Episode 195: June 16th, 2022

--- tags: G&R --- # Episode 195: June 16th, 2022 ## Agenda - [00:00](https://youtu.be/8YRpgtrXsz8): Introduction - [02:08](https://youtu.be/8YRpgtrXsz8?t=128): Votes and Polls - [06:16](https://youtu.be/8YRpgtrXsz8?t=376): MIPs Update - [10:34](https://youtu.be/8YRpgtrXsz8?t=634): Forum at a Glance - [15:55](https://youtu.be/8YRpgtrXsz8?t=955): Initiatives Update: May 2022 Financials - [35:21](https://youtu.be/8YRpgtrXsz8?t=2121): Discussion: AAVE D3M Response - [53:53](https://youtu.be/8YRpgtrXsz8?t=3233): Conclusion ## Video [Link](https://www.youtube.com/watch?v=8YRpgtrXsz8) ## Introduction ### Agenda and Preamble #### Payton Rose [00:00]() - Hello. This is our 195th G&R Call here in MakerDAO. My name is Payton, and I am one of the Governance facilitators. I go by prose11 online. This is an open meeting, so we encourage you to participate, ask questions and give your opinion on things. But let’s do it in a respectful manner. And be mindful that there are a lot of people who might want to share their opinion as well. - Our agenda today: - Governance Roundup - Votes - MIPs - Forum - Initiative Updates - May Financials - Discussion - Aave D3M Response ## General Updates ### Votes #### Payton Rose *Polls:* - 3 Concluded Weekly Polls - [Deploy a Trial Permissionless Open Market Operation & Resurrect the Burn](https://forum.makerdao.com/t/signal-request-deploy-a-trial-permissionless-open-market-operation-resurrect-the-burn/15381) - **PASSED** - [**YES**: 76%](https://vote.makerdao.com/polling/QmWCy8Bc) - NO: 14% - ABSTAIN: 10% - [Management of Velodrome Airdrop and veNFT](https://forum.makerdao.com/t/signal-request-incoming-velodrome-airdrop-on-optimism-velo-venft/15371) - **PASSED** - [**YES**: 90%](https://vote.makerdao.com/polling/QmQD5mao) - NO: 10% - ABSTAIN: 0% - [Add rETH as New Vault Type](https://forum.makerdao.com/t/reth-mip6-collateral-application/6881) - **PASSED** - [**YES**: 65%](https://vote.makerdao.com/polling/QmfMswF2) - NO: 35% - ABSTAIN: 0% - Ongoing Ratification Polls Covered in MIPs Segment - 2 Ongoing Greenlights - Voting ends Monday, June 20th - [KREKIDA (KredikaLTD)](https://vote.makerdao.com/polling/QmWTfWad#vote-breakdown) - [XSGD (StraitsX)](https://vote.makerdao.com/polling/Qmd4RbRq#vote-breakdown) [*Prioritization Polls - Technical Resource Deployment*](https://vote.makerdao.com/polling/QmYqBhDx#vote-breakdown) - Overwhelming first choice support for Compound D3M - Collateral Onboarding is the only 1st choice option with over 1 MKR support - Lots of support down other voters lists - Maker Teleport voted in top 5 of all voters over 1k MKR - Most voters ranking only a few options [*Prioritization Polls - Collateral Class Sentiment*](https://vote.makerdao.com/polling/QmdZezCr#vote-breakdown) - Overwhelming first choice supporting Core Crypto Collateral - Peg Stability Solutions has over 10k MKR as a first choice - Broader Market Demand-Based Solution showing a lot of support among top voters - RWA Options absent from most top voters, representing about 2.1k MKR collectively in voter's top 5 options - Higher percentage of options ranked, but most are still ranking with top 5 *Executive:* - Urgent Executive - **PASSED & EXECUTED** - [Unwinding Aave D3M](https://vote.makerdao.com/executive/template-executive-vote-temporarily-disable-the-aave-dai-direct-deposit-module-d3m-june-15-2022#proposal-detail) - Next Week's Executive - CU MKR Transfers: DECO + RWF ### MIPs #### Sebix [06:31](https://youtu.be/8YRpgtrXsz8?t=391) ![](https://i.imgur.com/wrg57wu.jpg) [Weekly MIPs Update #90](https://forum.makerdao.com/t/weekly-mips-update-90/15648) ![](https://i.imgur.com/zAP6RxF.png) ### Forum at a Glance #### Artem Gordon [10:36](https://youtu.be/8YRpgtrXsz8?t=636) ![](https://i.imgur.com/7rwvxut.jpg) Post: [Forum at a Glance: June 9th - 15th, 2022](https://forum.makerdao.com/t/forum-at-a-glance-june-09-15-2022/15843) Video: [Forum at a Glance](https://youtu.be/8YRpgtrXsz8?t=640) _Selected posts_: - [Decentralized voter committees: Wednesday and Thursday 9 pm CEST - getting real edition](https://forum.makerdao.com/t/decentralized-voter-committees-wednesday-and-thursday-9pm-cest-getting-real-edition/15777) - [Updated Growth Task Force Vote (Lite Post-Mortem)](https://forum.makerdao.com/t/updated-growth-task-force-vote-lite-post-mortem/15796) - [Introducing a Budget Reporting Tool for Core Units](https://forum.makerdao.com/t/introducing-a-budget-reporting-tool-for-core-units/15710) - [Increasing