How to Destroy MakerDAO
There’s really only 2 instances where MakerDAO can fail:
- ‘Dummies’ getting hold of 51% of the Governance Tokens and making really bad decisions that lead to a Shutdown of the System. Someone ‘spinning up the system’ again is not guaranteed after the 1st Shutdown.
- Being Exposed to a Massive Black-Swan Event + a $T ‘Peg-Attack’ by a Bank, at the same time, TWICE.
(A Third Option is also present, but there are already some pre-built defenses against it.)
3rd Option: An entity (person/bank) buys up 51% of the Governance Tokens and controls what Proposals are voted in. (The Thinking is that they would try to vote in bad proposals that Ruin the System.)
Defenses:
- There is an implemented Security Delay (Default: 24 hrs) for the Maker System to implement new Proposals. If a Global Settler sees a ‘Harmful’ Proposal has been Approved through Governance Voting, an Emergency Stop can be issued to protect everybody before the ‘Harmful’ Proposal goes into affect.
- And yes, that Security Delay can be changed by the Bad Governance Voter that has 51% of the Tokens. But again, if a Global Settler sees an ‘Unreasonably Low’ Security Delay has been Approved through Governance Voting, an Emergency Stop can be issued to protect everybody before the ‘Unreasonably Low’ Security Delay goes into affect.
Pretty good defenses!
Here’s a Pretty Good Explanation for #1 (‘Dummies’):
‘Dummies’ in this context means: “Someone who doesn’t spend the time to understand the Stablecoin System and all the things they need to vote for, nor whether or not they are voting for the things that help keep the System healthy.”
And since these types of Stablecoins have associated Governance Tokens, everyone who owns the Governance Token has a vote, even the ‘Dummies’.
/Begin/
I heard the assertion that because of the possibility of Global Settlement, MKR tokens will gradually accrue to better and better ‘MKR Governance voters’ over time. I do not buy this. I don’t buy it because over time the “Avg % Understanding of the MakerDAO System by those who hold MKR tokens” will continue to decrease.
- When the MakerDAO project was launched, and only the main team members held MKR tokens, “Avg % Understanding of the MakerDAO System by those who hold MKR tokens” equaled 100%.
- As early adopters heard of the project and became educated in the project they were allowed to buy some MKR tokens and the “Avg % Understanding of the MakerDAO System by those who hold MKR tokens” slipped to 99%.
- As more and more people joined the community and became educated on MKR and bought MKR, “Avg % Understanding of the MakerDAO System by those who hold MKR tokens” slipped again to 90%.
- As a ton more people joined crypto and found MKR, “Avg % Understanding of the MakerDAO System by those who hold MKR tokens” slipped again to 80%.
- As more and more people continue to hear of MKR, “Avg % Understanding of the MakerDAO System by those who hold MKR tokens” continues to fall to 75%.
- Into the future as it becomes easier and easier to buy MKR (maybe it’s added to Bittrex or Bitfinex or Binance) the “Avg % Understanding of the MakerDAO System by those who hold MKR tokens” will decrease rapidly to 50%.
- Along with more people buying MKR at a faster pace, the subreddit Community will begin to grow at a much faster pace as well. r/MakerDAO currently has 4.5k subs. r/Omise_Go has 37.5k subs. I joined the OMG sub over a year ago when it was at 3k subs, and it’s where I have spent my most time on Reddit. I have seen that as the size of the Community has 12x’d, the amount of negativity, vitriol, emotion, and FUD has increased dramatically. I expect the MakerDAO communities to follow this path as well. This will further depress “Avg % Understanding of the MakerDAO System by those who hold MKR tokens” to 25%.
For these above reasons, I believe it will actually be more and more ‘Dummies’ buying into the MKR Ecosystem into the future, not more and more ‘Smart MKR Governance Voters’.
A valid counter-argument could be: “Well as more time passes, the people who bought MKR earlier have educated themselves more and more about the MakerDAO system, so the increase in ‘Avg % Understanding of the MakerDAO System by those who hold MKR tokens’ over time will outweigh the decrease in ‘Avg % Understanding of the MakerDAO System by those who hold MKR tokens’ that the Dummies bring in”.
My counter-argument to that counter-argument is: “The rate at which Dummies buy in and decrease the ‘Avg % Understanding of the MakerDAO System by those who hold MKR tokens’ will always be greater than the rate at which old MKR holders educate themselves more to increase ‘Avg % Understanding of the MakerDAO System by those who hold MKR tokens’.
More simply: There’s more dumb money out there to buy into MKR, than there is time for older MKR holders to educate themselves more thoroughly on the Maker System.”
