Simple MakerDAO — Governance from first principles

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

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.

47 Likes

Just a comment that this is consistent - at least as I read it - w/ some suggestions from a post from a16z today on the overall subject: Lightspeed Democracy: What web3 organizations can learn from the history of governance - a16z crypto

And more broadly IMO is a positive pattern similar to an approach a number of us are advocating for within the metagovernance DAO wildfire (spawned by FE).

This approach strikes me as similar to the approach of some successful open-source projects btw.

I do not know Maker well - just lurking here - so hesitate to voice an opinion other than that such an approach seems necessary for a broad range of organizations including many DAOs.

11 Likes

As an additional data point, here is a similar project in the past to create a single vision and strategy:

https://forum.makerdao.com/tag/project-compass

If I’m not mistaken there was an additional, more concrete output to this that isn’t tagged there. I’ll have a look for it later.

I’ll just add that, from my experience, it’s extremely hard to agree on any single vision or strategy within the DAO (unless it lacks detail to the extent that it becomes meaningless.)

This has lead me to believe that it’s more useful to work on consensus-seeking mechanisms that identify likeminded groups and try to build as big a consensus as possible. Without setting the expectation that there will necessarily be a single one.

That being said, if these consensus mechanisms work well enough then it may still be possible for a universal set of shared values or principles to arise. But that would require way better governance infrastructure than we have today.

20 Likes

So just looking at the names of those tagged as writing this, let’s go ahead and get the following question out of the way (which I don’t endorse but have already heard since this post went live):

“Is this just folks on the wrong end of this week’s votes now trying to change the rules so they have a possible way to enact the platform that was rejected?”

At first glance, I think @wouter is right that it will be nearly impossible to get any meaningful agreement. Perhaps whales on each side should offer to buy each other out or the DAO could just split into a PSM+RWA and then a crypto collateral in the other, with issuance of dai being the primary overlap

5 Likes

This proposal simply delivers what I have described several months ago in my Delegate Platform and reiterated many times before and after. Originally I wanted to take more time to finish this proposal up but the recent interest in Maker governance has motivated me to finish it up early. The governance system that is outlined in the proposal works independently of what inputs (vision, council members) you give it, so it’s credibly neutral in that regard.

9 Likes

Do you see an alternative possibility where the focus is on innovation and improvement of the process of

(1) identifying competing visions and strategies and quantifying the MKR support,

(2) iterating on governance improvements to maximize the common ground, and

(3) work towards an emergent constitution starting from there (I.e. ossification of a universal set of principles)

This is a slower and more organic approach, but it wouldn’t depend on the assumption that a common vision and strategy can be found from the start.

It’s basically taking the process that you describe in Appendix A and turning it into a continuous governance mechanism implemented in software.

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this is a fair point but if Maker cannot build a consensus vision and strategy, there is a growing risk that Maker becomes economically irrelevant as other players better innovate and adapt to the dynamic evolving crypto market.

also stable coins have serious network economics and increasing returns to scale so there will likely be a small number of coins that reach scale. The others will probably wither on the vine as they wont have adequate unit economics.

The crypto market and other participants are continuously evolving: they dont care that Maker is currently too divided to create a consistent bigger vision or strategy.

2 Likes

I love that we are already realizing that on a technical level MAKER is the best example of how to approach a protocol, but I continue to insist that socially we are not taking the next step, the only reason why the USD historically came to do what it is today is due to its global use and its exposure, those of us who are in the protocol and know absolutely everything live in a bubble of knowledge, thinking that everyone knows what MAKER is and what DAI is, if we exposed ourselves to a little more to the world new users will use DAI before USDT, BUSD or USDC even though the latter are centralized.

How much emphasis should we put on MKR holder profit vs. operating as a public good?

Earnings for MAKER holders is at the right point, everyone is doing their job, I personally wouldn’t change it, but exposure to the public should be expanded.

I always put it in context with the exposure and the bad decisions that FIAT had, of course there is no level of comparison but we realized how many bad decisions have made the dollar lose value but increase its exposure, therefore, if we make good decisions we increase our exposure and thus get them to use the protocol, but without exposure there is no use.

Thanks to the Bretton Woods agreements, the value of the dollar continued to be the most important reference, so we can conclude that despite the bad decisions, the exhibition is the one that maintains the value of the dollar as an international reference, and that we must do with DAI so that be the reference value

What is the right balance between decentralization and efficiency?

That MAKER and DAI be used by the average citizen, small and medium investments, they are the ones that move the economy, if we increase our exposure to them they will continue with decentralization and efficiency

Should Maker stay isolated to crypto or expand to the real world?

Unity is strength, but I always liked the idea of ​​also adding MAKER as a brand and doing business in underdeveloped countries where regulations are not so authoritarian, and getting these supplies to be paid with cryptocurrencies and stable currencies, which in the name of Maker have a % to return to the protocol and thus the commercial volume continues to move and we increase our exposure, or simply that this money is used for the vault, thus we manage to incentivize the vault and increase the exposure of MAKER towards the public that should be an important goal

These images are taken from the topic:

From my peers:
@Marian @0xRami @Nicolas_Bernabe

I place this because for decentralization you have to touch reality, and adoption is our ultimate goal

Should we burn MKR always vs. burning MKR tactically?

No, I still support tactical burning, as continuous burning is a waste of money.

Is Maker a bank?

And this is the question that makes MAKER something completely different from the rest of the protocols that practically serve as a bank, Maker by having an image becomes a reason for being, since everyone here wants decentralization, users by having all The same vision of decentralization will never be a bank, the DAO’s is a dream since the cypherpunks and without a doubt MAKER will be the first to do it, but we need that union of vision that I know we all have, but some personal interests can accident the arrival

What is the right shape for MakerDAO (the organization)?