MIP Efficiency Community Poll](https://forum.makerdao.com/t/increasing-mip-efficiency-community-poll/15773) - [Change on-chain voting from voting by raise of hands to voting by ballot](https://forum.makerdao.com/t/change-on-chain-voting-from-voting-by-raise-of-hands-to-voting-by-ballot/15745) - [[Informal Poll] Permit the RWF Core Unit to allocate time and resources to reviewing an upcoming New Silver request for Debt Ceiling increase](https://forum.makerdao.com/t/informal-poll-permit-the-rwf-core-unit-to-allocate-time-and-resources-to-reviewing-an-upcoming-new-silver-request-for-debt-ceiling-increase/15768) - [Informal Poll: Fix stETH price at 1 ETH and save crypto](https://forum.makerdao.com/t/informal-poll-fix-steth-price-at-1-eth-and-save-crypto/15808) - [URGENT: Signal Request Set Aave D3M bar to 0%](https://forum.makerdao.com/t/urgent-signal-request-set-aave-d3m-bar-to-0/15800) ## Initiatives Update ### May 2022 Financials #### Adrian [16:59](https://youtu.be/8YRpgtrXsz8?t=1019) - In this executive summary, we’re summarizing some of the key changes for May. - The results continue their compression amid the broader market turmoil tied to May's new Luna/Terra debacle. - This month, you can expect more of the same with Celsius and 3AC creating even more turbulence. - **Monthly recurring revenue is down to 4.3M DAI**: about 10% down year on year, **and about 50M down next 12 month** basis on the back of strong declines in the price of ETH and WBTC collateral. - **Monthly recurring income is down to 1M DAI**, so down 78% year on year. - **Approved operating expense budgets are about 50M DAI, but based on the reported spend, on a mix of cash and accrual, the operating expense items are about 32M DAI.** - The overall lending business continues to be driven by the availability of collateral to draw debt from, which is tied to the price of ETH and the price of WBTC. - In other words: Maker is a leverage multiplier protocol, meaning that when things go up, Maker goes up very fast; when things go down, Maker goes down very fast. - Maker strength and resilience is in being able to manage these transitions in a smooth way. - Maker downside is that the operating expenses are based in a different currency than most of the revenues in the sense that the DAI generated is tied to the price of a volatile asset. - **With about 100M DAI in our surplus buffer at the moment, the runway for Maker is sufficiently long to weather a number of years.** - We will propose a structured framework for extending that runway further and help rationalize operating expenses, adjust operating budgets to new market realities, and improve the resilience of the protocol. ![](https://i.imgur.com/ga1D2Kq.png) - [Here](https://youtu.be/8YRpgtrXsz8?t=1136), you have an overview of the monthly results. - Top to bottom on the page: - We're working through a **net interest income of 4.3M** and a **net liquidation income of 4.2M**, which brings the **overall protocol revenue to 8M DAI**. - This liquidation income is highly dependent on overall market conditions. - **Workforce expenses of about 3M DAI** - Caveat: this is on-chain data so it may contain multiple months of built-up expenses in one transaction. So one month may be higher, and another month may be lower. - **We are still sustaining a 71% return on Equity.** ![](https://i.imgur.com/vIUxfX7.png) - [In this slide](https://youtu.be/8YRpgtrXsz8?t=1206) we're showing what the drivers are for the change in recurring net protocol income from one point in time to another. - On the left-hand side of waterfalls, on the top of the screen, there is the ending balance (April 2022) recurring net protocol income; at the bottom to the right, the end of the three months (Jan. 2022). - If you walk through each of the different steps, we isolate the different drivers: **collateral**, **price**, and **yield**, for ETH and WBTC. - Quarter on quarter, we can see a marked effect of the impact of the price decline on the landing business. - To drive higher revenues and higher profits, Maker needs to add more collateralize and use them. - On the bottom we can see quarter and quarter drivers in rNPI change. - Optimizations on Oracle gas costs, lower ETH/USD price and lower network congestion drove more than 1.4M DAI in improvements from Oracle utilization. ![](https://i.imgur.com/yTP7nfy.png) - [We are showing](https://youtu.be/8YRpgtrXsz8?t=1287) the monthly income statement by breaking out the different revenue items and lumping