Episode 198 | July 7, 2022

--- tags: G&R --- # Episode 198 | July 7, 2022 ## Agenda - [00:00](https://youtu.be/EdmJ1onA-20): Introduction - [02:24](https://youtu.be/EdmJ1onA-20?t=144): Votes and Polls - [04:55](https://youtu.be/EdmJ1onA-20?t=295): MIPs Update - [08:46](https://youtu.be/EdmJ1onA-20?t=526): Forum at a Glance - [13:57](https://youtu.be/EdmJ1onA-20?t=837): Discussion: Rethinking PSM Fees - [1:08:53](https://youtu.be/EdmJ1onA-20?t=4133): Discussion: MakerDAO Constitution - [01:23:59](https://youtu.be/EdmJ1onA-20?t=5039): Conclusion ## Video [Link](<https://youtu.be/EdmJ1onA-20>) ## Introduction ### Agenda and Preamble #### Payton Rose [00:00](https://youtu.be/EdmJ1onA-20) - Hello, everyone, and welcome. We are up to the 198th Scientific Governance and Risk meeting here at MakerDAO. My name is Payton Rose; I go by Prose11 online. I am a Governance Facilitator at the DAO. A group of wonderful people that care about, work for, and are interested in the Maker Protocol are joining us today. Whatever camp you fall into, we are glad to have you here. - In pursuit of having an effective meeting, I would like to read down a few ground rules before we begin. - This meeting is being recorded. _Hello_, if you are watching us at a future date. - Let us try not to talk over one another. That is annoying, and it ruins the recording. If someone else is speaking, let them finish. - There are a few tools you can use to let me, as the host, know that you have something you would like to add to the conversation. - You can use the _raise hand_ feature if you desire to join the proverbial speakers' list. You will find it located under _reactions_ in Zoom. I will be happy to call on people as they _raise their hands_. - If you are unable or unwilling to hop on the mic, you can drop your comments or questions in chat, and we will address them when conversationally appropriate. - This is an open meeting. We encourage and appreciate your feedback and presence here. If there is something you would like to add, please feel free to voice it. We try to make the process as simple and inclusive as possible. - That, more or less, covers who we are and what we are doing here, so I might as well get started. ## General Updates ### Votes #### Payton Rose *Polls:* - 3 Concluded Weekly Polls - [Add RWA-009 (HVBank) as a new Vault Type](https://vote.makerdao.com/polling/QmQMDasC) -- **Passed** - [PPG - Open Market Committee Proposal](https://vote.makerdao.com/polling/QmefrhsE) -- **Passed** - [Select a Target Level of rNPI Profitability to Guide Budget Cuts](https://vote.makerdao.com/polling/Qmasg6zr) -- _Winning option:_ **Break-even (Plus-minus 5%)** - 2 Concluded Prioritization Polls - [Prioritization Sentiment - Technical Resource Deployment](https://vote.makerdao.com/polling/QmYqBhDx#vote-breakdown) -- _Winning option:_ **Compound D3M, with 72,753 MKR Voting (53.94%)** - [Prioritization Sentiment - Collateral Class](https://vote.makerdao.com/polling/QmdZezCr) -- _Winning option:_ **Core Crypto Collateral, with 69,030 MKR Voting (51.16%)** - Conclusions from the first run - _Reflection post on process to come_ - _Looking to release v2 shortly, potentially ultilizing new options from DUX_ *Executive:* - [Yesterday's Executive](https://vote.makerdao.com/executive/template-executive-vote-core-unit-distributions-recognized-delegate-compensation-keeper-network-stream-setup-july-06-2022) -- _At the moment of writing this summary:_ **Passed on July 06, 2022, 23:32 UTC. Executed on July 08, 2022, 23:38 UTC.** - Payments and Streams for Keeper Networks, Recognized Delegates and Growth, and Strategic Finance CUs - Next week's Executive - Implementation of Keep3r DssVest Stream MOMC Parameter recommendations ### MIPs > [name=Sol Invictus]**Dear Reviewer: my intention with this breakdown of the MIPs section is to keep it as short and simple as possible while containing key information, aiming to declutter the publication. That is why I decided not to include slides today. I hope it is not rude to kindly ask you to keep it as is (if you see fit). I'm also trying a little something new with formatting in this section. Please, bear with me. Thank you for your time and understanding! ♥** #### Pablo [04:55](https://youtu.be/EdmJ1onA-20?t=295) [Weekly MIPs Update #94](https://forum.makerdao.com/t/weekly-mips-update-94/16330) ![Calendar](https://i.imgur.com/y54rF8V.png) > July's format submission window closed yesterday, and we have had only one submission for this Governance Cycle. #### [_**Core Unit Facilitator Onboardings**_:](https://youtu.be/EdmJ1onA-20?t=319) [MIP41c4-SP37: Governance Facilitator Onboarding (GOV-001)](https://forum.makerdao.com/t/mip41c4-sp37-governance-facilitator-onboarding-gov-001/15284) <details> <summary>Summary</summary> _"This sub proposal onboards [@Patrick_J](https://forum.makerdao.com/u/patrick_j) as a Facilitator for the GovAlpha (GOV-001) Core Unit."_ - [Ratification Poll for Governance Facilitator Onboarding GOV-001 (MIP41c4-SP37)](https://vote.makerdao.com/polling/QmY3xqFQ#vote-breakdown) - _Leading option:_ **Yes, with 58,187 MKR supporting.** - _Posted on July 11, 2022, 16:00 UTC - Ends on July 25, 2022, 16:00 UTC._ </details> --- #### [_**Proposals in RFC**_:](https://youtu.be/EdmJ1onA-20?t=330) #### [_**Top-Level MIPs**_:](https://youtu.be/EdmJ1onA-20?t=337) [MIP76: Makershire Redux](https://forum.makerdao.com/t/mip76-makershire-redux/16400/32) <details> <summary>Summary</summary> _"The Maker Protocol holds approximately $5.2B in stablecoins, effectively earning zero yields. Multiple efforts are underway (off-chain and on-chain short-term bonds) to invest the majority of stablecoin exposure. Makershire Redux will be a 10M pool allocated across Liquidity Pools to support DAI liquidity/utility and earn yield."_ > MIP76 was formally introduced as an SPF and was rejected. It is currently being reworked into a top-level MIP that addresses some of its previous iteration's concerns. </details> --- [MIP72: Delegated Collateral Attachment - RWA Arranger Application - 6s Capital ](https://forum.makerdao.com/t/mip72-delegated-collateral-attachment-rwa-arranger-application-6s-capital/14482) <details> <summary>Summary</summary> _"MIP72 formalizes the use of revolving credit agreements by 6s Capital and Wilmington Savings Fund Society ("WSFS"), in its capacity as trustee (the "Trustee") of the RWA Senior Lending Trust, a Delaware Statutory Trust, and its independent trust sponsor to cause a delegated authorization for collateral attachment and credit for real-world onboarding collateral to meet the [Clean Money Initiative 2](https://forum.makerdao.com/t/the-case-for-clean-money/10684), sets forth the scope of lending activity as further outlined herein and names 6s Capital as a Real World Asset Arranger for MakerDAO."