How Does MakerDao’s Proposed 20% Charitable Giving Principle Make Sense?

EDIT: This is now outdated. The 20% principle was voted out of the Foundation Proposal that was eventually passed. I will keep this piece up as a bit of MakerDAO history.

After much anticipation from the community, the Maker Foundation put out a post called the Foundation Proposal. The article briefly covers several areas of prime importance to the Maker Community such as the goal of scientific governance, the 20% Principle, sustainable finance, gradual decentralization, the role of the Maker Foundation in fostering Dai adoption, and information about the first official MKR vote; which will be held on August 22nd, 2018(EDIT: Foundation Proposal Vote was moved to September 12, also the proposal was changed to exclude the 20% principle).

In this piece I will zoom in on the newest piece of the puzzle — MakerDAO’s initiative to match 20% of the fees burned in the Dai Credit System(DCS), and making those funds available as a decentralized public charity fund, which MKR token holders will control through their votes.

First, I will explain what the 20% Principle is, and then I will dive into some of the community’s concerns regarding the political implications of such an initiative. My rebuttals to community concerns will reflect my own views, and will contain some insights which were initially shared by Rune Christensen, the CEO of the Maker Foundation, during the first community call regarding the proposal.

I fully expect members of the community to take what I’ve written, as well as what was said by Rune and other community members regarding these issues, and to discuss whether we are in line with reasonable thinking. In the spirit of intellectual honesty, you should ask yourself, are there flaws in these points? Are there details which were overlooked? What are the blind spots, if any? If you think there are, please share your thoughts. This is the only way we can grow in our discussions surrounding these fascinating topics. I hope, as a reader, you are encouraged to participate in this discussion since it addresses two of the most interesting areas of thought in the crypto-ecosystem — decentralized governance and decentralized giving.

The Idea Explained

Currently, as Collateralized Debt Positions(CDPs) are closed or partially wiped, a governance fee of 0.5% APR is paid on all outstanding CDP debt (ie: all Dai in circulation). The Maker Foundation wants to put up 20% of the total MKR supply out of their Dev Fund to continuously finance a charitable utility fund which will be controlled by MKR token holders. As written in the Proposal, “The 20% principle will be funded in a sustainable manner that ensures the charitable transactions always remain at exactly 20% of the system’s fees minus expenses.”

Here’s a quick example of what this means:
If you have $1,000 of outstanding debt, and you pay it in full exactly 1 year later it would look like this:

To further illustrate the point, when the system burns $1,000,000 in governance fees, the Maker Foundation will have allocated approximately $200,000 of their own money into the charitable utility fund. For the life of the system this 20% match will be collected out of the 200,000 MKR set aside from the Dev Fund for the purpose of altruistically giving it out to the world — a form of decentralized charity.

The Maker Foundation (as of July 18th, 2018) owns 33.17% of all MKR, or exactly 331,772.229 MKR in their Dev Fund (Etherscan wallet address). This fund is dedicated to the development and adoption of Dai, which of course includes the funding of the operations of the Maker Foundation itself. Notably, the Maker Foundation intends to reduce their influence and control over the system as time goes on, including their use and control of the Dev Fund.

An Abundance Mentality

Although it wasn’t explicitly written into the proposal, this idea of an abundance mentality was shared by Rune in the community call (minute 11:20). I find this very important, as it refers to the idea that, for a group of people who are doing financially well and overflowing with surplus, it’s healthy to have a mentality of abundance, rather than a mentality of “it’s not enough”. Greed causes poor and short-term decision making, which is not a characteristic we want in a typical MKR voter. In essence, the core value is to be generous rather than greedy. This idea captures the spirit of the Maker Foundation’s 20% Principle, as well as the desired ethos for the growing voter community.

As a part of the governance philosophy, this desire to operate with an abundance mentality is meant to shape the voter culture to fit what would be best for the long-term success of the system. Implementing a layer for charitable giving, as well as promoting an ethos of selflessness, generosity, and abundance will attract better voters as well as mitigate the cultural risk of greed.

What will these funds be used for?

The Foundation Proposal mentions that the fund is meant to fuel the hyper-growth of Dai as an engine of (financial) equality to the world. Unsurprisingly, there is still an ethos of splitting away from the control of the world’s traditional system of finance. The Maker Foundation’s philosophy still strongly endorses economic freedom for the world, allowing unbanked and under-banked populations to have access to the world economy. However, if you listened to the meeting you will also know that Maker strongly supports the need to work with governments and regulators to ensure that Dai and the MakerDao platform spreads into the world with the least amount of friction possible. In fact, one of the main synergies of the 20% Principle is that it could give regulators and governments a positive outlook on MakerDAO. We align, in principle, with them because we are after the public good and are willing to be good financial citizens. Rune talks about this around minute 32:30 in the first community discussion surrounding the proposal.

