Incentivizing active participation in MKR holder insurance pool: a potential solution to front running
In response to the question of holder front running posed earlier, I've thought of a potential solution.
Disclaimer: this an extremely rough draft of some ideas I've been mulling. Nothing here is official. The Maker team may already have better solutions.
The OP of the previous thread posed this issue:
In fact, if anything MKR holders are more likely to be detrimental to the process: As soon as a rational MKR holder sees the system moving close to a point where this is going to be the case, the rational thing for every MKR holder to do is to sell their MKR before new MKR is minted and sold.
I believe this is a valid criticism of the current token design. Economic incentives trump everything, ideals and all.
As such, I believe the community should take steps to heavily incentivize MKR holders to actually provide insurance when the system needs it most. And punish holders if they act negatively.
Augur is a good comparison.
Reporters are heavily rewarded for correct reporting(by receiving more REP) and attackers/griefers are punished(by losing their REP).
A potential solution is a staking mechanism such that holders contribute their MKR to a pool and only participants in the pool get access to voting, cashflows and dilution.
This solution has a problem as it creates a free rider problem as not all holders will stake, yet they will receive benefits from cash flows.
A(very rough, very experimental) solution to this is to remove the burn mechanism altogether and replace it with an inflationary model.
New MKR tokens are minted to the insurer pool, based on cash flow.
Non stakers get the optionality of speculation but do not participate in governance or cashflow and are punished by dilution by inflation.
Again, these are rough ideas and im very much open to criticism and refinement
Posted Feb 19, 2019, 11:41 PM UTC
The Guardian reserve entities are the way that actual insurance is built into the system. Over time the governance process can choose to divert a portion of its income into special foundations that are legally wired up to act as insurance pools that then step in to be the first line of defense when there is bad debt in the system. The reason why this has to be done through legal systems rather than through an on-chain mechanism is because the reserves need to respond differently to an emergency shutdown depending on whether it happens during a black swan event or not, and it is not possible for the system to endogenously determine whether a black swan event is happening, so the reserves will always be reliant on oracles. For that reason we need strong legal entities with strong guarantees against abuse built up around these oracles, and that's where the Guardian concept comes from. The Foundation is preparing to release a mega-update some time in April that will among other things also provide more clarity on the roadmap for Guardians.
It is actually deliberate and by design that MKR holders should dump their MKR the moment they predict MKR inflation is about to happen, because this effect helps turn the MKR price itself into a performance indicator for the governance process. If new governance actions starts tanking the MKR price it's a strong signal that something is wrong and things needs to change.
Hi Rune,
Thanks for responding.
That makes a lot of sense and seems very robust. I'll wait for the April release before adding any more comments on the guardian reserve entity system.
However, this means that either currently or under MCD, MKR holders are not insurers of the system. Until the socialized loss insurance pool is created.
If MKR holders are not economically incentivized to insure the system, in adverserial situations we have to assume that they will not.
Important to clarify because i think the some of us(including myself) viewed the token as a kind of insurance contract. It seems that is not the case.
It is the insurer of last resort. Once the reserves are exhausted MKR is printed to recapitalize in case of bad debt.