Source
r/MakerDAO•
MusaTheRedGuard

A first draft design for MKR dividends and a MKR staking pool

Had some thoughts about what MKR staking would look like.

The point of staking would be to programmatically ensure that holders act as insurers when the system is undercollateralized.

MKR holders would stake their MKR in a pool and only Stakers would be privileged to vote and would provide insurance capital during a downturn.

Unsure what the stake period should be, but Stakers should not be allowed to withdraw their MKR during this period or they suffer a steep penalty. E.g Slashing their MKR stake and burning the excess.

Because of all this risk they are taking, Stakers should be incentivized much more than speculators(who have the optionality of selling during a downturn).

I propose splitting the stability fee into two: a Burner address in which all MKR would be burned and a Dividend address in which all Stakers have a proportional claim on the collected MKR.

Withdrawing MKR from the stake pool after the stake period should give the Staker a proportional amount of the MKR collected in the dividend pool.

Though I'm not sure what the exact split ratio should be, 40 to burn, 60 to dividend seems fair. Also this split should be voted on by holders.

Under this design, there's no free rider problem:

The system is still deflationary(though not as much as before),

Speculators still get the cash flow rewards of a token burn

Stakers get extra rewards by correctly governing the system and pledging to provide insurance capital

Speculation is discouraged by reducing the power of non Stakers.

Please let me know what you think, this is just a first draft

Posted Mar 7, 2019, 1:55 PM UTC

3717
i3nikolai•

Tangential note, dividends can always be represented as buy/burn of a share asset. Your mechanic this is equivalent to making an MKR-LOCKED asset with different properties. Think WETH/PETH. This has no impact on your actual idea, just saying it wouldn't get implemented as a split of dividends vs burn but rather a split of burn this vs burn that.

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MusaTheRedGuardOP•

Very good point and probably cleaner to implement as well

1
FourthStreetx•

Agreed

1
d3l33t3d•

spencer bogart argues otherwise https://twitter.com/CremeDeLaCrypto/status/1103428612668026882

and he has a point. burns in their current fashion do not represent an increase in cash flow per share

1
i3nikolai•

I tried to follow his logic and am here: "Instead the price at which MKR holders can sell to MakerDAO is entirely a function of other investors’ willingness (or lack thereof) to sell at a lower price."

This is also true when you sell equity for its full present value now on the market, instead of waiting around for future dividends

What if each stakeholder sells stake proportional to amount burned as it is burned? IE a contract that maintains 1% of the total stake, and "takes profit" when there is a burn and so it owns eg 1.01%. The "dividend" as a buy order gets matched with 1% of all stake on the sell side, everyone's equity remains the same, everyone got an amount of cash equal to the amount they would have gotten in a dividend. Seems exactly equivalent.

I think he is looking at the "burn" in isolation after the "buyback" which in SCD happens when interest is collected?

2
crandallberries•

So the point of this basically is to make people commit to not selling their mkr? Most of the functionality of this system you described is how mkr works right now.

Personally, I would take it a step further and allow staking mkr behind specific collateral pools. Debt ceilings for each collateral pool would change based on the amount of mkr locked up in them. If an asset was at its debt ceiling, the mkr locked behind that asset could not be withdrawn until the debt is decreased. This kind of system would expose mkr holders more directly to their risk/reward behaviors, and as you discuss - passive mkr holders could still stand to gain from burns, just at a lower rate since most of the stability fee for each collateral type would go to the mkr staked specifically for that collateral pool. Ultimately, the entire mkr pool would be held accountable for debt that couldnt be covered by the collateral specific mkr pools.

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MusaTheRedGuardOP•

Collateral specific pools are certainly interesting. I think it would be difficult to distribute cash flows to specific holders though

Most of the functionality of this system you described is how mkr works right now.

No, not right now. Depending on their entry price, some holders would be incentivized to sell when the system needs them to act as a backstop to the system.

1
crandallberries•

I don't think the cash flows would be difficult, this is basically how peth works in the system right now. If you converted to peth the day dai went live and held until now, you would have made 4%!

The harder problem would be deciding the locked mkr to debt ceiling ratio as well as working to balance the overall ratio between collateral types in the system...

Granted, even with MCD working the way it is envisioned today, finding the proper balance between collateral types will be difficult... One way to address this (which would probably be useful even today) may be a dynamic interest rate, that rises as debt approached the debt ceiling or rises above a certain percent of total system debt relative to other collateral types.

edit: that said, I do see your point that locking mkr with some penalty to withdraw could be useful. It also may be possible to introduce some sort of penalty for mkr that is not actively voting.

1
DavidutroCore Community Lead•

How would you fix the issue of needing your MKR to vote, while having this staking system in place at the same time.

1
MusaTheRedGuardOP•

I think the staking system should be tied to the voting system. My thought is that only stakers should be able to vote once the system is in place.

It can be something similar to how uniswap tracks pool ownership. When you pool liquidity in uniswap, you are given a token to track how much of the liquidity pool you own

5
FourthStreetx•

When you stake you could be given a voting token in place of your MKR.

3
werbt•

Interesting idea. I need to think it over again before making up my mind. Even if the mechanics are achievable, should we allow this much decentralized control over the system? Risk teams act as training wheels while we build liquidity and demand for DAI. I'm not against staked MKR in a few years (assuming we get above 1B DAI). Staked MKR could serve as a form of checks and balances to the risk team's power.

There was another thread 10 months ago that had a similar idea.https://www.reddit.com/r/MakerDAO/comments/8biua7/some_criticisms_of_makerdaos_multicollateral/

I don't understand why MKR can't be pooled like ETH was pooled to allow for the collection of liquidation penalty fees and most importantly localized voting inside that pool... So that those that vote for risk are the ones most directly impacted by their decisions.

I

1
krollAY•

I thought the original idea behind burning instead of providing dividends was to avoid being labeled a security? Or at least it was with other token burn models like REQ.

1
capitalol•

The point of staking would be to programmatically ensure that holders act as insurers when the system is undercollateralized.

The system does this already - MKR holders get diluted when MKR is created to provide the liquidity.

I find it hard to imagine people willingly signing up to have their MKR actually burned rather than diluted. It's likely immaterial in financial returns but psychologically the difference I imagine to be quite large.

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MusaTheRedGuardOP•

No it doesn't. The point is some holders will sell before the system gets undercollateralized but is moving closer to undercollateralization.

In a staking method, their MKR is still gets diluted when the system is undercollat. It's just that holders will not be able to sell outside staking periods

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capitalol•

No it doesn't.

Not in single collateral, but for McDai I heard it was. I would be quite surprised if it doesn't work that way.

0
The1percenter•

This is an awesome idea but you should take a look at Decred's staking model (ticket buying and random selection of tickets over time) as I think it builds in many of protections and economic components relevant to Maker's operations. This is particularly important in developing a holder base with low time preference.

1