The launch of the DAI stablecoin was one of the most anticipated events in the space of cryptos and digital assets. It seemed like everyone had something to say about Maker’s new stablecoin: from enthusiastic users to sceptical analysts. After all, many saw it as the first clear step towards a wider adoption of the concept of decentralised stablecoins. And with good reason: in terms of technical design and risk management practices, Dai is one of the most advanced stablecoins available today. Even so, there are some inherent limitations that may lead to future problems – or even risks – down the road.
Recently, Maker’s founding team and VCs participated in Maker’s largest governance vote in its history.
There may not have been a more meaningful clash between ideology and institutional participation – both in terms of votes – in the history of any decentralized autonomous organization (DAO).
DAI, MakerDAO’s overcollateralized stablecoin, stands at a crossroads regarding how it should be governed going forward. There’s no doubt that a trustless and battle-tested system such as Maker is essential, particularly today, as people bang the drum for decentralized finance (DeFi) and criticize opaque and centralized lending platforms.
A governance drama has engulfed MakerDAO before. A key focus of this most recent event was Maker’s Lending Oversight Core Unit (known as LOVE), whose voting process began on June 13.
Using its Maker governance token (MKR) holdings to vote in favor of LOVE’s continued existence, this unit successfully lobbied venture capital firms, including Andreessen Horowitz (a16z), Paradigm, and BlockTower.
Just over a week ago, MakerDAO creator Rune Christensen, along with other members of the protocol’s founding team, narrowly defeated the LOVE unit, which advised on onboarding real-world borrowers.
Approximately $300 million worth of MKR participated in the ratification of LOVE (around 294,000).
According to one DeFi researcher, the top 3 “yes” votes were placed by VC whales a16z, Paradigm, and ParaFi. Founder Christensen holds approximately 79,000 MKR on the side of “no,” which ultimately won with roughly 60% of the vote.
A few corners of the Maker community have portrayed this battle as VCs attempting a carefully orchestrated coup, countered by Maker’s founding fathers, and ultimately winning out in favor of decentralization.
This is a terribly simplistic view, which ignores Maker’s history of governance dilemmas and the complicated question of who’s really in charge.
It must be a pressing concern for the community, according to Luca Prosperi, the lead at the LOVE unit, how Maker founder Christensen and other members of the founding team can outvote the combined mass of VC firms invested in the platform. Maker, then, is a de facto company controlled by a network of connected parties that operates through a redundant decentralization layer, according to Prosperi.
“There is nothing bad in it, but we should call a company what it is,” Prosperi said in an interview.
“We shouldn’t call it a community or a decentralized organization that has different voices; we should call it a corporation that has a CEO and has controlling shareholders. And given this, the CEO and effectively controlling parties should take full operational and legal responsibility when they call the shots, which means that maybe it should be regulated, maybe even incorporated – you cannot have it both ways.”
A major event in the lead-up to all this relates to Maker’s proposal earlier this year to partner with an SME loans platform called Monetalis, with Maker acting as sole backer. Monetalis was founded by Christensen and other large holders, causing controversy within the community.
Monetalis’ onboarding was opposed by token holders, following a vocal negative opinion given by Prosperi, a finance professional with 20 years working for Morgan Stanley (MS). Consequently, Prosperi is straightforward when it comes to assessing the quality of participants.
“Some businesses came in with proposals to manage $500 million or $1 billion with no experience, zero skin in the game, and no track record, which I found to be quite substandard,” said Prosperi.
Big Political Awakening for the Community
The broader issue that Prosperi points out is the lack of experience in traditional financial markets of the leaders of the crypto and DeFi communities. In their 20s, there are young engineers who have become billionaires, he said.
“But credit is a zero-sum game and not the space for centralized and inexperienced teams with crazily aggressive plans anymore. We should have learned it by now. We need to step up our game with good checks and balances, as well as more engagement from institutions and, inevitably, regulators.”
In the wake of the recent close-run votes, Maker founder Christensen called it “a big political awakening” and said that it was a good thing that groups with different perspectives wanted to make decisions about the direction of DAO, since the current system was “kind of chaos.”
Despite acknowledging a conflict of interest with his investment in Monetalis, Christensen also favors a strong core unit overseeing lending, for example. He is concerned that core units are becoming involved in governance decisions, something that should be left to token holders.
The fundamental change Christensen detects is the empowerment of “managers” to run Maker like a business, he said in an interview. “Decentralized organizations can still be done without having to resort to hierarchy, without managers and executives taking charge of coordinating the DAO,” he said.
The Power of DAO
It was not clear what invigorated the VCs to rally together to defend the lending oversight committee. Andreessen Horowitz points to Porter Smith’s forum comment in which he praises the LOVE unit’s credit-risk framework for onboarding real-world assets.
MakerDAO researcher Mika Honkasalo believes timing plays a significant role in activating venture capitalists. Honkasalo pointed out the blowups and balance sheet hits happening to centralized crypto firms at this moment as an important moment in Maker’s history.
VCs might be more focused on other things in a bull market, but now it’s a bear market and they’re thinking about their investments.” This is the most popular way of implementing stablecoins in a decentralized manner. As a result, they have invested in this opportunity.”
MakerDao’s Governance Drama
It has been described as “governance drama” in MakerDAO’s history, and is generally viewed as a temporary growing pain with the expectation that “eventually everyone will come together and be completely objective, and it will all run like a computer program.”
As Christensen has grown convinced the DAO is headed in the opposite direction, he has come up with a complex ” Endgame Plan,” including a scheme to organize token holders into “Decentralized Voter Committees” to align MKR holders to some extent and address a lack of clarity about what they want. A framework will also be set up to incentivize more widespread governance participation through the distribution of DAO token rewards.
Christensen said, “What we’re seeing is the true essence of a DAO.” In a sense, it’s like a company run by politicians. The company isn’t real, of course. In the absence of a leader, you will get something similar to a parliament. But nothing like that has ever happened before.”
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