MakerDAO Governance Risk Framework (Part 1)

MakerDAO
MakerDAO
Jul 10, 2018 · 14 min read

Introduction

Whether vilified as a protagonist of the robber barons, the architect of the ‘money trust’, or lauded as the savior of the financial system and the creator of the federal reserve — one cannot deny the basis of J.P. Morgan’s claim; character and trust are the basis for all transactions. In stark contrast to that bygone time, the financial system has evolved through ever-growing notions of character and trust, and at present has landed on a new manifestation of its meaning in the form of the blockchain.

Trust and the Stablecoin

Stablecoins are tokens that attempt to create money using a mechanism that purposefully weights the transactional value over the commodity value of the token, resulting in a token that is more like the fiat currencies that we all understand today.

  • Seigniorage Shares
  • Collateralized

Collateralized StableCoin — Dai

Maker contends that users should place their trust in the value proposition of the blockchain. If a user is on the blockchain, by default, there is a certain level of trust already employed. Instead of trusting in an off-chain mechanism, or concentrating that trust into one organization on-chain, it seems natural to bring the stablecoin to where the trust already is — decentralized, and on the blockchain.

Collateralized Debt Position — the Engine of Supply

As mentioned, a CDP is a smart contract designed with the purposes of minimizing credit risk using collateralization as well as supplying Dai to the Ethereum economy. So what is credit risk and why do we need collateralization?

Governance and Decentralized Risk Management

The Goal of Governance for Risk

The goal of governance is to establish the most effective way to protect the integrity and stability of the Maker system. We achieve that goal by creating a decentralized, open scientific risk management community. A community that will make clear arguments and apply competing models to assess and manage the risks underlying the system. The community will initially be guided by the foundation, but eventually be lead by a multitude of risk teams that are formally elected by MKR vote, and independent risk researchers contributing on a volunteer basis.

Forming a Decentralized Risk Management Function

The vision is that we will arrive at a point where the community will rigorously debate a potential risk construct applicable to the system. This debate will be scientific and evidenced by competing risk constructs put forward by established or contending risk teams. That is, a risk team could challenge the current construct in place by way of introducing a new construct for consideration. The acceptance of the new construct will attract an initial weighting, a weighting that will determine how that construct will contribute to the overall risk function.

Risk Teams and Their Contributions

As we move towards a more decentralized risk function, risk teams that are approved by Maker token holders will have their risk constructs included in the system. The output of these risk constructs will consist of assessments and risk parameters for the system. Risk constructs may differ concerning what kinds of evaluations and risk parameters they output, or, on what kind of tokens they produce this output. Further, hybrids may arise where a risk construct only provides a subset of risk parameters for specific tokens (e.g., only produce qualitative assessments on asset-backed tokens). Another permutation is that a risk construct from one risk team may produce output that is used by another risk team.

Outline of the Governance Mechanism

The governance mechanism will have two groups of functionality. The first is proactive and the second is reactive. Proactive governance includes debate, resolution and automated implementation. Reactive governance contains procedural intervention.

The First Risk Construct

How do we start the decentralized risk management function? The risk function will begin with the internal risk team of the Maker Foundation. This team will serve two purposes, to create the first risk construct and to serve as a reference and template for future risk teams. The idea is to outsource risk management to the decentralized function and for the internal team to become a meta-function that guides the format and process in which constructs are created, considered and included.

Conclusion

In this first part of the series on the Governance Risk Framework, we considered where Dai fits into the suite of stablecoins in the industry. We further outlined the function of supplying Dai and focused on the salient risks of this process. Importantly, we described the intended decentralized risk management function that will be in place to manage these risks. Including an initial outline of where Maker token holders fit in and the types of decisions required.

MakerDAO

Stability for the blockchain @ MakerDAO.com

MakerDAO

Written by

MakerDAO

Stability for the blockchain @ MakerDAO.com

MakerDAO

MakerDAO

Stability for the blockchain @ MakerDAO.com