Executive summary
This proposal describes a series of simple governance changes to MakerDAO that would address many problems that exist in governance today. These include a general lack of vision and strategy as well as low accountability to MKR holders.
Table of contents
- Executive summary
- Why we need to talk about this now
- Problem statements
- Proposal
- Expected impact on Maker
- Implementation
- Appendix A - How is the constitution created?
- Appendix B - How is the council elected?
Thanks to all contributors: @adcv @Aes @SebVentures @Eumenes @hexonaut @teej @luca_pro @MarianoDP @Nadia @pipko
Why this matters now
We are at the foot of an unprecedented opportunity for Maker.
Other stablecoins (UST) and centralized lending markets (Celsius, Blockfi, Voyager) are blowing up. Lending demand is evaporating and borrowing costs are going up. Yield-bearing, uncorrelated RWAs are being tokenized on-chain. All against a backdrop of global interest rates rising, forcing investors on a quest for financial stability. If we play our cards right, DAI can become the USD-as-a-service for the next generation of internet users around the world.
At the same time, Maker is at a pivotal time internally. rune, the founder, is pushing back into the spotlight with plans for a massive restructuring of our governance model. Some of his ideas are good but I’d like to give the community another governance proposal to choose from. The best ideas are born in the fire of competition and debate and ideally, Maker can find a way to pick the best from all proposals to build a strong, unified consensus.
Finally, interest in Maker governance has never been higher. While reaching consensus may be difficult initially, whatever we decide now will have unprecedented buy-in from MKR holders.
Problem statements
The supply chain for decision-making in any organization basically looks like this:
These different layers of decision-making require very different skills and resources — e.g. a vision should be very high-level and long-term, whereas implementation choices require highly local knowledge & are necessarily short-term in nature. Smaller organizations can initially get away with having very flat hierarchies but as they grow and mature, they naturally run into the scaling limits of that approach, e.g. the local knowledge problem. From there, hierarchies are implemented to allow for division of labor and specialization in each layer of this decision-making supply chain.
Turning to Maker, the CUs currently handle most implementation decisions while MAs/cross-CU collaborations are responsible for our tactics. However, there is a lack of vision of what Maker should be and a lack of strategy on how it should get there. (Another way of putting this would be: there’s an excess of visions and strategies and no unity about them.)
Based on these observations, we define two problem statements:
Maker has an identity crisis
- How much emphasis should we put on MKR holder profit vs. operating as a public good?
- What is the right balance between decentralization and efficiency?
- Should Maker stay isolated to crypto or expand to the real world?
- Should we burn MKR always vs. burning MKR tactically?
- Is Maker a bank?
- What is the right shape for MakerDAO (the organization)?
We are discussing these and other questions in Maker for years and are still discussing them today. In my opinion, it matters less what the vision for Maker is (although I certainly have my favorites) — what matters more is that we have a vision and stand united in executing it.
If Maker had a vision, many strategic or tactical governance decisions would derive from them as well w/o the risk of falling back into the same fundamental debates over again. Instead, discussions about vision could be contained to the vision layer, and decisions about strategy could be contained to the strategy layer, etc., and wouldn’t be conflated as much as they are today.
With a consistent vision, there would also be less flip-flopping around important decisions because a vision is meant to be set in stone for at least the next 5-10 years.
Maker has a governance crisis
In its current governance model, almost all steps of the decision supply chain are kicked to MKR holders. MKR holders are supposed to decide on every tactic, sometimes even down to the implementation level. Most of the time, someone with more local knowledge could make a better decision than them.
In other cases, it is the lack of global knowledge: in the best case, MKR holders bring their own vision + strategy for the project and vote in a way that maximizes the probability of success. But usually, decisions are made without any concern for the long-term or information that sits outside the proposal at hand.
This is further exacerbated by the continuous nature of Maker governance: if all budget decisions were made at the same time, it would automatically force decision-makers to zoom out & take a holistic view of the budget; instead, budget requests are streaming in every a week, and every decision is made without taking all other budgets in mind.
Finally, there is a lack of voting incentives in Maker. Most MKR doesn’t vote at all; this gives more relative power to MKR holders with an external incentive to vote. For example, they can vote to onboard collateral which would maximize their own portfolio rather than that of Maker as a whole.
It would, however, be a mistake to blame MKR holders for this — Maker’s current governance system is setting them up to fail. Maker has long outgrown the time when a single person can vote on everything. Specialization within layers of the governance supply chain, and cooperation between the layers of the governance supply chain, are urgently needed. But Maker’s incentives actively discourage both: delegates have to vote on everything to get paid; specialization is actively discouraged; and the more voters/delegates participate, the less incentive there is for anyone to specialize.
In summary, the most overloaded role in Maker has been the MKR holder/delegate. Ironically, it is also the least incentivized at all. As a result, Maker has been less efficient, more wasteful, and less accountable to its holders than it could be. The status quo does not even maximize decentralization, because governance participation is minimal and important principles are not set in stone but rather depend on how who shows up to individual votes or discussions on a given day.
These two problems are related but not the same. For example, many of Maker’s governance problems derive from its identity crisis. If there was a single source of truth for what Maker is or should focus on, governance would become easier (although still not easy enough.) But because a single source of truth is never established, fundamental debates frequently break out over seemingly unimportant votes or proposals.
To address the two problems of identity crisis and governance crisis, we propose two changes to Maker. Both require no changes to the code infrastructure (not even the voting portal) — they are just changes in the process that should hopefully address the problems outlined above. Both are meant as an invitation to explore and discuss, not meant as final truth.
