platforms
  • Positive price impact during “good” times

Cons:

  • MKR in vaults is MKR not voting
  • During market downturns, MKR vaults could contribute to death spirals (price drops so MKR vaults have to sell to cover liquidation so price drops more, etc.)
  • Moral Hazard and Emergency Shutdown

Should we consider adding MKR as collateral?

  • Yes
  • No
  • Abstain

0 voters

This poll will run for 1 week to provide ample discussion if necessary and not too long in case there is any traction. If you can think of any other pros/cons I will be sure to add them to the overview. Looking forward to hearing the communities thoughts on the matter!

1 Like

We have no way to prevent other secondary markets from using MKR as collateral, so self-isolation cannot solve the problem. If we reject MKR, please reject LEND and COMP as collateral at the same time, because I think MKR is safer than them.

2 Likes

Couple of cons:

Moral hazard
Allowing the lockup of MKR has the potential to raise the price of MKR on the market, directly benefiting MKR Holders. This effect would be more pronounced the higher the debt ceiling (so long as there was demand for leverage on MKR)

Emergency Shutdown
It is almost certain that the price of MKR will drop significantly in the case of Emergency Shutdown, directly affecting Dai Holders and effectively delivering a haircut.

2 Likes

On a procedural note, I will make the point that new collateral types should be onboarded through the MIPs process unless we’re in an emergency situation.

If this signal succeeds, we would have to start talking to the domain teams and figuring out how to fit MKR into their current onboarding plans.

1 Like

Synthetix gets some flack because SNX is used as collateral to back their synthetics. But what backs SNX… belief that the system has value. It’s kind of like this perpetual motion machine that seems unstable at best. I’d vote to keep MKR pure

5 Likes

@LongForWisdom For sure. If this gains traction it would elicit the creation of a MIP6 for MKR.

@Jtathmann I agree that in the past that may have been true for SNX, but they are in the process of adding other collateral options as well (ETH). Since MakerDAO already is primarily backed by ETH I think that if we were able to choose a pragmatic debt ceiling and liquidation ratio that never allowed MKR to be more than a certain percentage of total debt then we would be find. The crux would be making sure that years down the line governance didn’t slowly creep the total allowed debt ratio higher and higher out of complacency since we already opened pandoras box. Unfortunately I think MKR being added will always be on the table and is inevitable. As long as we always have good stewards of the system we would be safe but alas, as time stretches to infinity the possibility of this outcome taking place nears 100%.

2 Likes

I don’t know the answer to this, but would Maker governance be weaker if MKR was allowed to be used as collateral?

It would definitely open other avenues for MKR holders not to vote so in theory yes but the argument could be made that people opening vaults with MKR would just do that on other lending platforms like Aave so we might as well be creating DAI with it instead of it sitting somewhere else. Ultimately if we want to discourage that behaviour I think we would need to incentivize governance participation through MKR staking/voting.

One option for doing this would be to set the risk parameters very high for such vaults. IE. similar to USDC-B and a 50% stability fee. That would allow MKR to be used for liquidity purposes in an emergency, but would discourage normal use.

3 Likes

Only if the dc is too high relative to total supply

This poll has been open for 1 week as specified and it looks like the community has strongly signalled “No”. I will be closing the poll and thread. Thank you all for participating!

4 Likes

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