The case for Clean Money

I personally would like to see a systematic explanation of the fundamental idea/innovation behind the saggitarius.

Is it simply a reward mechanism?

I like how climate change can be described as a systemic problem of capital allocation. However systemic problems need systemic solutions.

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I’ve been a long time supporter of maker, was honored to vote in the multi collateral DAI launch, and have been thrilled to see the project gain traction in this current bull run. I’ve also appreciated Rune’s leadership of the project over these past five years.

That said, I am dismayed by this direction. Simple version is, how about instead of doing all this we just burn maker tokens?

Longer version is, one of the reasons I like crypto is that it is not heading in the same direction as traditional finance, central banks, and so on.

Central bankers have now been saying that their mission is to fight racism, and fight climate change, and increase employment, none of which they should be involved in.

Now my favorite crypto project is jumping on the bandwagon and deciding that we have to fight alleged climate change.

I appreciate that we can vote on these proposals, and I will certainly vote against all of them, but also, I may just sell my tokens, realizing that the project has fundamentally diverged from its original charter.

Either way, I wish all the maker supporters well.

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Focusing on the ESG part, I think this direction is quite good.

We need cheap funding to generate profit to burn MKR. An ESG mandate is a differentiation factor. You can hold USDC and finance the US deficit or hold DAI and change the world.

Having access to more DAI as people are supporting such a mandate gives us more capital to invest (in ESG bond, solar farms, …) and lead to more profit.

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I appreciate posts like these, and I hope the community won’t try to silence voices that don’t agree with the ideas I laid out, but instead listen to their concerns and try to find common ground - but also accept that it will never be possible to please everyone and that we are going to lose good, long term community members who will disagree with either the direction, or the process, or both.

What I’d like to offer as a response here is first on the “not my problem” question, i.e. should private businesses like Maker be involved in climate change? Shouldn’t we just focus on ourselves and what’s good for us?

from the initial wall of text:

The crisis is so severe, and in such a late stage, that the global response needs to be nothing less than “total war”. Every aspect of the global economy, the business model of every company and the life of every individual will change, either proactively by working together to avert disaster, or involuntarily by inevitably suffering the consequences of inaction.

Basically, you may not want to deal with climate change… but then you are just resigning yourself to destruction, because we are won’t be saved unless there is collective, systemic change. It’s unfortunately not a joke or a gimmick, either everything changes voluntarily, or we get something akin to the late bronze age collapse, likely within our lifetime. Here’s an hour long lecture on the subject. TL;DR: Mass migration due to natural disasters can cause cascading collapse of advanced interconnected economies 1177 B.C.: When Civilization Collapsed | Eric Cline - YouTube

And unfortunately central banks aren’t even doing what they should when it comes to climate action - they don’t do strict ESG screening on QE, meaning they are inadvertently pumping billions into polluting economic activity that’s now beginning to backfire by causing costly disasters in their economies. And don’t forget that the disasters we are seeing now are absolutely nothing compared to what’s already locked in (but won’t show up for another 30 years because of the climate lag), and what will be further locked in over the next decade.

Now the second point I want to address:

Simple version is, how about instead of doing all this we just burn maker tokens?

My argument is that this is exactly what this is all about. This is in my personal opinion the strongest move we can make towards reducing the amount of MKR that is in circulation. A strong direction that we can collective execute towards that accomplishes just that.

The first caveat is of course that I’m equating long term token lockup to burn, which is the point of the Sagittarius Engine. It’s an approach to taking MKR out of circulation that can have a much stronger and much more immediate effect than old school buy and burn, and in the process also works to recruit a new generation of active governance participants and project supporters that are motivated by the economic incentives of participating, but also getting motivation from a vision that goes beyond just money.

