A week is a long time in politics, as the U.K. government is currently experiencing.
The same can be said about the recent drama, division and lobbying that gripped Ethereum’s pioneering decentralized money layer, MakerDAO.
A series of proposals that prompted the most voting ever by the Maker community was probably also the most meaningful clash – both in terms of ideology and institutional participation – in the history of any decentralized autonomous organization (DAO).
Read more: What Is a DAO?
The big picture is that MakerDAO stands at a crossroads concerning how its overcollateralized stablecoin, DAI, should be governed in the future. That future state may be uncertain, but there’s no question about the importance of a trustless, battle-tested system such as Maker, particularly now, as people bang the drum for decentralized finance (DeFi) and pile censure on opaque and centralized lending platforms.
It’s not the first time MakerDAO has been divided and embroiled in governance drama. In this most recent instance, however, a key area of focus was the debate over Maker’s Lending Oversight Core Unit (known as LOVE), which began its voting process on June 13. This unit successfully lobbied a cluster of venture capital firm investors, such as Andreessen Horowitz (a16z), Paradigm and BlockTower, to use their combined Maker governance token (MKR) holdings to vote in favor of LOVE’s continued existence.
The LOVE unit, charged with advising on the onboarding of real-world borrowers and new types of collateral, was narrowly defeated just over a week ago, thanks to the considerable voting power of MakerDAO creator Rune Christensen plus others from the protocol’s founding team.
Nearly one-third of all MKR in circulation (around 294,000, or approximately $300 million) participated in the ratification of LOVE. The top three "yes" votes were said to be VC whales, or large holders, a16z, Paradigm and ParaFi, according to one DeFi researcher. On the side of "no," which eventually won with around 60%, founder Christensen holds around 79,000 MKR.
In some corners of the Maker community, this battle has been portrayed as a bunch of bloodsucking VCs ganging up and attempting a carefully orchestrated coup – comparable to a company’s hostile takeover – bravely offset by Maker’s founding fathers, and an overall win for decentralization.
But that’s a woefully simplistic view, which belies the nuance surrounding Maker’s history of governance dilemmas and the complicated question of who’s really in charge at the end of the day.
Read more: Making MakerDAO Matter Again
For Luca Prosperi, the proponent and outgoing lead at the LOVE unit, a pressing concern for the community must be how Maker founder Christensen and certain other members of the founding team could outvote the combined mass of VC firms invested in the platform. This means Maker is a de facto company controlled by a group of connected parties that operates through a somewhat redundant decentralization layer, says Prosperi.
“There is nothing bad in it, but we should call a company what it is,” Prosperi said in an interview. “We shouldn’t call it a community or a decentralized organization that has different voices; we should call it a corporation that has a CEO and has controlling shareholders. And given this, the CEO and effectively controlling parties should take full operational and legal responsibility when they call the shots, which means that maybe it should be regulated, maybe even incorporated – you cannot have it both ways.”
An important event in the lead-up to all this relates to a proposal made earlier this year to bring an SME loans platform called Monetalis into the Maker fold, with Maker as sole backer. Christensen and other founding members and large holders were lead investors in Monetalis, a fact that caused controversy within the community.
The move to onboard Monetalis was opposed by token holders, a position that followed a vocal negative opinion given by Prosperi, a finance professional with 20 years of experience working for firms like Morgan Stanley (MS). As such, Prosperi talks straight when it comes to assessing the caliber of those participants being invited onto the platform.
“There were businesses coming in with proposals to actively manage $500 million or $1 billion with zero experience and zero skin in the game, as well as zero track record, which I found to be frankly substandard,” said Prosperi.
The broader problem that Prosperi calls out is that leadership of the crypto and DeFi community is very immature with little to no experience in traditional financial markets. “You have young engineers who became billionaires in their 20s,” he said. “But credit is a zero-sum game and not the space for centralized and inexperienced teams with crazily aggressive plans anymore. We should have learned it by now. We need to step up our game with good checks and balances, as well as more engagement from institutions and, inevitably, regulators.”
Maker founder Christensen called the recent close-run votes and the involvement of VCs “a big political awakening” and said that ultimately it’s a good thing that groups with different perspectives want to make decisions about the direction of the DAO because the “status quo was kind of chaos.”
Christensen, who acknowledges his investment in Monetalis could be viewed as a conflict of interest, also says he’s in favor of a sturdy core unit overseeing lending, for example. His problem is a change of direction whereby core units are getting involved in governance decisions, something that should remain the purview of the token holders.
“Basically, my position is that core units should be neutral,” Christensen said in an interview, adding that he detects a fundamental change in direction to empower “managers” to run Maker as if it were a business. “I think there’s still hope to do decentralized organizations without having to resort to hierarchy, without managers and executives in charge of a kind of coordinated responsibility for the DAO,” he said.
Make Maker great again
None of the VCs who voted to defend the lending oversight committee chose to comment on what exactly invigorated them to rally together. A representative from Andreessen Horowitz pointed to the forum comment of Porter Smith, a deal partner on the a16z crypto team, which praised the LOVE unit’s credit-risk framework for onboarding real-world assets.
But MakerDAO researcher Mika Honkasalo believes timing has a lot to do with what activated the VCs. This is a very important moment in Maker’s history, Honkasalo said, citing the blowups and balance sheet hits happening to centralized crypto firms right now.
“In a bull market, VCs are maybe more focused on other things, but now it’s a bear market and they’re thinking about their investments. Stablecoins are the biggest use case in crypto and this is the number one attempt to do it in a decentralized fashion. They can see this is a great opportunity; that’s why they invested in the first place.”
‘Company run by politics’
These types of divisive moments in MakerDAO’s history have been labeled “governance drama,” Christensen said, and are generally viewed as temporary growing pains with the expectation that “eventually everyone will come together and be totally objective and the whole thing will just run like a computer program.”
However, Christensen has become convinced the reality is the DAO is heading in the opposite direction, which prompted his complex “Endgame Plan,” part of which includes an attempt to organize token holders into “Decentralized Voter Committees” designed to align MKR holders to some degree and address a lack of clarity about what they want. It will also set up a framework to incentivize more widespread governance participation by distributing DAO token rewards to users who get involved in decision-making processes.
“What we are seeing is the true face of what a DAO actually is,” Christensen said. “It’s like a company run by politics, almost. Of course, it’s not a real company. But that’s what you get if you don’t have a leader; something that’s more like a parliament. Except there isn’t even a precedent for anything like that.”