_ </details> --- #### [_**SPF**_:](https://youtu.be/EdmJ1onA-20?t=371) [MIP55c3-SP5: Interim Chief Legal Officer](https://forum.makerdao.com/t/mip55c3-sp5-interim-chief-legal-officer/15981) <details> <summary>Summary</summary> _"The MakerDAO Interim Chief Legal Officer Special Purpose Fund will pay legal fees and expenses to retain Kianga Daverington, Esq. through [@DaveringtonPLLC](https://forum.makerdao.com/u/daveringtonpllc) as full-time Interim Chief Legal Officer of MakerDAO for a period of six months."_ </details> --- #### [_**Core Unit Budgets**_:](https://youtu.be/EdmJ1onA-20?t=395) > These budgets are being submitted outside of the budget windows that were introduced with the recent [MIP40](https://forum.makerdao.com/t/amended-mip40-important-information-for-core-units/15450) amendment. This falls under the transitional grace period. [MIP40c3-SP73: Modify Dai Foundation Cure Unit Budget (DAIF-001)](https://forum.makerdao.com/t/mip40c3-sp74-modify-dai-foundation-core-unit-budget-daif-001/16379/4) <details> <summary>Summary</summary> _"This Budget Proposal for DAI expenses aims to fund the activities of the DAIF-001 Core Unit as described in [MIP39c2-SP17 adds Core Unit DAIF-001: Dai Foundation](https://forum.makerdao.com/t/mip39c2-sp17-adds-core-unit-daif-001-dai-foundation/9239). This budget is necessary to fund DAIF-001 activities in its second budget year."_ </details> --- [MIP40c3-SP75: Modify Oracle Core Unit Budget (ORA-001)](https://forum.makerdao.com/t/mip40c3-sp75-modify-oracles-core-unit-budget-ora-001/16397) <details> <summary>Summary</summary> _"MIP40c3-SP75 renews the Oracle Core Unit (ORA-001) budget from July 01, 2022, through June 30, 2023."_ </details> --- #### [_**Core Unit Facilitator Onboarding**_:](https://youtu.be/EdmJ1onA-20?t=424) [MIP41c4-SP38: Immunefi Security Core Unit Facilitator Onboarding (IS-001)](https://forum.makerdao.com/t/mip41c4-sp38-immunefi-security-core-unit-facilitator-onboarding-is-001/16348) <details> <summary>Summary</summary> _"I have worked as Deputy Facilitator for Immunefi Security since its inception on Dec 2021 and, during part of its incubation period under SES, two months prior (Oct and Nov 2021). I have taken charge of the accounting, written status updates, and contributed to our core unit's goals. Our current Facilitator, [@travinimmunefi](https://forum.makerdao.com/u/travinimmunefi), continues to lead with long-term strategic planning but is stretched thin by his many other responsibilities. When Travin has scheduling conflicts, I am asked to attend the weekly Mandated Actor's meeting in his place. This MIP formalizes what is essentially already the status quo."_ </details> --- #### [_**Core Unit Offboarding**_:](https://youtu.be/EdmJ1onA-20?t=444) > We have two proposals aiming to offboard the Events Core Unit. These proposals are to be considered a unity, and if formally submitted, they will bundle into a single ratification poll since these are the two components needed to offboard any given Core Unit. [MIP40c3-SP73: Modify Core Unit Budget (EVENTS-001)](https://forum.makerdao.com/t/mip40c3-sp73-modify-core-unit-budget-events-001/15991) <details> <summary>Summary</summary> _"MIP40c3-SP73 removes all and any active budgets for the Events Core Unit—Dai or MKR."_ </details> --- [MIP41c5-SP8: Facilitator Offboarding (EVENTS-001)](https://forum.makerdao.com/t/mip41c5-sp8-facilitator-offboarding-events-001/15992) <details> <summary>Summary</summary> _"I'm sure these are nice people, but this core unit is not needed, and [severance has been proposed](https://forum.makerdao.com/t/mip40c3-spxx-modify-core-unit-budget-for-events-001/15991)."_ -- @Ippy </details> --- #### [_**Amendments**_:](https://youtu.be/EdmJ1onA-20?t=465) [MIP4c2-SP23: MIP50 Direct Deposit Module Amendment](https://forum.makerdao.com/t/mip4c2-sp23-mip50-direct-deposit-module-amendment/16387) <details> <summary>Summary</summary> _"MIP50 was too specific to lending protocols. I've updated it for the V2 rewrite, which covers all external protocols that allow users to `deposit` / `withdraw` DAI. I've updated the MIP to remove details of the targeting mechanism as that is no longer important."_ </details> --- [MIP4c2-SP21: Add Retrospection Process to prune unused MIPs](https://forum.makerdao.com/t/mip4c2-sp21-add-retrospection-process-to-prune-unused-mips/15142) <details> <summary>Summary</summary> _"Bureaucracy tends to grow without active pruning. The Retrospection Process aims to surface a process to help prune unused or low-utility MIPs. This process also helps introduce and familiarize the broader community with MIPs that continue to be used. This change makes MIP0 depend on MIP4 for the removal process."_ </details> --- [MIP4c2-SP15: Core Unit Offboarding Process Amendments](https://forum.makerdao.com/t/new-mip4c2-sp15-core-unit-offboarding-process-amendments/15291) <details> <summary>Summary</summary> _"The original motivation for this amendment was to simplify and clarify the Core Unit offboarding process. Recent examples (see MKT-001 offboarding: [1 3](https://forum.makerdao.com/t/mip40c3-sp49-modify-core-unit-budget-mkt-001/12059/12), [2 1](https://forum.makerdao.com/t/mip41c5-sp3-facilitator-offboarding-mkt-001/12058/11), [3 1](https://forum.makerdao.com/t/content-production-core-unit-offboarding-post-mortem/13756)) have demonstrated several gaps in this process. Ratifying simple changes started small, and along the way, the ambitions grew into revisions for much of the Core Unit MIP Set. Thanks to generous contributions from GovAlpha, we now have a cohesive MIP Set. The aim is to reduce harm to the DAO and community during Core Unit disruptions."_ </details> --- ### Forum at a Glance #### Artem Gordon Post: [Forum at a Glance: June 30 - July 6, 2022](https://forum.makerdao.com/t/weekly-forum-recap/16247/4) Video: [Forum at a Glance](https://www.youtube.com/watch?v=EdmJ1onA-20&t=526s) - [_**News & Announcements:**_](https://youtu.be/EdmJ1onA-20?t=563) - [Meet the Dai Foundation Board during EthCC](https://forum.makerdao.com/t/meet-the-dai-foundation-board-during-ethcc-5/16290) - [Announcing Maker Risk Dashboard v3](https://forum.makerdao.com/t/announcing-maker-risk-dashboard-v3/16335) - [MakerDAO Actual Expenses vs Budget - May 2022](https://forum.makerdao.com/t/makerdao-actual-expenses-vs-budget-may-2022/16365) - [_**Discussions:**_](https://youtu.be/EdmJ1onA-20?t=661) - [[Informal poll] Disable the Emergency Shutdown Module](https://forum.makerdao.com/t/informal-poll-disable-the-emergency-shutdown-module/16292) - [End-Game Summary - Part 3](https://forum.makerdao.com/t/end-game-summary-part-3/16245) [& Part 4](https://forum.makerdao.com/t/end-game-summary-part-4/16416) - [[Vault-Discussion] NonSC Crypto-Backed Loan