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Governance needs community inputs
Plus the goals of token distribution
Voter apathy is a concern for all governance protocols. Without participation from token holders, whatever gets proposed will pass, and then, true power rests with whomever is doing the proposing. Even when there is strong voter participation, controlling the docket is a powerful governance tool. It’s why Mitch McConnel has so much power in the U.S. Senate and its why all DeFi and governance protocols need to have a sybil-resistant method of curating proposal submissions.
Protocol upgrades are time consuming - requiring research, development and social coordination. While polished code should be in the final proposal to token holders, resources are finite and can only be directed to proposals with popular community support. Furthermore, long-term token holders have strategic, financial and social interests in the future direction of the protocol that need to be voiced through a more elaborate way than an up and down vote.
Forums and community calls are the most common ways of gauging community interest. These have worked so far, but they do not scale. Increasingly, teams are relying on on-chain polls, or non-binding votes to set direction for future proposals.
Maker has a weekly cadence on its stability fee signal polls, which help determine the specifics of the proposals put before MKR holders. In the current MakerDAO design – before the MIP process is fully implemented, all changes to the system are altered through an Executive Vote. Token holders have only two options: vote for the changes or abstain and signal support for the status quo.
In Maker’s Continuous Voting system, there is no time limit; once an Executive Vote gets a majority of MKR in the governance contract in support, it is implemented. An Executive Vote can continue to gather votes until it reaches a majority OR until it is withdrawn and replaced with a new Executive vote. The Maker community can only vote on one Executive at a time, so ensuring an executive will pass is important to efficient governance.
This has been especially important during the last few months because it means that Maker can only respond to market dynamics once a week through the Executive Vote. This is why you see jam-packed proposals like the one last week to add WBTC as collateral, lower the USDC stability fee to 0% AND approve new MIPs. Polling and community governance help narrow the options down to something that is palpable to the community.
A full Executive Vote process might look like this:
Previous discussion in forums and community calls
Monday “inclusion poll” for any proposal that may be included in the Executive. Typically, this has been stability fee adjustments. A poll has 8 options for the stability fee (including the current one) and the winner is set into the full Executive vote. This week, there were 3 separate polls for stability fee adjustments to WBTC, USDC and Dai (or ETH).
Friday, governance and risk team submits formal proposal for Executive vote, continuous voting begins
Executive vote passes, the spell is cast and the upgrade will be implemented after a two day timelock
Two days later, proposal executed and Maker system updated to represent changes from the Executive vote.
Polling has considerable influence over what is eventually implemented. The Monday stability fee polls for WBTC, USDC and Dai had less than 2.5% voter participation. Over 86% of MKR polled signaled a continuation of the 1% WBTC stability fee. USDC and Dai’s (or ETH’s) stability fee are both at 0% to encourage more Dai loans, but with the peg slowly returning to parity, MKR holders may vote to raise stability fees, which would raise borrowing rates on Vault owners.
The USDC & ETH stability polls were very close. 57% signaled support for maintaining the 0% stability fee on Dai loans with ETH collateral (and 42% in favor of raising to1%), but 58% of MKR indicated support for increasing the USDC stability fee to 1%, edging out 41% of poll respondents who wanted to keep rates at 0% for USDC.
This morning, since the USDC stability fee poll signaled a change to the status quo Maker system, a proposal was submitted into the Executive Vote to raise the USDC stability fee.
Both the USDC and Dai stability fee change polls involved less than 2.5% of all MKR and the difference between 1st and 2nd place was 3,300 MKR or 0.33% of all MKR. Moreover, voting came from 30 addresses. And with $11.3m Dai minted from USDC, the stability fee increase would have material effects for MKR holders (burnt fees) and Vault owners (higher borrowing costs).
Of course, as MakerDAO Founder Rune said on yesterday’s community call, now we need to “decide whether it should be even included in inclusion polls”. Maker already has off-chain polls in their online forum and it is also exploring how to do ranked-choice voting for polls.