As we think about the possible beneficiaries of such a fund, here is an example of who or what might be worth considering:

Eventually all proposals will have to go through a decision making framework to determine if they meet the criteria for being nominated to receive from the 20% utility fund. A larger conversation on this topic will take place over the coming years. In line with the proposal’s point of gradual decentralization, the proposal explains that, “Distribution of charitable funds will be managed through a process similar to the Governance Framework. The Maker Foundation will initially lead the community by presenting the best choices available, but over time the process will become decentralized, and completely controlled by the community through a framework that is based on data-driven impact analysis.”

In the first public discussion regarding the foundation proposal, Rune briefly went over some of the main drivers of the 20% principle — Grouping them into internal and external benefits.

Internal Benefits

(that positively affect the community who runs the system)

• Reinforces a voter culture of selflessness, generosity, being mindful about voting, and having an abundance mentality.
• Has the potential to create a positive cycle; the better the system does, the more money will be available to give away. Increased success creates increased giving.
• Prevents tragedy of the commons by attracting voters who are less likely to vote based on short-term gains rather than long-term planning.
• Acts as a mechanism for self-selection where those who do not believe in charity will be more likely to forego investment in MKR.
• Reduces the exposure of the MakerDao Foundation by reducing how much MKR they control.
• Reinforces the mentality that a balanced approach to public good is healthy for society.

External Benefits

(that positively effect image and adoption)

• Giving away 20% shows that Maker is ultimately mindful of the public good.
• Giving fuels adoption; giving out Dai is more effective than posting ads and hoping people use Dai.
• Good for brand image in general, and makes the DCS look positive to world regulators.
• Increases the effective distribution of Dai — getting it into the hands of people who need it most.
• Currently the DCS doesn’t pay any taxes, and some form of tax can be expected from a profitable system such as this. Usually the average corporate tax rate is around 20%, deeming the 20% charitable giving principle as a well balanced approach.

The Political Issue

Political tendencies are often hard to write about, because one must be careful not to insert their own bias into the conversation. Anything I am writing here is general, and typically deals with what is considered stereo-typically leftist or stereo-typically rightist. I think that on the whole, most people can sympathize with both the left as well as the right, and that extremists are the minority outliers that cause the most noise and concern. Moderates seem to be the quiet majority.

As polarizing as politics can become, it’s reasonable to raise concerns over MakerDao’s 20% Principle. Questioning it is exactly the spirit of the DAO, and the reason why this proposal was released.

Some great questions came up in response to the 20% principle in regards to politics:

• Is using capital for public good inherently leftist?
• How does MakerDao stay above the fray, remaining politically fair and above reproach?
• Is it possible to be fully neutral?
• Is it wrong for the Maker foundation to push their beliefs onto their DAO’s voter culture?
• Is Maker spreading ideology?
• What does the passage “ensuring Dai becomes a global engine for equality” mean?
• “long-term societal, environmental, and sustainability impact into account.”, is this section politically or ideologically charged? If so is it unreasonable?

There were many questions about this topic, phrased in a variety of ways, so I chose the few that I felt broadly covered the community’s concerns. Shortly after the proposal was released, there was a discussion meeting which was open to the public. As one of the main thought leaders behind MakerDao, Rune Christensen came on to address some of the communities questions. The hour long meeting did not cover everything, but it did go over some of the questions I mentioned above. It’s clear that the political aspect of the 20% principle needs to be better understood by the community. There were many great insights, and I have tried to capture them alongside my own views in the way I’ve written my answers below.

Before we focus on each individual question, it’s important to note that not being charitable is an act of omission, which could still be criticized under a political lens. Regardless of whether MakerDao does a public utility fund or not, either path risks political scrutiny. I think the main issue was not the existence of such a fund itself, but rather the core values that the Maker foundation will attempt to align it with.

Is using capital for public good inherently leftist?

From the outset, Rune suggests that charity is not inherently politically polarizing — in the sense that the absence of charity is about as political as the presence of charity. What makes charitable giving more political depends on the context. There has always been charitable giving from both the left and the right, albeit for different reasons and motives. Both sides participate in giving capital over for public benefit. In fact, the debate has never been “should I give?”, but rather “for what purpose do I give?” Giving is a medium, and the spectrum for reasons to give is too large to simplify fit into left versus right.