Optionality](https://forum.makerdao.com/t/vault-discussion-nonsc-crypto-backed-loan-optionality/16312) ## Discussion ### Rethinking PSM Fees #### Thomas Flitter [13:57](https://youtu.be/EdmJ1onA-20?t=837) - Our discussion topic today is _[Rethinking PSM Fees](https://forum.makerdao.com/t/rethinking-psm-fees/16168)._ - Tim Schuppener--Schuppi--posted this thread on the forum several days ago, sparking a lively discussion. Thus, we asked him and others to talk about his post today. - Tim, if you would, talk to us about this post and your thoughts on the zero PSM Fees. - **Tim:** As a brief introduction, the [PSM](https://makerdao.world/en/learn/governance/module-psm/) is a module that permits anyone to provide USDC and get DAI or any other stablecoin for which we have a PSM, and vice-versa. - From the beginning, we designed the PSM with a fee, both for the in and the out transaction. Half a year ago, we decided to lower the fees to zero, essentially allowing swaps for free. - By that time, the main reason was not the lack of revenue but about being able to enforce something akin to a hard peg for DAI. - Two years ago, we had the issue of DAI not keeping its peg, and since we had a lot more demand than supply of DAI, if we did not utilize a PSM, DAI would have traded above one US Dollar at all times. - Thus, the PSM was a powerful tool for enforcing a hard peg, which was not the original design since Dai was a soft-pegged stablecoin since conception. - The issue we are currently facing is that, over the last few months, the amount of DAI generated by classic vaults--people locking up collateral and then minting DAI--diminished to less than 20%. Ergo, 80% of the DAI in circulation is not backed by any crypto collateral but by people swapping USDC into the PSM and then minting DAI. - We are in a questionable situation. We have a lethal amount of USDC in our books. If something catastrophic were to happen--which we cannot predict--such as black-listing or de-pegging of USDC, we would be doomed. - We turned our backs on the original users of the Maker Protocol: the people locking up collateral in a vault to generate DAI. - There are two cases where you would choose to use classic vaults. - One is leveraging: you bet something you are going to buy with DAI will explode in price, and then you make a profit. - On the other hand, once DAI trades north of the peg, you could arbitrage with what you are minting out of the vaults. - We are in a Bear Market; nobody has an appetite for leverage anymore; nobody uses vaults. And since it is virtually free to swap USDC for DAI and vice-versa, the other reason you would lock up collateral in a vault, arbitraging the de-pegging, is gone. It becomes unreasonable to lock up any collateral or to create DAI to arbitrage in the peg. [18:32](https://youtu.be/EdmJ1onA-20?t=1112) - I have discussed this with a few people, especially with Brian from Protocol Engineering: I have been thinking that maybe we should recreate the incentive for arbitrages by increasing the PSM fee once more. - I did not come up with any specific value yet. I am focused on revisiting the idea of providing an incentive for arbitraging with crypto collateral again. That, more or less, sums up my motivation. That is why I was proposing to discuss this. - I understand that this comes with a series of side effects, and I do not know if we even know all of them. - There are side effects for people who want to do large transactions swapping DAI against USDC since they would not have the guarantee anymore to have a hard peg using the PSM. Or even for people who are using GUNI--was this renamed?--providing liquidity to Uniswap with a 50x leverage. They would probably be affected by that. - The idea of this post was to find out the sentiment and to identify the missing pieces. - The ultimate goal was to start a Signal Request and go through the appropriate Governance circuits to raise the `tin` or get this rejected on-chain. - **Thomas:** Thank you, Tim. Does anyone want to respond to that opening? - **Payton:** I noticed this comment about RWA and large borrowers caring deeply about the one-to-one peg. - One objection to adding fees to the PSM is that, as Schuppi was demonstrating, this means no hard peg. That would be harsh for borrowers who could not depend on a one-to-one peg and would have to do some currency hedging, in addition to whatever setup they create to convert DAI to hard money or spending money. That is one for the _Cons_ list. [22:21](https://youtu.be/EdmJ1onA-20?t=1341) - **Person 1:** I would like to comment on this topic. If the only argument for increasing `tin` is the incentive for crypto vaults to mint more DAI, I think we should evaluate the fact that there is a high chance that they might be indifferent to this change. - During the last year, we tried, with different initiatives, to lower USDC reserves. To my understanding, this was one of the main goals of the whole DAO. - One of those initiatives was to lower stability fees on the vaults, hoping that more demand would arise with a lower price. But, to my knowledge, and from the testimony of the people I talk to, the stability fee has a slim effect on actual demand for leverage. Going from there, I doubt that a slight premium will have a higher impact than the stability fee has. - We introduced the PSM for two reasons: the first being that the traditional soft-peg mechanisms to maintain the peg do not work during large market drawdowns, and there are several reasons why they do not work. - When you have a 40% drop on Bitcoin or ETH, there will not be many people jumping on the train to mint depth and build leverage in such a stage. - The other reason we introduced the PSM is that the vision was that we would grow based on real-world assets because the hard peg is much more relevant for RWA than it is for general crypto back loans. Then, for one year or even more, we tried to lower USDC reserves or diversify them. - Most of these initiatives failed; the philosophy shifted toward achieving returns on our reserves instead of getting rid of them. - If I understand this new philosophy correctly, the strategy is to have as much research as possible. - I think the whole DAO needs to decide on its strategy and only then tweak the PSM and reformulate the mechanisms of DAI as a pegged currency. - Going back to the PSM, I have been thinking that something that might work would be introducing `tin` at a higher level. Let us say _three-ish_ percent. - The PSM would only serve as a hard-peg vehicle in the case of large market drawdowns. In stable market scenarios, the traditional soft peg mechanisms would arbitrage this slight back. - We need to understand that these soft mechanisms will never fixate hard-pegged DAI to one, but with the PSM and high fees, we will still ensure the maximum possible