Maker is in the process of shifting to a monthly governance cycle to allow for more feedback into votes and implementing a new Maker Improvement Proposal (MIP) process, which is a more appropriate way to make complicated governance decisions that don’t happen in a weekly cadence.
I’ll dive into the new MIP process next week; the first monthly governance cycle started this week.
On Maker’s Docket:
Raise the USDC Stability fee from 0% to 1% - Rune’s comment on Friday afternoon in online Maker chat, “I think it is extremely irresponsible to vote for an SF increase when the peg is still broken. It puts everything at risk since it is signaling that maker governance has turned irrational and might abandon the peg, which could then cause a significant price deviation as vault holders scramble to exit in fear of unpredictable losses”. There’s also a healthy discussion of USDC protocol risk in the forums.
In Maker forums, chats and community calls:
Black Thursday Vault compensation – after Maker Man’s liquidation report, there continues to be discussions on resolutions. Nothing seems imminent and still trying to get signal on the appropriate % of liquidation compensation.
Change the Stability Fee Structure [Signal Request] – discussions on the call and in forums. There seems to be some concern that this is the dreaded "negative rate" for Maker. SamM contends that a negative base rate is just a way to subsidize different collateral below the overall base rate. Subsidizing the debt pool is an important tool (as Synthetix has done) but this seems to be a problem over semantics and proposal structure, something the governance process should sort out more.
A new investment disclaimer that was read by Head of Risk Cyrus Younessi that adds 5 minutes to community calls.
More collateral applications – Most notably, official application from Matt Luongo at tBTC, MANA, ZRX (before the pump), a tokenized Freight shipping project, a token with royalties from music streaming and TUSD, which seems the most likely to be the first included through the new formal collateral on-boarding process.
A rather unfortunate ‘Zoombomb’ on Thursday’s Maker call. A MIP has been initiated to switch services.
Tweet of the Week: Distribution to whom?
A great back and forth thread about what behavior should be incentivized. Some projects try to target addresses and users that have been active in other projects in the past because that’s a signal that they are a “good token holder”. UMA’s Allison Lu argues that protocols should only incentivize actions that benefit that specific protocol, so it’s more forward looking.
On the Synthetix Docket:
SIP 56 - Differential Fees: A proposal to enable different trading fee structures between different trade pairs, charging a trade into sUSD at 0.1% and a trade into sETH at 0.3%.
In the Synthetix forums and on the community call
Synthetix community call set for May 11/12. Calls are not regularly timed but take place every month or so. Call is Monday evening East Coast time and Tuesday morning Aussie time.
Discussions about how to limit polling to only SNX holders. Whereas Maker’s polling is done on chain, Synthetix relies heavily on Discord for governance organization.
Managing the debt - discussion related to SIP 56 Differential Fees and widespread agreement that Synthetix will need to incentivize different trades and debt exposure, and since it doesn’t have a stability fee like Maker, trade fees are its primary tool. Of course, Kain admits this may lead to lower short-term trade revenue but will incentivize long-term strategic initiatives (like FX exposure). This quote from @Bojan was revealing, “If we know that aggressive inflation policy worked really well for supply side, I believe there is high probability that aggressive fee cuts would work well for demand side."
Discussion and excitement on the release of a Layer 2 Synthetix Exchange testnet in collaboration with Optimism.
Can Curve.Fi be used to create a more efficient sETH/ETH Uniswap pool?
On-chain Governance with Tokenless Voting (Kain at DeFi Discussions)
Elsewhere on the Docket:
Other Governing things
Voting for Cash Flows [Bankless]
State of the Raid - April [Raid Guild]
That’s it! Feedback definitely appreciated. Just hit reply. Not always going to be so Maker-heavy but busy time. Suggestions on projects to cover welcome. Written in Brooklyn.
Govern This is written by Chris Powers. Opinions expressed are my own. All content is for informational purposes and is not intended as investment advice.