all of the CUs' expenses into one line at the bottom. - We can also see the impact of the liquidity income in moments of high market turbulence and the relative amount of net interest income in prior months. ![](https://i.imgur.com/yVgccXr.png) - [Here](https://youtu.be/8YRpgtrXsz8?t=1316), is the overview of the lending business, the core of Maker. - There's an ongoing slow down in DeFi lending markets, and that is putting pressure on gross interest revenues. - **Lending income of 4.3M DAI, down 31% from last month**. - We see the distinction between the collateral types. ETH and BTC are still driving the vast majority of our lending income. - The return on assets is holding up reasonably well given the environment, but still under a lot of pressure, particularly looking at it from a year ago perspective. - The key element is our dependence on these two crypto-assets and, therefore, their underlying price. ![](https://i.imgur.com/ubNOfcl.png) - [On this slide](https://youtu.be/8YRpgtrXsz8?t=1366), we're showing an overview of the historical results of Maker over a longer time horizon, trying and trace the performance of those revenues with the price. - Our revenues are very high and highly correlated to the price of the underlying assets. - In the [full May financial report](https://forum.makerdao.com/t/financial-report-2022-05/15770), we have an additional slide that is quite interesting to compare with, which shows the amount of collateral that's locked in the system as well as the revenues that are generated from it: - ![](https://i.imgur.com/FK3brKu.png) - A reasonably large and consistent amount of ETH and WBTC collateral is locked in. But ultimately, the revenue growth Maker can capture beyond the fluctuation in price is tied to the number of collateral types we can attract and introduce at scale. #### Mark [24:02](https://youtu.be/8YRpgtrXsz8?t=1442) ![](https://i.imgur.com/Uom8jtI.png) - Here we see ETH lending market share measured in ETH. - **It started to stabilize with ETH deposits increasing by about 200K in May vs. last month**, and most of these deposits are to protect existing positions and not borrow new debt. - ETH market share held steady at 43% in May flat from April. - **On a year-over-year basis, Market share decreased by 3%, with Aave being the primary beneficiary.**. - Aave recently ended its liquidity mining incentive program. - Compound continues to provide COMP emissions to depositors and lenders. - If there's any indication of that liquidity management being effective, we should see it in the data in the next few months. ![](https://i.imgur.com/l3IAyXr.png) - [This overview of WBTC Market Share](https://youtu.be/8YRpgtrXsz8?t=1512) shows how **the lending market declined by about 2% from last month and was up 27% versus the prior year**. - **Maker’s market share increased by 3% versus last month, with about 2000 More WBTC deposited in the Maker protocol compared to April.**. - **WBTC deposits increased by 74% from last year**, and our market share is flat from last year, despite that big growth. ![](https://i.imgur.com/SE18jFY.png) - It’s actionable to carry out a budget reduction in the near term. We think the DAO should approach this. - *Step one* in this process would be returning excess funds that have been drawn from the surplus buffer back to the surplus buffer in the DAO. - **We have 16M DAI in CUs wallets right now. And the burn rate is about $2.65M DAI a month**. - *The next step* is determining what we want to achieve with the budget reductions. We can shoot for profitability, target a break-even, or set a fixed or moving cap based on our recurring revenue. - Once we decide what our goal is, there are a few different options: - *Option A* is a broad-based cut across the DAO with no layoffs. This would probably be around a 10% cost reduction. - *Option B* is a more broad-based deeper cut, targeting around a 20% reduction in the burn rate and could involve layoffs. - *Option C* (in my view the best option, but more complex) is a targeted budget reduction based on individualized CU performance budget reviews executed by the delegates. This is more akin to what is performed in traditional corporate finance and many companies. And this allows us to take the first step as a DAO to more reasonable and targeted capital allocations decisions. - We can start posting Signal Requests to see what direction the DAO wants to take. #### Nadia [29:04](https://youtu.be/8YRpgtrXsz8?t=1744) - I think it’s