You don’t have to choose between doing good and making money - you can choose to do both and get more of both! That’s what I’m suggesting, in particular when it comes to the collateral strategy. We can use the simple direction of Clean Money to converge on decisive solutions to a number of really important tasks that are all about growing, expanding and increasing the value of the project both in short and long term:

  • Derisk USDC exposure: We can deal with this by allocating the assets into corporate bonds with an ESG component. Why not just put the money into regular corporate bonds? Arguably, ESG bonds have a political advantage if it’s done in countries with a strong climate agenda. Political leaders that are struggling to square the round hole when it comes to emissions reductions will be less inclined to crack down on a project and movement that is genuinely supporting them. This kind of political defense cannot be measured in money, but considering how the USDC exposure and concerns about blacklist or seizure, I think we can consider any kind of political protection very valuable.
  • Increase ETH collateral: everyone loves ETH, so getting more ETH as collateral that we can charge fees on is not very controversial I think. We can achieve this with yield farming, and the Sagittarius Engine allows us to both issue MKR to power the yield farming, while actually having the net effect of reducing circulating MKR, especially in the short term.
  • Get high quality RWA exposure in safe jurisdictions: This is where the “Super Countries” come in. There are certain places in the world where real world assets are just significantly safer and better for DeFi. Places like the UK or New Zealand where people care about climate change and being considered climate-aligned gives political clout. Meanwhile these places are also among the most climate resilient countries in the world: New Zealand rated best place to survive global societal collapse | Globalisation | The Guardian and that means we are tapping into Climate Alpha - the one thing that’s going to absolutely dominate finance in the future.
  • Begin professional marketing: Maker has never really been able to market itself much because the Foundation would be exposed to too many risks by doing so. Now that Maker is decentralized, it will be possible to do a lot more aggressive marketing activities, especially in the areas where we also have political clout. Clean Money and green branding that goes beyond the greenwashing most other products have to offer is a way to differentiate crypto against tradfi in a way that appeals to regular people that aren’t necessarily money crazy and aren’t being attracted to all the bells and whistles that the rest of DeFi has to offer.
  • Streamline and upgrade the governance bureaucracy: Maker Governance has a very complex and interconnected bureaucracy today, that is unfortunately very opaque. The DAO as a whole needs to maintain a high level of idealism if we want to have any chance of maintaining a large decentralized bureaucratic apparatus that doesn’t just corrupt over time because it is run by people whose only motivation is money. If we can truly create a movement that is about working together for a goal that goes beyond just making money for oneself (though importantly, also includes making money!), then we have a real chance to tap into the power of DAOs as a way to scale and parallelize work beyond what a centralized organization ever could.
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I like the Clean Money focus as it gives us a vision and is also a real differentiator but the details will matter.

What does it mean to focus on climate change investments and how do we define the space? What qualifies as a ESG investment? For example, educated, healthy, employed folks are generally more focused on addressing climate change. Thus should we also invest in projects that promote these worthy goals?

Supercountries make sense but they are currently a small market. Can we afford to de-emphasize the EU and the US as they are such huge markets?

I also expect that most ‘Climate Alpha’ will be generated through long term equity investments as opposed to short term debt investments.

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Thought Leadership and Vision

Thanks @rune for the post. Purpose mixed with passion. It is inspiring and a perspective of hope to say the least.

Significance

For all of us there comes a moment in each of our lives where economic success gets put on the “back burner” in favor of significance (usually as you have already made some money in life). The longer you work (crypto or other) the more you see it and feel it. We all want to make this world better than we found it and have it more positively impact our children than our own experiences / struggles.

Initiatives and vision like @rune sets forth, represent a challenge that the community should embrace. This is not 18 months of work, nor 18 years. This is a perspective that spans decades / generations / even centuries. It is a mission… a duty.

When you mix economic success with significance, it should have everyone’s attention.

Challenge Accepted

6s Capital is happy to answer the call and will add new collateral sectors to its commercial lending line-up.

Further as outlined in this post, I stressed the need (and my personal desire) for other community-led commercial lenders to join 6s. I echo that same message today. We need more LendCOs (and we need them all over the planet) !

The foregoing notwithstanding, our ethos and mission may be the environment around us, we must still "Crawl. Walk. Run. " We must do so in an aggressive yet prudent manner. The only thing worse than no action would be willfully putting on the blinders (with regard to safety) in the name of a great cause only to drive off a cliff by not including the institutional safeguards available.

With the addition of broadly defined renewable / sustainable / resilient collateral, 6s Capital looks forward to applying for & working with the community to tackle this challenge head-on.

That said, 6s does not take this initiative lightly. I view this not only as a mission but rather a great privilege and responsibility to ensure this is done safely for MKR holders / for 6s’ investors / for 6s’ staff / for 6s’ borrowers / for the world we live in.

This challenge is as great as one can dream. It is a challenge that we can individually and collectively take pride in.

What will your contribution be?

I am in. Let’s roll !!