premium. - We could have the security that DAI will not deviate enormously from the peg. At the same time, we can reintroduce traditional MakerDAO soft peg mechanisms, which many participants have enjoyed in the past. [27:41](https://youtu.be/EdmJ1onA-20?t=1661) - **Person 2:** I have heard that Genesis can only do 25 million DAI at a clip. Why would a whale want to use DAI when transferring 100 million or 200 million? - On whale alert, you see BTC and ETH transfers of nine digits. If Genesis could only handle 25,000 DAI, why would anyone want to use it? I think that is the bigger question. - Personally, if I had nine figures ready to move, I would rather do it in DAI than BTC or ETH. Some people might shoot me for saying that, but it is what it is. - That, to me, is the bigger question: how are we affecting the confidence of how to get out? As someone who earns nine figures in DAI, or BTC, maybe I want to go out there and buy myself an American football team, or I might be bored of being in DeFi. If I wanted out and Genesis could only take 25 at a clip, why would I use DAI? - **Payton:** I suspect this might not be an easy question to answer, and maybe I should not ask it. Still, I am curious: in terms of actual revenue impact estimates and usage impact, has anyone looked into how the fees might affect either of those? Of course, we can expect less useful when it's being charged. - **Tim:** I do not have the numbers, but I would not expect any direct effects on the PSM and the fees: we have plenty of liquidity on Curve and Uniswap. - This will be cheaper than exchanging within the PSM, and it would get absorbed earlier. - Although I think this will, to some extent, have a trickle-down effect, I believe that if we were to turn up the `tin` right now, that would not happen immediately. - **Person 1:** I agree with Schuppi: if we increase `tin`, nothing will happen. The back will slightly change. But we will not reduce reserves whatsoever. [31:18](https://youtu.be/EdmJ1onA-20?t=1878) - **Nadia:** Why did you think we have to re-evaluate the PSM fees? Is it because you believe we have accumulated too much USDC? Is it because you think we need to get revenue from said USDC? I want to define the problem to think about the solutions. - **Tim:** My intention is not about the amount of USDC we have right now. Other people are more concerned about this. I am not part of this party. At least not vocal. - My concern is that I do not want the product of Maker, or the pegging of DAI, to be WUSDC with T-bills on top. That is not how I think this should run. - Either we have RWA or a rising amount of DAI created by vaults. It could be institutional vaults or any other type. I do not care. I want DAI to be backed by vaults and not a PSM. That is my main concern. - We have been lowering the stability fees for quite some time. And with every passing month, I feel we are only turning knobs. And it does not have any effect. That is just sad. - I would like to encourage people to use our main product again, vaults, following the _be your bank_ narrative--which I like--. That was what brought me to Maker. Does that help? - **Nadia:** Yes. We should consider the problem before analyzing a solution: there might be other alternatives. - If you do not want Maker to invest the PSM on T-bills--I believe Maker holders do want that; I don't know if that passed--, we have to point in that direction. - **Tim:** This is not a black and white thing. I dislike the idea of having T-bills, but it is inevitable. We need to do that to survive. It is the proper way of dealing with the current situation, but in an ideal scenario, we would not need to do that. If all the PSMs drain, there would be no plan for investing in T-bills. - I put up this post to discuss what is happening. If somebody has a better idea than raising that, I am happy to hear it. - I do not want to complain about _"Oh, we have too much USDC in the PSM, yadda yadda, yadda."_ You need to come up with a proposal to do something, even if it is not the best. - **Person 2:** If you want to attract DAI-vault users, go out there and get them. You got to get out there, close deals, and attract new users. There is no other way around it. - Increasing the `tin` 10, 20, or 30 basis points will not get you more users. The only way to get users is to go out there, be innovative, bring institutional vaults, etcetera. That is the drill. There is only one way to grow a protocol: you need to nurture the network effect that will build it. - Again: it is not by increasing 10, 20, or 30 basis points and being here, arguing until we are blue in the face about _USDC and too much in the PSM,_ etcetera. That is my opinion. That is how things get done: you close deals. - **Tim:** Sorry, I cannot do that. [35:33](https://youtu.be/EdmJ1onA-20?t=2133) - **Brian:** The point of a permissionless system is not to have too close deals; it is to provide the right solutions so that people will want to use our product. I am going to quote Thomas Sowell and say that _"Many of today's problems are a result of yesterday's solutions."_ - 85% of DAI backing being USDC _is_ a problem. Typically, we have this trifecta where we can optimize for DAI users, MKR holders, or vault holders. - Throughout this process, we have been optimizing for DAI users and neglecting vault holders. We are also adding this fourth leg to the problem: we are optimizing for RWA, which we do not have many of, and all our revenue comes from vaults. - As a vault holder, if I want to generate DAI from a vault, I would put my collateral in and pull the DAI out. And I am, at this point, effectively losing money on DAI because I have to pay gas fees, etcetera. We have stripped every incentive for a vault holder to take DAI against their collateral by not allowing it to float in the market. - I am not sold on the fact that vault holders are concerned about a strict one-to-one peg because I know I am not, and I am not even sure why RWA holders would be even if there is a 1% `tin` on the PSM. That does not mean that DAI is equal to a Dollar one. It can trade between a Dollar and a Dollar in other markets. - We have Uniswap, Curve, and other places where we have rugged all of that range for trading. - We have stunted liquidity pool growth and the ability for vault holders to at least recoup some of their gas costs on DAI generation, and we have eaten the whole market for DAI trade. That is long-term harmful to DAI. - I want to make that point: we talk about how vault holders do not wish DAI to be off-peg, but I do not see how that does not come out as a wash in the end. - If you borrow 100 million DAI and you can sell them on the market, maybe not through the PSM, but on the open market for a Dollar one, and then you have to buy them for a