/End/
As a Result, we should see the Graph of “Avg % Understanding of the Stablecoin System by those who hold the Governance Tokens” vs. Time look something like this. (With maybe a slightly different slope/coefficient for how fast the Dummies join the Network):
There is a High “Avg % Understanding of the Stablecoin System” at the beginning when there are a few early adopters holding most of the Governance Tokens, followed by a steady decline in “Avg % Understanding of the Stablecoin System”.
This steady decline comes from price change of the Governance Token over time.
As the price changes (hopefully, appreciates!), the Early Adopters sell their Governance Tokens to Later Adopters.
These Later Adopters don’t understand the System as well as the Early Adopters (because they literally had to be part of the MakerDAO Community for a while before the Maker Foundation would even sell any MKR to them), and as a result, “Avg % Understanding of the Stablecoin System” slowly decreases every time these trades happen.
If the Governance Token appreciates very quickly, a lot of ‘Moon Bois’ will quickly join in as Governance Token Holders, leading “Avg % Understanding of the Stablecoin System” to rapidly fall.
The Moon Bois don’t know anything about the system, nor care to learn anything about the System. They saw a FOMO Price Graph and wanted in on the Pump.
And so for every Early Investor selling to a Later Investor/Moon Boi, you’re adding someone to the Ecosystem with <50% “Avg % Understanding of the Stablecoin System”, and removing someone with 90%+ “Avg % Understanding of the Stablecoin System”.
That’s Double Bad because it will lead to ‘Dummies’ eventually having the most voting power in the system.
And the reason this leads to the System failing is because it becomes all the ‘Dummies’ who are voting on Risk Profiles for Tokens, for who are the Global Settlers, for how long the Delay is before a New Proposal can go into Effect, etc….all the things that need to be ‘Governed’ to make the System run smoothly.
And they’re ‘Dummies’ so they will be making poor decisions on these issues that will lead to the System Failing and Users losing Trust in the System.
Something interesting about #2 (Being Exposed to a Massive Black-Swan Event + a $T ‘Peg-Attack’ by a Bank, at the same time, TWICE) is it ONLY works when all parts of the Statement are TRUE.
It is an AND Statement.
A $T ‘Peg-Attack’ with no accompanying Black Swan Event will just lead to an Emergency Stop, and all Dai Holders will be fulfilled with their $1 of Backing Collateral.
No ‘Trust’ in the System will be lost (although there will be fewer users for a short while after the System boots up again).
IF you can make Massive-Black Swan Event be TRUE + $T ‘Peg-Attack’ by a Bank be TRUE then you may be able to make some headway in Destroying Users’ ‘Trust’ in the MakerDAO System.
It’s going to be very Difficult, though.
Since Dai will be backed by ‘Sufficiently Diversified’ Collateral (Cryptocurrencies, Digital Fiat Currencies, Tokenized Real Estate, Tokenized Equity, Tokenized Bonds), one has to wait for a Black Swan Event that Crushes all 5 of those Categories at the same time.
I think the 2008 Crash would definitely had put a dent in all of those Categories.
But you have to wait for another 2008 crash. It could be tomorrow or in 100 years, nobody knows.
The Goal with waiting for the crash is to have the value of Collateral drop lower than the amount of Dai Outstanding and do a $T peg-attack right then (before MKR can be inflated and sold to Recapitalize the System), so that an Emergency Stop is initiated and Dai holders are reimbursed $0.95 or $0.40 or $0.10 for each Dai they have.
That will make people scratch their heads and say: “Hey I thought I would always get $1 in Collateral for my Dai at the time of Global Settlement”.
THAT will make Users lose Trust in the System…which is your Goal if you want to Destroy MakerDAO.
BUT there is a caveat….if you want to go through with #2 you have to have the Black Swan Event + $T ‘Peg-Attack’ TWICE.
With NuBits, we saw that the Community did not fully lose faith until after the 2nd Peg Break.
This means you’ll have to wait for TWO 2008 Crashes to happen pretty close in time for Users to completely lose Trust in the MakerDAO System.
That Probability is nearly 0.
For these reasons, I think #1 (‘Dummies’) is many, many times more likely to happen than #2 (Being Exposed to a Massive Black-Swan Event + a $T ‘Peg-Attack’ by a Bank, at the same time, TWICE), so if you’re a Bank your best bet is to probably just wait for the ‘Dummies’ to take over.
[Rune Christensen, Richard Brown, David Utrobin, Scott Herren, u/EmergentCThaeh, u/svantetobias, u/directdirt, and hinder+equivrel+cyrus.younessi+kluge from chat.makerdao.com helped me understand MakerDAO by answering my Qs in this Document.]
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