Proposal
Main idea #1: Create a Constitution for Maker
In broad strokes, the constitution would be a document that breaks out the vision and other foundational principles from the rest of the governance supply chain. the constitution would define
- Maker’s vision and north star
- The rights & responsibilities of key stakeholders within the system
- Maker’s mandates (e.g. make money for MKR holders, create the most liquid decentralized stablecoin, and become the cheapest source of credit)
The overarching of the constitution is to address the first problem, a lack of identity, but also has many positive effects on Maker’s second problem, its governance crisis. The benefits can be broken down as such:
- Create a rock-solid foundation of underlying principles of Maker. The constitution defines those parts that are explicitly NOT subject to frequent change and from which other decisions (e.g. on strategy or tactics) derive.
- Encode in writing what we can’t encode in smart contract code.
- Create a yardstick against which all other parts of the decision supply chain (delegates, council, MAs, CU members) can be held accountable — both by each other and by MKR holders.
- Cleanly separate the what (vision, goals) from how (strategy), so they can be discussed and decided individually.
The constitution is supposed to be a living but hard-to-change document that puts Maker’s current identity in writing. most governance decisions can be derived from it. The constitution can be updated but this should require extensive discussion, a quorum of MKR holders, and a supermajority in a given vote. This locks in the slow-moving, decentralized nature of Maker as a decentralized credit protocol.
For thoughts on how the constitution could be initially written, see Appendix A.
Main idea #2: Establish a Council of Makers
The overarching goal of the Council of Makers would be to break out the second part of the governance supply chain, Strategy, and give it a dedicated role. This role should be highly encouraged to specialize in what allows them to make good strategic decisions while being accountable to the Constitution as well as MKR holders/delegates directly.
Specifically, the council could be tasked with
- Setting a high-level strategy for Maker to reach the goals laid out in the constitution.
- Setting a budget for Maker.
- Allocating the budget to CUs + external contributors.
- Managing bigger DAO transactions like buy buybacks, dividends, DAO-to-DAO partnerships, and token/debt offerings.
The goal is to give decisions that need global knowledge of Maker and the crypto credit market to an entity that has it. For example, it is impossible to make individual budget decisions for Maker without considering the budget of all CUs, Maker’s current recurring revenue and runway, overall market conditions, etc.
Specialization within the council would be further encouraged. For example, the council could have a fixed number of seats (7) with different areas of expertise, e.g. business, ALM, technology, legal, and wildcards. In order to attract the best specialists for these roles, competitive compensation will be required. The council members would be ratified by MKR holders and serve on fixed terms, e.g. 1 year.
The council would sit between the CUs and delegates, and be accountable to MKR holders at all times.
- MKR holders/delegates appoint council members on 1-year terms
- MKR holders/delegates can fire council members anytime with sufficient quorum
- MKR holders/delegates need to ratify every executive spell. The council can not get any decisions passed on-chain unilaterally. It is paid to serve and propose.
For a discussion on how the council could be elected, see Appendix B.
Expected impact on Maker
The biggest impact of this proposal would be to move from MKR holders/delegates deciding over all parts of the decision supply chain to deciding over three much slower moving areas:
- The Constitution, which encodes Maker’s vision, values, and principles
- The Council of Makers, which sets a strategy for Maker and manages its treasury
- Ratifying every spell before it goes on chain.
Instead, all decisions in Maker would be made at the right layer:
Different issues (e.g. vision, strategy, or tactics) can be discussed at the right layer without conflating them. Mapping different layers to different decision-makers finally unlocks specialization, reduces the scope of any individual decision-maker, creates a separation of power, and increases accountability.
As a result, CUs can have more freedom to build while at the same time being more accountable to MKR holders and the enshrined. Governance becomes more efficient, which is needed for Maker to scale. Governance becomes more robust to attack and capture. Maker is set up to harvest the enormous opportunity in front of us.
Implementation
So, what is the minimum viable way to do these things?
Fortunately, nothing needs to be changed technically — only governance MIPs. MKR holders/delegates still vote on any spell.
Voting/polling, which has always been informal, is abolished in favor of more local decision-making by the Council and MAs.
The Constitution and Council are in theory independent of each other — either could be implemented without the other, although they do unlock a lot of synergies if they are both implemented. As a result, if MKR holders want, they could be implemented in parallel tracks. Especially the process of creating the constitution might take longer than six months, but we could benefit from a Council much sooner.
The next steps would be to
- create a creation process plan for the constitution (see Appendix A)
- create an election process plan for the council (see Appendix B)
- create a compensation plan for the council
Appendix A - How is the constitution created?
Based on some initial ideas, the process would have two steps.
Initially, someone has to prepare a constitution. This could be done by the Council if it were to be elected first. The council could then prepare different versions of the constitution and sending to the vote. Alternatively, Maker could incentivize a Constitution WG/committee that is independent of the Council. Finally, there could be many independent individuals or groups working on preparing drafts of the constitution.
In the second stage, all the available constitution drafts should be sent to a vote for MKR holders to choose from. I believe the optimal format would be a multi-round vote, with a discussion period between all rounds, until only one draft remains.
The constitution should need a supermajority to pass (2/3+).
Appendix B - How is the council elected?
Again, many different ideas here, but some thoughts we would need to address here are:
- What should the specialist seats on the Council be?
- By what process do we propose Council members to MKR holders? Should we create a Council hiring committee?
- What should the compensation plan for Council members be? They should probably have clear and measurable objectives, and a large variable pay share tied to them for maximum accountability and incentive alignment
- Are members elected individually, or do MKR holders vote on different permutations of the Council?
Note that the Council would also be compatible with a Party system if that is where we end up going.