Dollar one when you come back to repay your vault, it is a net wash. - We are trying to optimize for something that does not seem to be an issue. Setting the fees to zero was the no pain option: _no pain, no gain._ - We have eaten the entire market, and that causes predictable downstream problems that we are dealing with now, to the point where we are talking about off-chain assets, which is entirely antithetical to the spirit of DeFi. [39:20](https://youtu.be/EdmJ1onA-20?t=2360) - Nadia Alvarez: We have two different problems or challenges. One is that I advocate maintaining Dai at one dollar because this is not just an RWAs problem. It is a real-world problem. If people think they are getting the stablecoin pegged to the dollar, they expect one Dai to be one dollar. They do not understand what a decentralized stablecoin is. It will be way harder to explain what is a soft peg stablecoin. Probably if they can understand that, they will prefer another stablecoin better than Dai because they never know what will happen with Dai. It will be unpredictable. If Dai is not at one, it will affect only those RWA and any Dai user. I wrote that in the post. I tried to pay any service provider in Dai because it is easy for me to demonstrate that one Dai is one dollar. If exchanges on/off-ramps want to have Dai on their inventory, they must buy large amounts of Dai. And if it increases in value to the exchanges, they will increase the value to retail. It will not just affect RWA or big borrowers. It will affect retail. Maybe we will go back to the vault users, but we will forget about the Dai users. And we have to maintain middle ground between both. [41:25](https://youtu.be/EdmJ1onA-20?t=2485) - Brian McMichael: I think that was my point. We have got that trifecta. And we have been over-optimizing for Dai holders for way too long. So Dai has value because vault holders are over-collateralized. At some point, they want to buy back Dai to repay their vaults to recover their over-collateralized assets. Dai has its demand built-in with its incentive structure in the system. We are in the market trying to further incentivize Dai beyond that. But we are not doing anything to stimulate supply. And in fact, I would argue that the PSM being at zero is discouraging additional supply for this pain-free option of not trying to induce vault generation of Dai. [42:13](https://youtu.be/EdmJ1onA-20?t=2533) - Nadia Alvarez: Do you think that it is possible to think of other options to incentivize vault usage? For example, if we think about a vault where you lock ETH, we can use that ETH to do something else. Maybe that is not technically possible. But maybe that is a feature that will be interesting to people. Perhaps we are focusing the conversation on the PSM, but the real problem is how we can incentivize the usage of the vault. So one thing that I agree with Monet is that vault users love predictability. If we can tell them okay, we will keep these fees until the end of the year. That is something for them. That is a lot for them. They will appreciate that even more than maybe if Dai will go to 1.01 or maybe not, you do not know. You will have to be prepared, just in case. Predictability is gold for people wanting to open a vault. It would be great if we could think of different solutions to incentivize the Maker vaults' usage and analyze all the solutions from a technical perspective. And also, what will be the impact on Dai users and vault users. And stop thinking just about the PSM? Think about more ideas. [43:53](https://youtu.be/EdmJ1onA-20?t=2633) - Brian McMichael: In an ideal situation, we would have some asset inversely correlated to Ethereum or Bitcoin that people could speculate on the short side. We do not have that, though. We have the stables, which are the intermediate play. - I want to get back to the point that if we raise the PSM fees, even 1%, that is not saying that Dai will be a dollar one in the market. It opens the window so the market can trade between the dollar and the dollar cent. It means that vault holders may have to go out and sell their Dai on an open market to get a rate they like. But it also means that we would be guaranteeing that in a Dai liquidity crisis if the markets are collapsing and vault holders need to repay their Dai, we can guarantee a dollar one. But for anything outside that, we would let the market take care of it instead of trying to be the market for them. - Person 1: Do you think Dai could function without PSM? - Brian McMichael: Dai functioned without the PSM. SAI functioned its entire lifecycle without a PSM and traded under peg the whole time. Dai did not start trading above peg until the bull market. We have internal debates on whether this actual market cycle is over. But at some point, Dai will start trading under-market as people are exiting crypto, trying to get back to dollars in their Trefi accounts. Because that happens, it is titled. In that case, Dai will be under all of these plans to take this USDC off-chain and put them in bonds will be dashed because we will have to pull them back on-chain to pay these redemptions out. We should encourage vault demand as sticky users generate revenue for the protocol because we have taken this easy route of just hard-locking through the PSM. And we have got this huge supply, which is a great vanity metric. But it is going to disappear. And we will not have anything to show for it when it is all over. [46:25](https://youtu.be/EdmJ1onA-20?t=2785) - Nadia Alvarez: Based on the experience of the major whales using the protocol, they will use the PSM. For them, it is important that one to one between Dai. - Brian McMichael: That is the point. Why aren't they using vaults? How do we get them to use vaults? - Nadia Alvarez: I mean, the whales using Maker vaults. So the main ones using it are the ETH and WBTC vaults. After they get Dai, they convert it to USDC. - Brian McMichael: There is a little disconnect here between saying that one-to-one is necessary, but how strict does this one-to-one be? Let us say the third place after the comma shifts a little or the second even? How are you seeing this affecting the demand for Dai? Is this like a no go? How tight does the peg have to be, in your opinion? Is it okay if the second point after the comma shifts by one or two? Or do you think this will already scare people away? How tight does it have to be? [48:02](https://youtu.be/EdmJ1onA-20?t=2882) - Person 1: In my opinion, a 3% deviation is completely okay, especially if you consider that the majority of the world is who not domestically using USD is using USD crypto. For example, I am European and am okay with the dollar deviating from Euro. So I am not that hurt if my stablecoin will slightly deviate also. - Payton Rose: It also probably