something that we have to think about altogether. - I like this initiative Dennis and David are running about how to improve the way we handle communications and our calls. - I want a small group where people from different CUs, the community, and delegates can think about the different ways to solve this challenge or how to manage it. - Going straight to the Forum with Signal Requests is complicated: a lot of drama, people pointing fingers, and conversations on the Forum that probably are not productive. #### MakerMan [31:22](https://youtu.be/8YRpgtrXsz8?t=1882) - It looks like our real cash expenses to revenues are net positive - So, if you think that our net expenses are something more like 3M a year, if we have cash revenues of even 20M, we're sitting on 80 million and the surplus, so you have 7 to 8 years worth of run provided that doesn't decay. - We can look at this more carefully before we get all dramatic about what we will do or how we will cut. - We need to think about what we think our revenues are going to look like. - We got some good revenue streams potentially coming online, and our cash expenditures aren't that high; it's the CUs holding on to a whole bunch of cash. - I would like to look at this more carefully and not get dramatic about doing a head twist change when we can smooth out the run here and not do anything extreme. #### Unknown Speaker [32:51](https://youtu.be/8YRpgtrXsz8?t=1971) - We are about to break even on a cash basis, assuming that many of these self-reported CUs expenses are accurate. - It’s a little difficult to see on-chain because many CUs are requesting three months plus the runway and their initial draw from the surplus buffer, which obfuscates the true cash burn of the protocol. - On that basis, we're about break even, losing about a million a year at the current recurring stability fee rate, which is not a terrible situation considering the market carnage. - We should tighten the budgets a little bit, but we're not in a dire situation. - Certainly, there's a risk if the markets continue to deteriorate further, but we should still have plenty of runways. ## Discussion ### AAVE D3M Response #### [35:21](https://youtu.be/8YRpgtrXsz8?t=2121) - Primoz Kordez: I can provide background on what would be the following steps on our site. We posted an urgent proposal to disable our D3M two days ago based on three things. The first thing that happened, and everybody knows, is that Celsius became under stress earlier this week. Once we started digging into long books, specifically into Dai market, to which D3M is exposed, we realized that Celsius is the biggest borrower of Dai, which means we are apart from our exposure to Celsius. Maker: we are exposed to them on the Ethereum Dai market. The second thing that made us anxious is that they hold many ETH. They are the biggest stated supplier to our with about 400,000 ETH supplied, but they borrow stable coins, which is different from the other. The usual users who mainly supply take the Eth and borrow it. In the Celsius case, the situation is worse because it is not only about staked in the pegging in conflict with its liquidity, but they are short-stable coins, which means they are exposed to its price, which is in the market right now. - All of this made us a bit anxious, but we were not convinced to push this proposal through. However, Gauntlet's proposal on governance forums was the third thing that made us decide on this. They proposed to change three parameters, making sense from the perspective that they primarily mitigate the risk of those positions for long stake ETH and short ETH. Applying this to the Celsius case was way too risky for us. There were three changes, and one of them was very crucial. They proposed to increase the liquidation threshold to 90%. In our terms, you would decrease the liquidation ratio for stake ETH by 210%. This was risky. You have Celsius under stress: they mostly collateralize their stable coin with staked Eath, which is liquid, and you have a 110% liquidation ratio; this was where we decided to disable D3M temporarily. - In the other part of the story, we feel this does not create any problems for us; in this case, the exposure of D3M was 50 million. We were earning 1.4% API for this, which is low. We did not see we would impact our revenues a lot with this. Although that is not in our domain and is not the main trigger behind the decision, it was something we also examined. - The second one was: Do we impose