NOTE: These are personal views and interpretations from working closely with Maker over the past many months with Monetalis as an Arranger for Maker in integrating its balance sheet with TradFi instruments and structures.
Let’s start with my opinion: certainly not insane and certainly necessary - more likely brilliant - and perhaps - just perhaps - insanely brilliant if crypto actually becomes deeply integrated with the traditional financial collateral-based systems over the coming years and execution of the Endgame is done to a reasonably high standard.
Short-form history of foundation to DAO transformation & the build-up of issues
MakerDAO is one of the OG’s of the crypto-world and grew on a simple and elegant business model, very well executed: DAI issued on over-collateralized, locked-in, crypto-collateral - and mechanisms (automated collateral liquidation, key stablecoin swaps, buffer capital etc) to aid in retaining a tight soft-peg of DAI to USD. And an equally simple mechanism for value capture by the governance token (MKR) via a surplus burn.
When MakerDAO closed down its foundation and became a pure DAO, it inherited what seemed a strong business with solid long-term prospects from just executing on the already set out well-performing business model. This is where the story should end “...and MakerDAO lived happily ever after” - but it didn’t.
Firstly, the primary long-term fuel of the business model is an ever increasing amount and classes of well-behaved on-chain collateral. Collateral that you can reasonably lock-in, easily liquidate, risk evaluate and create price boundaries around - and thus safely allow DAI to be issued upon. No material pure on-chain collateral assets beyond Eth and BtC has appeared - and meaningful tokenization of traditional financial collateral and assets is only now at the cusp of a potential “early-adopter phase” with entrepreneurs and large financial institutions making attempts at issuances - and local regulators making attempts to find a reasonable regulation for such tokenisation efforts.
As this primary leg of the business suffered and withered, an unintended leg grew instead around fundamentally swapping USDC for DAI. The USDC 1:1 DAI swap mechanism was supposed to be a safety valve for quickly fixing DAI peg instabilities, but instead it became the single largest component of the MakerDAO balance sheet. It made no real money to MakerDAO and it distorted the original business model. DAI as a permissionless stablecoin derivative of permissioned stablecoins, for obvious reasons, clearly is not a stable, productive, long-term strategy.
Monetalis job (and many others) have for the past many month been to try and turn this stablecoin part of the balance sheet into yield-bearing, liquid, traditional financial instruments, yet ensure control reasonably remains with MakerDAO and that on/off-ramps remain wide open such that MakerDAO’s balance-sheet remain flexible and liquid. We have largely accomplished this, but I can safely say from first hand experience, that the current implementations are not an efficient or effective long-term solution. Tokenization of traditional financial instruments in jurisdictions that have gotten the regulation reasonably right and have an industry collaborative approach will highly likely become the primary solution within 12 months is my bet for collateral. And fundamentally allow MakerDAO a return to the original business model - which you may find, indeed, is what the Endgame ultimately is there to achieve.
Secondly, the DAO governance and CU structure horribly failed in ensuring efficient allocation of capital and human resources, effective organisational coordination, attracting and compensating high-performance human resources with relevant competences, demanding and ensuring performance delivery, and providing clarity of direction.
The initial design of this structure for MakerDAO I will have to characterise as a very beautiful thought and theory, but wholly impractical and impossible as a means of propelling MakerDAO productively forward. I don’t want to go into details about the reasons for the failings as it is quite a deep discussion and worthy of a separate piece at some point.
I also don’t want you to get me wrong: MakerDAO did attract more than its fair share of political animals, megalomaniacs, loudmouths, wannabe anarchists, budget hogs, and nincompoops. But it did also attract some great people - often from rather unique backgrounds - with good intentions, great work ethics, strong sense of morals, and focused on delivering value to MakerDAO - and truly trying to find a productive way forward for MakerDAO and developing a strong and thriving MakerDAO community. These are, in fact, the essential seeds of making the Endgame work in my view.
Lastly, regulation and regulators are coming down on crypto like a ton of bricks. Accelerated and heavier than ever expected, because of a long list of blown-up crypto businesses you all know very well and so I won’t repeat. This caused (and continues to cause) confusion and indecision in a place like MakerDAO, because what can a DAO do legally speaking? What is DAI in legal terms? How can it be promoted? What is the governance token? How can it be used? What about people working with a DAO? Etc etc. Nobody wants to get caught on the wrong side of the regulators at the current moment for sure.
So…something drastic had to happen...the status quo could not continue.
Endgame & how it resets strategy and organisation
And that’s why the Endgame was evolved over many months from an enormous amount of input and refinements by many community members of MakerDAO. I hear often that Maker Endgame is very complex and confusing, but if you think about it a bit, you can draw simple direct lines from the issues I list out above and onto the actual practical implementation and ambitions of the Maker Endgame. And suddenly you may find it not being too complex, strange or crazy in its essence. It is largely just getting rid of the issues identified and setting Maker up for competing in the market as it is changing. Making sure that Maker catches the “next bounce of the ball” in crypto and traditional finance market integration and transition.