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The Dai borrowed with MKR collateral will not cause a buildup of tail risk in the system, because it is “normal” Dai that has been generated through standard collateral, and is only lent out by the Sagittarius Engine after the protocol has earned it as surplus.

I’m not sure i agree with this. If MKR value is representative of the success of the protocol, then using it as collateral in the protocol feels like a circular collateralization issue. I can’t exactly explain how, but it feels dangerous to use a protocol token as collateral within it’s own protocol.

Imagine there’s a liquidation crisis because MKR devalues too quickly. Then we can’t liquidate MKR-collateralized loans, so we print more MKR (right?). This drives the value of MKR down even more, creating a death spiral where more MKR-backed loans need to be liquidated, but they can’t be fast enough, so we print more MKR.

I’ll be honest, I don’t really get how new MKR issuance might affect this.

MKR issuance

I’m worried creating more MKR will just drive away potential holders. Everyone wants a decreasing-supply asset

Impact NFTs

These could be used to represent carbon credits, which actually can be sold on the market. There are some projects trying to tokenize carbon credits out there already

Gotta read all the other comments now to see if anyone else has already addressed these things

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Thank you @rune. Count me and my MKR holdings in! Wonderfully articulated. I look forward to your coming proposals and plans, and will look for a way to get involved.

@mrabino1: I enjoyed your response. Your prompt “what will your contribution be”, alongside this manifesto for climate investment, questioned my past free-riding participation with MKR. Also, I’m not ready for money to be on the back burner (maybe someday), however, I am a new father (8 month year old), and my hopelessness for their generations future sure has a lit a fire in me.

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No, the DAI that will be given with MKR collateral will be part of the surplus previously earned from other loans. Meaning that DAI is already backed by another collateral. If MKR loses value worst thing that can happen is part of that surplus is lost.
That’s why there isn’t any death spiral situation like there would be if MKR was directly used as a regular collateral.

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Except capital is there for all kinds of risks and capital has a cost.

So you can be fine by wasting 55M (the current surplus buffer) on MKR-backed loan losses, but then you have no longer the capital to take the losses on the rest of the portfolio. If the portfolio is risk-free, why on earth do you keep such capital in the first place?

The proposal is also to provide cheap loans on MKR (DSR so currently 0.01%). So having capital (which has a cost of at least 15%, probably more as we are in crypto) allocated fully as a buffer of MKR loans that generates 0.01%. It’s basically asking MKR holders to subsidize those who will take an MKR-backed loan.

If you have 100M in capital, would you rather finance 1,000M of solar farm loans generating 30M in annual revenues or 100M of MKR-backed loans generating 0.1M of annual revenues?

Not saying I understand fully the proposal, but giving a framework to understand implications regarding the allocation of capital.

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@rune thank you for reminding us, the developers, creators and thinkers why we got into this space in the first place - to improve the current system, introduce new solutions, break ground and learn along the way - what a treat! I’m stoked to be involved with a project whose end goal is not to increase its balance sheet but to try and help those who are working towards healing the Earth.

“The story of climate change, energy and development of developing countries has to be one of the same.” - paraphrasing from a mini doco on oil (and its unfortunate projected usage increase) that I’ve seen recently.

One thing to ask, do you think a version of this Vision can be created without the Maker jargon to be shared with those not familiar with the project at all? In my opinion, the narrative for the purpose of “crypto” has largely been missing and this paints a clear picture of the technology’s great possibilities and drives it home nicely.

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My read was that we would only send DAI currently destined for burning MKR into the Sagittarius Engine; i.e., the Surplus Buffer would remain as it is, to be used for its current purpose.

We aren’t currently financing anything with profits generated by the protocol; we’re buying and burning MKR. I think the question is, instead, whether we’d rather burn 100M of MKR or provide 100M of MKR-backed loans exclusively to MKR holders. Both mechanisms serve to make MKR more valuable.

I’m not sure which one I’d prefer, but just trying to clarify the mechanics.

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I’m all about the social impact, but the thing that will make this effective is by aligning social good with self-interest. So, question:

Burning MKR reduces the total number of tokens in existence, and therefore increases the proportion of profits, assets, and governance power that each remaining MKR controls. This increases the value of each MKR token in a straightforward way, and is a big part of why MKR holders have historically liked MKR.