The main point of this question is to examine whether ‘public good’ is a left or right concept. I argue that it’s neither. That both sides desire the public good, but differ in their understanding of what ‘public good’ is, and how it should be funded.

How does MakerDao stay above the fray, remaining politically fair and above reproach?

Since the money will be coming out of the Maker Foundation’s own pocket, it’s technically a private voluntary gift by the foundation to the public. Actual MKR holders don’t lose out if the Maker Foundation decides to do this. There is no “tax” being enforced on the system, but rather an ‘angel fund’ is being allocated out of the Maker Foundation’s own coffers.

Another key point which helps MakerDao stay above reproach is the proposed core value of scientific governance. The goal is to always aim at the most reasonable, objectively driven path. This philosophy upholds the integrity of the foundation in the face of political criticisms, since the decisions will aim to be unbiased and data driven.

Lastly, Maker stays above reproach by the fact that this is the 20% principle, not the 40% principle or the 60% principle. When crossing over into extremes like that, criticisms of being leftist start to become more valid. As mentioned earlier, 20% is a well-balanced number in terms of the political spectrum. It is in line with organizational norms, and what would be considered appropriate by the entire political spectrum, barring extremists.

Is it possible to be fully neutral?

No matter what there will always be groups of people who will criticize any organization for being either too leftist, too rightist, or too something-else. It’s my hope that these public discussions and constant reminders of what the Maker community is all about will reinforce the fact that the philosophy does not aim to be political; but rather, it aims to provide a reasonable level of public utility out of an overabundance of resources, in a completely voluntary, transparent, and wholesome way. The goal should not be political neutrality, but rather intellectual honesty.

The truth is that giving money always has the potential for both positive and negative effects. In considering who we grant money to, it will be important for there to be mechanisms in place which will evaluate the political impacts of our giving. Eventually, as frameworks are developed to create a decentralized version of recipient selection, maintenance, and other necessary functions, the Maker Foundation will become gradually less dominant in the giving initiatives that MKR token holders vote on. The foundation’s goal is to promote a way of approaching any decision in a balanced and transparent way that takes into account all the risks the consequences of our actions.

Is it wrong for the Maker foundation to push their beliefs onto their DAO’s voter culture?

One obstacle when considering the feasibility of decentralized governance is the quality of the voters. Generally speaking, if there is no leadership to shape a common culture surrounding a DAO then the community will fail to develop as quickly as it needs to, if at all. Additionally, it would lack or be dis-unified in it’s goals and values. If you invite the public to vote without direction, you are gambling with the actors and values that will make up your governance system.

While the community is still in its earliest stages, the foundation’s guidance of the governance philosophy is very important for the long term success of MakerDAO. Having a dis-unified or severely polarized voter culture is very dangerous for the long-term health of the system and it’s inevitable societal impact. There should always be debate within the voting community, but the values underlying these debates should be agreed upon and shared. So the answer to the question is no, it’s not wrong. In fact, I argue that it’s necessary.

It’s also worth examining exactly what beliefs the Maker Foundation has been putting forth. Although there is no direct mission statement, in my reading of Maker Foundation’s publications, comments from people within the foundation, as well as my listening to countless interviews and podcasts, it seems like the main focus has been to support financial inclusion, economic equality of opportunity, objective and data-driven decision making, intellectual honesty of ideas, decentralization, transparency, and mindfulness. In my view, you should be for all of these things regardless of political orientation. Maker’s balanced and politically agnostic approach seems right to me. Especially since they invite public opposition and discussion at every step.

Is Maker spreading ideology?

Before I answer this, it’s important to note that the word “Ideology” has gained a bad reputation. It seems like all the world’s problems stem, in one way or another, from ideologies. An ideology is a shared value system. Shared is the crucial word. Ideologies can be a set of loose principles, or they can be a rigorous structure of values intertwined with cultural rules and consequences. They can be violent or gentle, ignorant or intellectually honest, inclusive or exclusive, and so on. The point is that there are good ideologies, and bad ideologies.

Is Maker spreading ideology? Absolutely. Is that a bad thing? Well, no, It’s not. If a positive and healthy ideology isn’t espoused, then there is a higher risk that an unhealthy ideology will creep into the community. Our goal is consensus, therefore it’s important to establish our values from the start, which is why MakerDao’s first vote is so monumental. It sets the stage for what the community decides it should value.

When forming a community there are two ways to spread ideology. To enforce it, or to allow the community to consider it. When ideology is enforced it usually becomes a problem or a crutch. When it’s put at the forefront for consideration, it allows the public to do what they decide is best — which fuels an organic culture. Afterall, we have the choice to vote against these initial principles if we see fit.