matters what your view is and when your projected use for Dai is. - Bourbon and all of us are asking about the basis points fee for flash minting. It all depends on the use case you see and what you add in. But ultimately, 100 basis points, which would be two decimal points over, is a lot—even 50 basis points. If you start to do larger transactions, it creates quite a bit of a fee and friction. So it all depends. - Person 1: We cannot decide if we do not have strong models about how this affects the whole system. We could run this experiment, right? It would be okay to say we are introducing that for a month or a week. And then see what happens. And maybe, as Schuppi said, nothing happens, and it is okay. [50:06](https://youtu.be/EdmJ1onA-20?t=3006) - Nadia Alvarez: I want to answer one of the things that Chris said growth is incentivized to keep a hard peg. We are not. I am telling all of you the consequences of having a soft peg. This will affect on/off ramps. This will affect retail people buying Dai because they consider it a stablecoin. This will affect the whales opening Maker vaults because they get Dai and convert it to USDC. If we want to go in the direction of Dai soft peg because the white paper stated that we could go there, and we, growth, will support that. But we must all be aware that it will not be a stablecoin. It will be something else. Because for people's mindset, stablecoin equals something that is a hard peg. You can explain to them, but they will always prefer a stablecoin that is a hard peg, that is, high liquidity, that they can convert into fiat. If we change the direction, growth will change the audience, the message, and all of that. We are not incentivized to go in that direction, but we must tell the community about the consequences and what will happen if we decide to do that. - Chris Blec: Of course, growth is incentivized to keep the hard peg, as is RWA and some other CUs. I am not saying that as an aspersion. I am saying that as a fact of the way the organization is built. We need to recognize that each team has incentives that it is driven toward because each team wants to be successful. That is not a bad thing. That is why we have the CUs. It is to separate our responsibilities and goals, and objectives. Everybody wants Maker to succeed. But everybody also wants to be successful. And if there is not a hard peg, growth becomes harder. It becomes harder to grow. We might even shrink. The growth team does not want us to shrink. The growth team wants us to grow. I am not saying that the growth team should advocate for a soft peg and hope we do not grow. That is not the role of growth. It is important in these conversations to recognize each team's objectives and how they are incentivized. It is not a bad thing. Do not take it as bad as in aspersion. It is just the way the organization should be set up. That is what I mean when I am talking about incentives. - Payton Rose: It is valuable to reflect on incentives. It is also something Nadia said that if the CU's mandate is to promote what the protocol goes with. And if the protocol decides they do not want to value a peg, then the CU would be shifting as well. - There is some interesting side-chat going on about flexibility. Chris chimed in and said 3% is not that bad. I do not know if there are more combos that we could be having there. I am noticing much chat about how necessary one-to-one is. [54:57](https://youtu.be/EdmJ1onA-20?t=3297) - Brian McMichael: I want to point out that Dai has no value other than what someone will pay for it. And the reason that someone pays for it is to unlock the collateral in their vaults. RWA, their net sellers, until such point, want to rebuy and repay Dai, that is over a longer period. They are not incentivized to repay in a downturn. They can possibly set limit orders to rebuy from other RW buyers in the future and get that $1 price. We are over-optimizing for a thing that we should not be over-optimizing for and losing all of our revenue because of it. - ElPro: Let us not forget that some more RWA platforms are looking to get some of the RWA collateral types on-chain. Let us give them a little bit of credit. In my opinion, without MakerDAO, RWAs will get on chain. It is a matter of whether we want it. How badly do we want it? And if we're going to make it happen. Let's opt out if we do not want to make it happen. But to Nick's point on the chat, we spent many years, many resources, or much money to try to get there. It will happen. [56:43](https://youtu.be/EdmJ1onA-20?t=3403) - Max: I joined this conversation late. I am trying to make sense of why the RWA lending is seen as not profitable. Or why is RWA controversial as it relates to this peg conversation? - Brian McMichael: With the collateral vaults, I put in $150 worth of ETH, and I can take out $100 worth of Dai. At some point, I will want my ETH back because the ETH price is falling, and I want to stop the hemorrhaging. Or, because the ETH price has gone up, I want to repay and unlock that $150 worth of collateral at the time. Like current schemes, RWA providers set a two-year interest rate buffer on those. So these RWA providers do not even have a Dai demand for another two years. Even then, I am not convinced that we have got enforcement of these repayment schemes worked out to such a point that they will create enough Dai demand to keep the peg from going low. - Person 1: Let me talk about enforcement schemes. In the proposed Huntingdon Valley Bank deal, which is up for vote right now, a Delaware Statutory Trust funded by a vault set up by Maker would then purchase assets. These loans would then be in custody at the Delaware trust, and they would have a duration of fewer than five years, and over the course of those five years, they would pay that principal and interest. - If that makes sense. And then the principal and interest. The principal is the principal, and interest is floating at a rate above benchmarks, so probably four and a half percent right now. [59:17](https://youtu.be/EdmJ1onA-20?t=3557) - Payton Rose: Correct me if I am wrong, but the fear and the criticism are not so much like, what if there are no assets, right? The question is, what are those assets doing to the peg? And do they encourage Dai to be bought back? - Brian McMichael: An arbitrageur can play both sides. They can effectively market-make as long as a market is to be made. But we do not have that. So we are on the market with a PSM fee of zero. We tamped down one ecosystem component, the arbitrage market, by setting the PSM fees to zero. As you mentioned, the point about the RWA is that these repayment schemes are not set to happen for another couple of years. In the meantime, we still need to spark Dai demand so that we can keep taking on