any additional stress on other markets if we do this? We did not because the exposure was still pretty low. We did not affect the rates there. After the vote passed, 50 million were withdrawn instantly, and today it is increased by 30 basis points. [39:59](https://youtu.be/8YRpgtrXsz8?t=2399) - As expected, we also tested the mock contract: the instant unwinding, which is great for 12. Regarding our next steps, we have monthly rates meetings at the end of the month and in about two weeks, a bit earlier. We will reassess the situation on our end and propose any further changes. We will be looking at three things. First, the situation with Celsius, but now also with Three Hours Capital, because we saw a considerable contagion risk. Whales keep failing, it seems, but who knows who is next. Thus, we will be looking at this; I am pretty optimistic about this. - Currently, it seems they are protecting their positions; they unwind that both of them yesterday, not sufficiently. They are still struggling with liquidity because they do small tops-up, basically repayments. The situation is improving. The second thing we are watching is staked ETH liquidity or staked ETH recursive positions, which are also improving. That is also good to know. The third most important thing we will be looking at is the governance proposals. This proposal that went online is currently not passing. That is good news, but it is still live, so it can still pass in theory. We hope this proposal will not be live at any moment or a similar one. - If there is a different one, we will evaluate it. These would be the next steps. - Prose11: the changes have already been enacted. That is because the mock setup for the D3M does not need to wait for our GSM delay, which is usually our 40-hour pause on regular executive actions. This is one of the safety measures of the protocol, one of the things that we can do to respond quickly. It is so cool to see that in effect, as mentioned. - Another thing worth highlighting is that the Open Market Committee will be looking into these rates in a couple of weeks. The regular governance processes are available to everyone. Anyone could write a signal to undo what we just did with that executive vote if they think the risk has passed. As the team has committed to looking into the issue and posting what they talked about for the Maker Open Market Committee parameter proposal group. - They are the people that look at our rates and periodic changes for our vault types. The only thing I wanted to add is on the governance, and this was cool to see happening quickly and effectively. We had an urgent signal process, so we had 24 hours over 70 voters from the Forum on that signal, then put up an exec and had it executed instantly within a great couple of hours. - I wanted to post the emergency response map here so you can see the rules we have set up for when something is urgent or out of cycle: the critical takeaway was that this could have been an emergency which would have been one level higher. - Talking to the other mandate actors, everyone was okay with it being an urgent request which is why we had that daily time before the exec went up. [44:25](https://youtu.be/8YRpgtrXsz8?t=2665) - Chris Blec: I wanted to rattle the cage once more on the above a topic. In addition to the reasons we have been discussing for this response, the Oracle situation is not something we should ignore. The initial risk assessment of Aave mentioned that Aave relies entirely on channeling price feeds with no double-check, no sanity check, no circuit breaker, and channelings price fees are secured by four of nine multisig. Many risks come along; I do not feel it was properly vetted over the discussions. We should consider that when we are considering bringing the Aave D3M back. - The compound D3M, on the other hand, Compound does have a sanity check; they check against Uniswap v2, I believe, prices for other markets. They hit an emergency pause if there is too much deviation from Chainlink. They are already accounting for that. I want us to keep that in mind when we think about bringing it back the Aave D3M, capitalizing on this safety situation, and bringing some awareness to it. - Prose11: As you mentioned, one of the things mentioned in the risk assessment: risk assessments are extended, and we do not always discuss every part. - ElPro: A follow-up question for Primoz. Are you guys monitoring Three hours capital? I heard there is possibly a liquidation at 