Overall, I don’t think the negative connotation of “spreading ideology” is deserved by the Foundation. They are putting forth what they consider the best set of values for a system like MakerDAO to run in a healthy and sustainable way. MakerDAO is an experiment, there has never been an entity like it. It is our duty, as a community, to approach it in the most careful, gradual, and balanced way.

What does the passage “ensuring Dai becomes a global engine for equality” mean?

Equality has become a buzzword of sorts. It can mean different things to different people, and I think this snippet should have been more clearly explained in the proposal. Based off of overall communications from the Maker Foundation, I believe what was meant by this passage was ‘economic equality of access.’ Social equality and political equality, for example, cross into the path of more subjective and jurisdictional political activism. Equality on a global scale, as affected by Maker, will primarily aim to affect populations that were previously stifled by lack of infrastructure and connection to the world’s traditional finance system. All in all, if you’re for financial inclusion then you shouldn’t be too worried about this statement. Although clarity about that particular sentence would be good, are there other types of equality that Dai is meant to be an engine for?

Is the passage below politically or ideologically charged? If so is it unreasonable?

“The makeup of the Dai collateral portfolio can have a significant impact on global capital allocation. It is therefore crucial that governance of the collateral portfolio take long-term societal, environmental, and sustainability impact into account.”

Disclaimer, I’m not an economist. However, I will do what I can to make sense of this passage. Since the MakerDao platform is in the business of issuing and removing Dai from circulation, this creates an interesting economic consequence. For any collateral accepted in the system, it reduces capital costs for the owners of said collateral, and potentially the underlying industry as a whole.

For example, I want to start a crypto-mining operation. My current net worth is 97% invested into crypto, so I don’t have enough cash to start. Since I don’t have the cash up-front, I need to find a way to get it. Assuming one of my assets is Ethereum, the capital cost for me is 0.5% APR on any loan amount, courtesy of MakerDao. In the grand scheme of things, this is extremely inexpensive. The cost of capital varies a lot across different scenarios. Home mortgages, for example, cost homeowners around 4% on average. A cash advance on a personal credit card could cost you over 20% APR, that’s a 20% capital cost! It’s important to realize that the DCS will be able to provide far more efficient capital costs to any asset we decide to accept as collateral, and it’s underlying industry.

What does this mean for us? As MakerDao scales we need to assume that we will have an enormous net economic impact on any asset class we decide to use in the system. Our choice of collateral, and the parameters governing it, will boost those industries because of cheaper capital costs. Going back to the passage from the Foundation Proposal, it makes sense for voters to take into account the long-term impact of our decisions. If we begin accepting oil based securities as collateral, we will be reducing their industries capital costs, granting them an advantage against their clean-energy competitors. The sustainable energy industry would suffer because they did not reap the same advantage as the oil industry. Being mindful of these kinds of economic effects should be a part of the community’s governance philosophy because these types of decisions will have real world consequences. If we want to see MakerDao foster economic stability we must hold long-term societal, environmental, and sustainability impact into account. Calling to do so is less about politics, and more about preserving and helping to craft our world’s future. The passage is filled with an ideology that prioritizes long-term health over short term profit — that doesn’t seem unreasonable to me at all.

Summary

As I’ve written earlier, there is rich discussion and debate happening around the Maker Foundation Proposal. This post only covered a few of the questions that have been raised. But the main point I’m driving at is that the political aspect of this initiative is unavoidable, and the decisions we make as voters should not come from the place of, “what is my own political orientation”, but rather they should always try to balance objective data and the consequences of our actions. It is clear to me that the proposal stands for an approach that always aims to be politically unbiased and data-driven.

In my opinion, the benefit of the 20% Principle far outweighs any concerns of political liability. MakerDao is more than a system that produces profit. It is an engine that will one day be a major pillar of financial infrastructure. The voluntary nature of this fund shows the character of the Maker Foundation in wanting to fuel adoption, while deleveraging itself by reducing their holdings of the total supply. Ultimately, there will be ongoing debate about the types of beneficiaries, how to measure the effectiveness of our giving, how the framework should be developed, the obstacles, and so much more. But step one is establishing our community’s core values.

I encourage anyone who is interested in MakerDao, and the public dialogue surrounding decentralized governance and giving, to join the discussion on Reddit at r/MakerDao, come talk in the MakerDAO rocket chat, or join us for the upcoming meetings on Google Meets where you can chat with members of the team and discuss your questions and concerns in real time.