these RWA deals and let them continue to sell their Dai for some USDC dollars, equivalent to the nominal value of the Dai they take out. But we can only do that for so long until there is no more demand for Dai. With the normal collateral vaults, the arbitragers would pick that up and add to or repay vaults as the price fluctuates. But because we are the whole market for that. I should point out that we are not making any money by being that market Maker. It is unclear that we have been cultivating the arbitrage ecosystem that would manage the peg over the long term without the demand to repay. - Person 2: What I see is that, in the PSM, Maker is holding many billions of USDC. I do not know if it is five billion or something. And that is effectively five billion of the runway, where you can increase the supply of Dai through the RWA program. And the broker-dealer who will swap that Dai for dollars is probably going to route through the PSM, swap Dai for USDC through the PSM reduce and draw down the USDC in the PSM, which is good for MakerDAO. Then whatever window at Circle is used to swap USDC for dollars will do that and then fund the trust. So it not only generates a yield for Maker but also addresses another problem in this system: concentration and collateralization with zero yield stablecoins like USDC. - Brian McMichael: To be clear, when an RWA provider takes a 500 million Dai loan and they push it into the PSM, they are burning Dai to decrease the supply. - Chris: Brian, quick question for you. If the PSM was never implemented back in, I think it was 2020. How much Dai outstanding do we have right now without the PSM? - Brian McMichael: The quote-unquote scale is not what I am concerned about. I am concerned about the stability of the system. And the long-term sustainable growth and security of the system. We have this existential 85% USDC right now, which is not sustainable. It is a vanity metric that will disappear if Dai demand starts to dry up. I hear many comparisons to Rai, and we will be like Rai. I like Rai. It has got its problems, though. Namely, it is a fork. The founders are a little bit different. It has got a weird peg mechanism. They are just things that you cannot compare to Dai. - Person 3: If during the RWA process, the broker-dealer gets Dai from the vaults, from the MIP 21, sends it to the PSM, and effectively burns Dai but gets back USDC, drawing it out of Maker and using it to create new collateral that is going to back MakerDAO. How is that not a great flow and beneficial? I am asking because I want to understand where the challenge is here. And again, I entered the conversation late. - Brian McMichael: It works until it does not. Many people in this chat had come in since 2020 when Dai started trading above peg, and they did not see the process that the DAO went through before that, just trying to keep the peg up. At one point, we had 20% stability fees on collateral vaults to try and hold that peg up. And we will be back to that, and all of that USDC in the PSM will be gone, but we will be dealing with a completely different problem that could be solved by encouraging vault holders. [1:05:21](https://youtu.be/EdmJ1onA-20?t=3921) - It is an interesting conversation. One point I want to make is that at this point, there are about five times as much as canonical Dai as crypto Dai. So it is about five billion versus one billion. Right now, canonical Dai is making no money, but it is starting to get put into treasury assets, where you would hope you could, on aggregate, 1% on that five billion. Assuming you get this up and going, it will probably make more money than the crypto Dai. I like crypto Dai. But let us be honest, folks, the rates have come way down. It is a pretty commoditized product, just lending. There is no moat there. In the long term, I look at canonical Dai and think this is the North Star. This has network effects. You can build payment rails. You can have massive integrations in the real world. People in Argentina with inflation want to use it. And then I look at crypto Dai. I like it, but it is low. It is a relatively low volume, low margin business, and we should always have it there. But I do not see it as a North Star. People race to scale it is just another product among many. As opposed to having a stablecoin that lots of folks want to use at scale is something else entirely, something more special. When I look at canonical Dai, I say: “That is something special. That scales”. And that can have much more impact on the 400 trillion dollars RWA. - Eric Rapp: I would follow up. Again, suppose folks tend to agree that canonical Dai is an important part of our ecosystem. In that case, we need to think more carefully about what the canonical Dai holders want and their interests? To their five billion out there, they deserve weighting in our considerations around fees, asset stability, and peg stability. That is our biggest product user. And I feel we do not give them enough weight and enough seriousness. And hopefully, by doing this right, in a couple of years, it could be 50 billion, but you got to take those guys very seriously and meet their needs. [1:08:55](https://youtu.be/EdmJ1onA-20?t=4135) - Kianga Daverington: Maybe if we have time to talk about the Constitution, I am curious what people are thinking about that. And to Eric's point about taking the views of other stakeholders in the whole ecosystem, this was a great conversation. What should be our takeaway from this, to act on what we discussed? We have raised some new angles to consider very urgently. Is the Constitution a process that can help this community sort through where we land on this or not? That would be my question, if it is okay to segue to that topic, not to cut off this conversation. - Payton Rose: This had come up in several long version proposals when we spoke about vision, organizational goals, or anything that you would think of as commonly agreed upon. The only way you can do that in a DAO is to have a document you agree on and agree not to change it or change it if a very strict consensus is reached. - With the Maker Constitution, is this something we could see helpful for settling ideological debates like this? Is this practical for a DAO that can have many different parties with different motivations. That is what a Constitution is. And, is it something that can be useful for us? It is the exploration question. - Chris: I would encourage anybody interested in this to check out the MakerDAO White Paper. Because if you want a Constitution, it seems like a great place to start. I know that is why I am here. And I know why a lot of early investors are here. If we want to change that, that should be a DAO-wide conversation. [1:12:07](https://youtu.be/EdmJ1onA-20?t=4327) - Payton