I would characterise the ambitions of the Endgame as simple as set out in these 3 strategic elementals:
Return to original base business model, restructured for entrepreneurs and given freedom to develop within a hard, core, risk frame
Collateral-based liquid lending will, without doubt, be a principal elemental in any future blockchain-based financial system - and the principal fuel source hereof (tokenization) is finally on a growth trajectory.
Maker doubles down on this positioning in the Endgame plans via the seeding of SubDAO’s (initially 4, but with many more to come) called AllocatorDAO’s with the ability to lock-in collateral and issue DAI. Each of these SubDAO’s can develop independent entrepreneurial businesses that can specialise on different collateral, asset, geography classes and develop their own criteria and mechanisms for issuing DAI on these chosen collateral. SubDAO’s are financially motivated by a revenue share from their collateral/DAI issuance business. The hope is that this SubDAO/AllocatorDAO structure will allow entrepreneurs to thrive within the Maker environment and allow the “Collateral Lending House of Maker” to reach much further and more successfully into all the collateral classes that will be tokenized over the coming years.
For this to work, of course, the key is to establish a very strong and clear risk and monitoring framework for what SubDAO’s can/cannot do, what to provide, what capital buffers to retain etc. To make sure that across all SubDAO’s, DAI issued remains a strong general currency with strong collateral backing.
Given this works out as expected, Maker is in an enviable position to take serious advantage of the great variety and scale of asset tokenization happening today in the market. MakerDAO would have a real chance to become the principal nexus on-chain for turning collateral into liquidity in a safe manner.
You might think of this as sort of a parallel to how large scale investment managers seed and risk manage new investment strategies in new asset classes and new investment teams - and ultimately build an ever larger investment house brick-by-brick this way.
But - obviously - the hard, core, risk frame and monitoring needs to be right and strong - or it will be a house built of straw rather than bricks.
You will see a substantive effort within Maker dedicated to ensuring this is the case: rules and frameworks are being developed (required stress test, require capital, collateral risk evaluation criteria etc etc) external advisors with relevant ALM experience being brought in to aid in design and to sit on permanent monitoring councils - and independent monitoring apparatus being put in place.
Overall, in my view, all the right noises are coming from Maker in respect of actually truly designing and operating the right kind of risk framework. In short, I think there is a good chance Maker will be building a “nexus house of collateral-liquidity” with bricks - not straw.Fix governance and put politics where it rightly should be
A lot is done in the Endgame to fix this. I won’t get into the details of the specific mechanism, but explain a few key points of what is being achieved that I find important:
The split between Maker Core and independent SubDAO’s is probably the most important change. We have already discussed the merits of SubDAO’s to harness entrepreneurship and growth, but the fact that Maker Core is circled and its scope narrowed has many productive qualities. When first the narrow perimeter of the core is settled and its engagement with SubDAO’s set out to work via high-quality frameworks and competent councils, we have a much more calm and slower moving version of MakerDAO (the speed and adjustments should sit in the SubDAO’s).
This makes MakerDAO core fit much better with a political process, that should be slow moving and should be guided towards carefully improving on SubDAO “legislation”/frameworks and the “public administration”/councils - rather than reaching into day-to-day subject matters that is best handled by SubDAO’s closer to the coalface.
This makes sense to me. This seems to be the right place for Governance Token holder decision-making and debate and community hearings etc.
To make this political process even better something akin to a party system have also been put in place and compensation for contribution to this process have increased to ensure high-quality efforts are put in.
I imagine this Maker Core Governance Token level policy making process will become even better over time, but I sense that for certain we already have improvements from the structural changes above - and so I am quite confident this governance situation will also reach a productive state that supports the business model above.Navigate the global regulatory environment such that MakerDAO and DAI can persist in the long-term
You would be surprised by how much activity and resources, in fact, are being put into this issue.
Given the Maker ambition of taking up the role as the global nexus for collateral-liquidity transformation on-chain, and much new collateral will be in a regulated format, there is a need for finding a neutral Maker global legal position that global regulators can feel comfortable about - and that such a neutral position does mean accepting certain responsibilities in respect of protecting the world from “bad actor money flows” - no real freedom comes in truth without responsibilities attached - want to be treated like an adult you must act like one etc.
I think there is a broad understanding within the Maker protocols political environment of these realities, and solutions and positions are actively being pursued.
I also have to think there is a global neutral position for a responsibly acting DAO as such a collateral-liquidity nexus to be found - and that finding this position is a multi-year journey. And that Maker is starting to be very well equipped to successfully reach a productive end of such a journey.
Obviously if I don’t see Maker efforts sustained to get through this journey, my vote on the Maker Endgame might quickly start moving from “brilliant” to “just insane”.
To complete the picture of this transformation I think I need to mention a two related areas where big changes are happening - but in both cases they are, in my view, purely support vehicles to ensure the changes above moves ahead with appropriate motivations and vigour:
Tokenomics changes to match strategy
New tokens, and new value streams into, and between, these tokens are being implemented. These are necessary changes to ensure financial value incentives flow and motivate for the desired behaviour that would underpin the “3 point” strategy above. I foresee that this piece will require some adjustment over time - which is fine - that is what the political process above should be able to appropriately and conscientiously take care of.