I think that it is like a committee in part to give an opinion, but those who have MAKER and vote are like the “bosses” and in them they will accept or not the proposals, so it would be like a matrix model, then it would be like a matrix committee? I don’t know, but it’s practically those two models together.

That is my opinion of course, I think that the use of DAI is the one that will increase the value of currency, a special value that the citizen will use more DAI than Tether for example, but for us to have that we need to expose ourselves to the real world, although they do not Like several people, the citizen uses more Tether than DAI despite the fact that Tether is much more insecure than DAI, the citizen uses more loans in a fashionable protocol or even does not use any, and all this happens due to ignorance, so therefore, we must be that teaching for the average citizen, that is where the true power is as a value.

6 Likes

I’ll second this point shared by @wouter:

As DAOs grow, opinions become fragmented and decision-making becomes more difficult. Whether a constitution or a core member, there will be a myriad of suggestions.

But that shouldn’t deter us from finding a common solution.

@Hasu I applaud your ability to peruse a simple roadmap (constitution & council of makers) and deliver on promises outlined in your initial delegate platform.

This seems to be one of the goal sof governance:

I would endorse a document that does such but allows for flexibility to include new emerging product lines or shifting values of the DAO. We need to encourage agility.

As for the council - deciding / allocating budgets seems to be the most important role. How do you limit conflict of interests between CU members? Will this be mostly outsiders?

4 Likes

It would definitely require us to think about competitiveness outside of the box of traditional corporations.

Why can democracies compete with dictatorships?

Because the melting pot of ideas and internal pressure testing resulting from disagreement can beat a single-minded direction. If one consensus forms and then it fails, there are 3 others to take over and try alternatives, evolving to a better outcome. This resilience can beat a single-design bet.

And it’s all very messy and chaotic and frustratingly slow along the way.

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If you consider delegates as elected members of the council (they’re already getting paid), you just need to ask them to set the vision through a Constitution.

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This is the correct answer. We already have a decentralized team of executives, hand-selected directly by MKR holders and whose terms expire annually with the expiration of their delegate contracts. If the problem with the DAO is a lack of efficiency, then adding another layer of bureaucracy is not going to help that.

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This proposition needs to be looked at in the context of everything that has been happening lately, particularly with the last vote.

When observed through that lens, it’s clearly a governance attack.

This is an attempt to codify the values of whichever VC/whale cartel wins an inevitable “test of strength” with an immutable Constitution that has the sole purpose of silencing dissent and squashing attempts to innovate beyond what is considered permissible by the executives.

At least now, we have VC/whale cartels battling one another. Under this new Constitution, we would assuredly have just one VC/whale cartel with codified morality that could not be violated.

If I thought that there would be any chance that this Constitution would respect the ideals of decentralization, censorship-resistance and trust minimization that this DAO was found upon, then I’d be interested. However, there is little to no chance that this proposal would have been made if the proposer didn’t believe that the votes were there to codify the very specific centralized vision for Maker that he’s been pushing for weeks/months.

This is an attempt to allow VC-anointed executives to run MakerDAO as a business rather than allowing the DAO to operate in a truly decentralized way.

It’s an attempt to trade decentralization & censorship-resistance for max efficiency and a clear path to regulation.

Decentralization is messy and less efficient than centralization. If we are seeking maximum efficiency, then we are simply giving up on the idea of a DAO.

If this proposition is accepted, it will destroy the DAO and it will create a centralized and regulatable organization that no longer deserves the descriptor “decentralized”.

Reject this very obvious attack on Maker governance.

6 Likes

If the DAO needs a Constitution, why don’t we start with the MakerDAO White Paper, which already enumerates a set of narratives and roles. What is the deficiency of this document?

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This is rhetorical sleight of hand, stating your opinion as fact.

From my view the endgame plan much more closely resembles a governance attack - explicitly forming a block that can dilute minority with voting rewards directed to a favored subset of token holders, potential for strategic voting to control key appointments (budget allocators, executive delegates, etc), define scope map, and control focus objective prioritization.

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Lots of governance attacks going on right now! There’s a lot at stake for the VCs and whales.

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That being said, I’m not wild about the idea of a “constitution” because the power should always remain in MKR holders’ hands - if the spell passes and is executed through governance it is prima facie valid. Sound mechanism design is preferred because it is explicit and enforces itself.

Would prefer the constitution part be revamped as @wouter suggested with a process where high level vision(s) can emerge through organic bottom up processes of MKR holders and other stakeholders.

7 Likes

The amount of red tape and bureaucracy that we’d be creating for ourselves with this type of system would be epic.

DAOs require a natural level of limited chaos. We need to maintain a decentralized system where anyone can be heard on any idea and anyone can quickly rise up as a MKR voter or delegate.

This proposition, in the context of today’s VC/whale wars, is going in the opposite direction of that. It is designed to make innovation harder.

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We need to be able to have a discussion about governance on Maker without launching into calling everything a ‘governance attack’. Recent threads on the forum have seen an unhelpful shift away from fact-based debate to conspiratorial mud-slinging and that is its own threat to Maker’s governance.

This thread is a serious attempt to debate governance from first principles and address Maker’s deficiencies, it very obviously is not a ‘governance attack’, and the quality of the discussion falls precipitously when we descend into bad-faith accusations.

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I outlined exactly how it is a clear governance attack. I don’t take the term or the accusation lightly nor do I use it often (or ever on this forum).

If this proposition passes, power will be consolidated with whichever VC/whale cartel emerges the strongest. Independent voices will be silenced. Innovation will be slowed.

1 Like