Rose: Certainly, anyone could vote for a MIP that is the MakerDAO Constitution. Procedurally, it would not be hard to do but is that a worthwhile endeavor? And even the white paper, if you take the view that that was the Constitution, how many things from the white paper are no longer true and are no longer in our business model? Is that something that should be revisited and revamped? Is it worth releasing a white paper 2.0? - Person 1: First, my slight comment is that tackling the white paper or the Constitution is a very valid thing to do because it is the root of all these discussions and questions we have at the moment. Do we focus on RWA? Do we not? How much on-chain versus off-chain should we be? How much of an investment vehicle credit facility are we? Where do we sit on this scale on the table? It is very difficult to answer. But we have to answer that otherwise, we will be in this perpetual: how much should we be leaning in this direction or not? We have to accept which way we are going. Much of that comes from a document, a vision, a mission; what is it we are here to do, type of thing, which seems to be where this constitution discussion is going. So it is a discussion to have, and hopefully, that will help answer where we need to focus, which feels like a lot of the challenges we are focusing on that we are talking through at the moment. The question is, how, if we do want to do it, the white paper is a great starting point for that discussion because it is what we have now. It is why we started on this journey. How much does it change? Who changes it? How is the discussion? What is the process for having that conversation? We must arrive at a group with those decisions to facilitate the discussion. Not quite sure how we go about it, but there has to be again some owner or someone to pick up the reins and at least put it forward to the community for discussion and debate, which is where we are now, but it does not have an owner or someone to hold the reins. We have seen different groups: the growth group and Rune's group. We are all trying to get to the same place in the end. We do not quite know the journey there—just some thoughts. - Chris: From a political perspective, a constitution exists within a democratic system to define some processes and protect minority rights. And, as Ben Franklin said, democracy is two wolves and a sheep deciding what to have for dinner. The Constitution is what would protect minority stakeholders from plans that would fleece them effectively. And if you want a robust community, you need to be able to protect those smallholders. Otherwise, it will just be the plutocrats running the show. Give the little guy something to grab on to. And if you do not want to do that, that is fine, too. Just vote on it. And we can all move on to something else. [1:16:14](https://youtu.be/EdmJ1onA-20?t=4574) - Payton Rose: Noting the time here. This is obviously like a broader conversation. I think we had it as a backup. We were not sure how much the first one would go. But yeah, this is a common problem now. And naming matters a lot. Whether you call it a constitution, vision statement, or something else, you do not mean to imply that constitution is more necessary than any other. [1:17:48](https://youtu.be/EdmJ1onA-20?t=4668) - Bourbon: There have been many talks about the ESM. And this sort of a minority thing. Does anyone know what its original intent was? We have two people involved in building it, but we have been moving it out of the way. I believe it was not put there by accident. If we are going to remove it or not, what is in place of it, I really would like to because I do not know in which case it might get triggered. I do not see it as an attack vector. There are edge cases where it could be exploited; borrowing Maker, maybe shorting Dai. It was put there for a reason, but I do not fully understand which case it might ever be triggered. And before we rush to get rid of that, that is the minority holder protection that we had. Does anyone truly understand what purpose it was there for and what its original intent was? - Person 4: From what I have heard from many discussions, especially Rune, he was very concerned about corruption and collusion. And the idea was what would happen if, for example, significant Maker holders got it together. And basically, they can do what they want, and the status quo does not change. His idea was that there should be a way for even minority holders to challenge the protocol and rechange that. Realistically, we have realized that even if they tried to burn it and trigger it, the majority can just say it is new and inappropriate for no cost. At least in terms of philosophy, that was the thinking. But others can chip in their versions. - Bourbon: Was it the ESM Rune's or Nikolai's idea? I do not remember whose idea it was. If it concerns corruption, and minority holders having a chance to shut down the protocol, it is still necessary. If enough holders gain control, I do not know. I struggled to see who would voluntarily torch their Maker rather than sell it just for the system's good. I still struggle to see it as an attack vector. It is an obscure one. It should be higher than any one person in some drunken state can trigger on their own. But purely as they borrow the Maker and shorted attack. That one is quite hard to execute. If you can predict which way the peg will go and short that, then, as Bourbon said, you can profit quite well. But you are not with certainty. You are spending much capital to execute this attack, and you are not 100% sure Dai will break the peg in the direction you want it to, probably down. If we get targeted by a state actor at this point, I do not think we stand a chance anywhere. Right? But whether the ESM in its current implementation is the right forum, but some sort of thing like that. - Payton Rose: We have a few ESM threads going on the forum. I would encourage you to continue the conversation there. - Noting the time here. I want to be respectful of everyone. We should think about wrapping it up. Are there any last questions or comments we wanted to include in this call? All right, cool. ## Conclusion ### Payton Rose - I appreciate the discussion. It is nice to get so many different voices weighing in. Hopefully, we will have more issue discussion calls and other things we can use to funnel these specific conversations and debates. We appreciate all the ground we covered today. We will be back same time, the same place next week. See you in the forums. Have a good one, everyone. [Suggestion Box](https://app.suggestionox.com/r/GovCallQs) ## Credits - Constanza produced this summary. - Kunfu Po produced this summary. - Larry Wu produced this summary. - Everyone who spoke and presented on the call.