It is important not to overplay this dimension of change - it plays a minor role in the grand scheme of things, and only has value in as much as it ensures the strategy plays out strongly, and fair financial motivation flows to those who participate in making this Maker nexus strategic positioning happening. It will have to be rebalanced over time.Resource Allocation/Investments to kickstart the change
Larger DAI and MKR budgets are being allocated to allow the change to take place and ensure it to take hold. This makes good sense to me. Again this should only play a short-term role, and yes, there is probably going to be some “slack”/overpaying - but there always is in transitions, so I am less worried about that.
Worth mentioning, here at the end, is that all this is being done on a proper viking “burn the ships on the shore” basis - i.e. with no going back possible. Gives me a sense of Maker being truly dedicated to making this change happen.
So Maker Endgame is neither the End of Maker nor a Game. It is a well-thought out strategy and approach to kicking Maker back into gear as one of the most central DeFi tools and protocols in crypto.
So what matters now, to me, is that this change is well-executed. What is well-executed you may rightly ask? It is a bit like the pornography definition - can’t really be well defined in simple words, but one is pretty sure one knows what it is when one sees it. I have developed a short list of things I will personally be looking for in the Endgame that will give me cause for concern. Things that I think, if not caught and corrected, could jeopardise the strategy implementation.
Well-Executed? Tell-tales of the Endgame process going off the rails
These are categorised under each of the 3 strategic pillars - and are only the most basic ones. I suggest you can come up with many more you would want to look for (and you may easily disagree with mine!) :
Return to original base business model, restructured for entrepreneurs and given freedom to develop within a hard, core, risk frame
AllocatorDAO’s allowed to take on collateral risks that are not on market terms, not documented, not as well risk managed as market would, and not conservatively aligned with a reasonable Maker ALM framework expectation etc - means the risk framework is not working and, most importantly, means that the AllocatorDAO is not setting the right standard of requirement to their ecosystem advisors (...and could blow up the protocol from bad collateral at this initial stage so I cannot emphasise tracking this tell tale sign enough).
AllocatorDAO’s not ensuring their advisors have sufficient long-term experience and track-record with the advised collateral risks - means the drive for competence improvements are not working.
The Core Risk Management framework is not being contributed to by experienced, global, ALM consultancies, not improving on a monthly basis and is not looking more and more like it is to a higher standard than used today in traditional finance (i.e. Basel III, Solvency II, UCITS etc) - means this very important element of protocol steering is not getting to the level required to be a global collateral powerhouse fast enough.
The Core Risk Management framework development is not engaging with technical resources to evaluate what tokenization means for risk and opportunities and not including these views in the risk management framework - means protocol steering is forgetting a core technical part of the risks
Council members being appointed without commensurate experience in risk management and control at a governor level from relevant businesses - again the competence upgrade not working.
Independent monitoring and reporting of risk, collateral etc not improving fast enough to a standard commensurate to standards of traditional finance - means the protocol is essentially running blind. Very bad.
Separation of duties not being implemented strict enough (i.e. council vs monitoring vs arranger vs asset mgr vs advisor vs etc) - basically the risk management framework is not being put in place with adequate independent controls and monitoring.
Fix governance and put politics where it rightly should be
Political process reaches directly into execution matters of Core and SubDAO (and doesn’t stay at Maker Core Scope Framework level) - means the separation is not getting done appropriately.
The political process not engaging with relevant independent experts and experiences in analysing and setting policy - means the demand for competence not being implemented strongly enough
Political “parties” create an environment of strong polarisation and “hold-outs” based upon what is disagreed, rather than building a centre of slow and steady progress based upon common points of agreement - means the political environment is building up the wrong culture for advancing Maker Core.
Policy review, analysis and decisions are not getting translated into monthly advances in practical scope frameworks to firm up the connection between Maker Core and SubDAO’s etc - means the politics is disconnecting from its key role of advancing the structure and setting the right perimeter of Maker Core with the SubDAOs.
Navigate the global regulatory environment such that MakerDAO and DAI can persist in the long-term
Require setups and demands to SubDAO from Maker Core not coming together with advice on how these fit with jurisdictions and regulatory environment - means that the Maker Core process has disconnected from a core piece of the puzzle it must ultimately engage, namely regulatory status.
SubDAO’s not coming out with plans and actions to enhance regulatory status of Maker/DAI/DAO - means the SubDAO’s are not actively engaging with jurisdictions to find productive regulatory long-term positions
Those are probably the principal tell-tales I am going to look for as the Endgame gets underway. Right now I am feeling very good about the path that has been set out and I will be buying/farming more tokens of one kind or the other from Maker as I understand better the value flows in the tokens.
I do think Maker has a good chance of developing a large scale, hitting it out of the park, kind of success with the Endgame. As long as it is well-executed.