FakerDAO: Battle Testing Maker Governance

When it comes to gradually decentralizing different DeFi protocols, we’ve seen a number of governance schemas take form in recent months.

With the introduction of Compound’s new governance token – COMP – it’s clear that more projects are focusing on initiatives – like DAOs – to place powerful decisions in the hands of the community.

While this all checks out from a high level – what happens when these governance schemas are exploited with malicious intentions in mind?

Using the leading lending protocol – Maker – as an example, governance is currently dictated by MKR ownership.

For those unfamiliar, executive polls are governed by the community, with MKR tokens being used to determine whether or not certain actions should be passed.

Multiple Governance Polls have been added.
Voters are now able to signal their support for a:

↔️Dai Stability Fee within a range of: 4%-12%
↔️Sai Stability Fee within a range of: 5.5%-13.5%https://t.co/Cp5U6O3V03

More info:https://t.co/jtlXUcfmOF

— Maker (@MakerDAO) March 9, 2020

 

As it stands today, governance participation on Maker (along with many other DeFi projects) is quite low, averaging at roughly 2-10% of the total circulating supply on any given vote.

Introducing FakerDAO

Earlier today, we saw the introduction of a unique schema to battle harden Maker governance entitled FakerDAO.

“FakerDAO: An Exploration Of MakerDAO’s Governance Incentives”

A writeup + code to demonstrate potential limitations in the @MakerDAO governance incentives.https://t.co/gBDriGrRdq

— ScopeLift (@ScopeLift) March 11, 2020

 

Created by Ben DiFrancesco and Matt Solomon, FakerDAO offers an intuitive front-end for users to effectively pool their MKR – all of which are ultimately auctioned off to the highest bidder to be used for governance on executive polls.

This DPoS-like model was created to draw attention to the fact that current governance designs have their flaws, and that the highest bidder *may* be able to drastically alter a crucial piece of DeFi infrastructure simply by expending high amounts of capital.

“(FakerDAO) introduces a simple smart contract construction that demonstrates why the MakerDAO governance model, as currently conceived, may not be incentive-compatible with the long term health of the Maker ecosystem.”

To highlight some of the key components of FakerDAO:

• Any MKR holder can lock their tokens in the contract

• Every seven days, the contract holds an auction in which anyone can submit bids denominated in ETH

• The highest bidder wins the right to control the MKR locked in the contract for the next seven days.

• MKR depositors are paid out after each auction for the proportion of the MKR they contributed.

• At the end of each cycle, MKR withdraws/deposits are permitted, and the process starts again.

Those who deposit MKR to the contract stand to earn a passive income for “renting” out their MKR, similar to that of many lending protocols.

For those actively looking to push forward Maker governance, systems like FakerDAO offer an intuitive way to “lease” voting power without having to go and acquire the MKR outright on a secondary market.

Why Does This Matter?

While we’ve yet to see a black swan event within Maker, there’s no denying that Dai is gradually increasing its capacity within the wider Ethereum ecosystem.

As such, many have come to challenge the existing governance design in an attempt to battle harden influence from bad actors.

As more project continue to conceive ways to stimulate governance participation, it’s clear that one of the main benefits (or drawbacks) of open-source designs is that the community is able to whip up innovate tools like FakerDAO to push projects to their limits.

Over the next few weeks, it will be interesting to see if anyone uses FakerDAO to push through a contentious vote, or if passive MKR holders even see enough value in depositing their assets to the FakerDAO contract.

Ben DiFrancesco, a co-creator of FakerDAO, notes:

“We’re hoping this proof of concept generates a serious conversation in the community about the security of Maker’s governance model. We’d love to hear feedback on why or why not this should be considered an issue, and what might be done to mitigate it”

In the meantime, we encourage you to test out FakerDAO on Kovan testnet here.