Incentivizing people to lock their MKR within the Sagittarius Engine with low-cost collateralized loans doesn’t do the above, even though you can argue that it “takes it out of circulation”. The total number of tokens is the same, and owners are still entitled to their share of profits. A low-cost collateralized loan is nice, but I can get comparable loans elsewhere (especially if the DSR increases). So what is the mechanism by which the Sagittarius Engine increases the value of each MKR token?

Things I can think of:

  • Rather than a traditional collateralized loan, where I can borrow up to (for example) 6,000 DAI against 10,000 DAI worth of MKR with an LR of 60% — instead, each MKR token should be entitled to avail itself of its share of the total funds we’ve sent into the Sagittarius Engine, irrespective of the price of MKR.

    For example, in the early days if there are 10M DAI in the Sagittarius Engine and 1M MKR tokens extant, then each MKR token can borrow up to 10 DAI. Not great, but it solves the problem of ◈2.5B of collateral chasing ◈100M in available loans. It also doesn’t matter whether MKR price fluctuates — there’s no risk of liquidation (excluding dilution and interest, which we can consider later).

    Much later, after 10B DAI have accrued in the Sagittarius Engine and if 1M MKR tokens are extant, each MKR token can borrow up to 10,000 DAI (even if MKR is valued at 2,500 DAI). This would have the direct effect of increasing the value of each MKR token.

    It’s sort of like MIP 49: Staking Rewards, but has the best of both worlds: cash is, effectively, returned to holders (like rewards/dividends); yet without a tax hit (like burning/buybacks).

  • By reducing the chance of a governance attack with borrowed MKR.

  • Locking MKR in the SE gives 2x governance power, but eventually that should mostly even out, so I don’t see a big benefit here.

Not sure if any of those are what you were getting at with “a much stronger and much more immediate effect” @rune but would love to hear specifics on what you have in mind re: what is the mechanism by which the Sagittarius Engine increases the value of each MKR token?

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Exactly what @someone said. I don’t think the surplus buffer is going anywhere. It just changes what the protocol does with the excess of DAI over it.

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Wouldn’t the DSR already be funded by the stability fee from the vault that originated the DAI? If so, why do we need a rate equal to the DSR on the new, MKR-backed loan within the Sagittarius Engine? Couldn’t we have an interest rate of 0? Or do we need a positive interest rate to ensure it’s considered a loan and not a dividend?

I like this a lot, but why ‘borrow’? It should be a dividend which I have all rights to have and spend (and never return):

The above image, from makerburn even shows the P/E as if this was indeed a dividend, corresponding to 1.49% of the value of each MKR.

1.49% returns/year

is not huge for crypto, but it is a real profit working today (without farming, or other tricks) and would ground the current price of 1MKR = 2500 USD on a solid reality.

My intuition: We should allow a MKR holder to either,

  1. get out their share of DAI (1.49%/year, as of today) when they want, or
  2. not get it out, but somehow borrow with leverage (i.e., more than their share of 1.49%) by locking their MKR, as in the SE idea of rune.

Both options should be allowed.

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Actually, that’s not true. We are expanding the surplus buffer (mainly) so we can lend more while keeping the same risk profile. And most of the Surplus Buffer is accrued interests on loans not yet repaid.

Sagittarius Engine or Surplus Buffer, it’s all MKR equity. I used the 55M of the SB as it’s the only capital we have yet.

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@rune A purpose and path forward, here is what was missing for Maker. We were becoming too bank-like but without a goal. Thanks for making the effort putting this forward. Count on me for joining the part with strategic execution. Living in one of the “resilient places” on earth, I take that as a personal duty to assist in the transition for the rest of the earth.

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When I said “profits”, I wasn’t including the Surplus Buffer; I view the Surplus Buffer as essential operational funds, not profits. I meant only DAI being diverted to the flapper as “profits”.

Do you consider funds that are currently being burned as “equity” for MakerDAO? Or if MIP 49 had passed, would you consider the rewards that were distributed to MKR holders as equity for MakerDAO?

My read is that the Sagittarius Engine is an alternative to those two as profit distribution mechanisms; and so is categorically different than the Surplus Buffer, which are funds that the DAO (not individual holders) still controls.

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It feels to me like this would introduce an issue of fungibility between MKR that have withdrawn funds and those which haven’t; or, at least, it would introduce a challenging accounting problem.

Instead, I would prefer to reduce the interest rate on the MKR-backed SE “loan” to 0, unless there’s a legal reason not to.