993 ETH. I am not sure if that is true. I wonder if you were monitoring. The second part of my question is, you, Primoz, as a head of the risk facilitator: When do you think you tell the MOMC team that you believe it is safe to turn it back on the D3M for Aave? - Primoz Kordez: We are monitoring the capital account; I monitored it the whole morning yesterday; I cannot even follow this now. The Chainlink price feed, I think it makes like, a couple of dollars. Otherwise, they would get liquidated. It was insane how close they were. Moreover, they did not react. After that, the price rebounded, and this started repaying. Their health rate was close to one, which is barely above one. Now it is at 1.14. so it improved. - You can see that improved, but with the minor repayments, so the situation is improving with both of them, but you can see they are still struggling with liquidity: that is what we will be monitoring in the next couple of weeks. That is one input we will use when deciding about it. I would say the most important one is also what will happen with staked ETH, as I said: liquidity. - Regarding the situation with Celsius and how it evolves, there was a letter of intent that it might take them over next time. It is too early to say what it will look like in two weeks; maybe we are not even at the end yet. Maybe this contagion is more significant. We need dust to settle. - Prose11: Much work for the risk department in a bear market. [49:58](https://youtu.be/8YRpgtrXsz8?t=2998) - ElPro: What I thought about because I saw this through some of the TG chat rooms: some were unhappy that this was turned off. I was wondering what we are doing regarding communicating that this is just temporary and it is nothing against Aave? I think a lot of us are Avi token holders, probably. What are we doing as far as getting the word out there? This is temporarily for those folks that want to be knuckleheads. - Prose11: I know Nadia thought about that on Tuesday. I do not know if you want to speak to that. - Nadia Alvarez: Yes, when these four went live, he told us that he wanted to prevent Maker from being more into Celsius. We thought putting the debt ceiling on zero was a good idea. At the same time: to prevent users from thinking that Maker was not trusting Aave. We decided to try to manage it through a Twitter thread explaining why we were doing this. It was to reduce our exposure to Celsius and not because we were not trusting another. In a couple of weeks, we will see how the situation goes; depending on that; we could like to increase the debt ceiling again. That is on the communications plan. I have to check if the Twitter guy already posted that. - Prose11: Good question, Frank. Managing columns is a big part of these urgent situations. We were fortunate to do our mandate actors’ meetings on Tuesdays. We are already planning to convene. At a different time, we would have to call a separate meeting to talk about what our response would be. It is quick, Chris. They can handle their PR. We work with them for many things. We will keep that in mind; bear markets do get pretty crazy. - ElPro: I want to point out that the debt ceiling is unchanged from a technical perspective. There should still be a debt ceiling outstanding on the Aave D3M. Only a certain amount of Dai gets pushed into it by the D3M. If the bar were to be reset to something, we would not have to manage the debt ceiling unless we wanted to de-risk it slightly from what it was before. - Prose11: We use that failsafe mechanism whenever we set the bar or change it again. We will react accordingly to that and to the DC, which I believe was 100 million. You can correct me if I am wrong. ## Conclusion ### Payton Rose [53:53](https://youtu.be/8YRpgtrXsz8?t=3233) - Thank you, everyone, for your time today. Nice having a lively discussion and a few topics from many different people. We will be here next week. [Suggestion Box](https://app.suggestionox.com/r/GovCallQs) ## Common Abbreviated Terms `CR`: Collateralization Ratio `DC`: Debt Ceiling `ES`: Emergency Shutdown `SF`: Stability Fee `DSR`: Dai Savings Rate `MIP`: Maker Improvement Proposal `OSM`: Oracle Security Module `LR`: Liquidation Ratio `RWA`: Real-World Asset `RWF`: Real-World Finance `SC`: Smart Contracts `Liq`: Liquidations `CU`: Core Unit ## Credits - produced this summary. - @Harrizko produced this summary. - Andrea Suarez produced this summary. - Everyone who spoke and presented on the call, listed in the headers.