May 3, 2020 MakerDAO and Community-Led Governance

The Maker announcement suggests the project’s security and long term sustainability depend on successfully transitioning to community-led governance and was quickly followed April 6th with the circulation of 13 ‘Maker Improvement Proposals’(MIPs) designed to elicit discussion and counter-proposals on the foundational processes for its governance system.

The Maker Foundation’s plans for leadership transition are notable for several reasons.On the one hand, the question of how to successfully transition to community-led project governance from a point of primarily foundation-led activity is one facing the industry as a whole. Given its position in the fledgling DeFi ecosystem, Maker’s attempt is bound to offer lessons for projects likewise planning such a transition—regardless of whether Maker succeeds or fails.

While projects’ motivations for transitioning to community-led governance can vary, many share similar conceptual underpinning:

On one common conception, legitimate executive power derives from community mandate; broadly speaking, decisions that negatively impact or disadvantage a given stakeholder group are only justified to the extent that the group(s) affected consented to that set of changes, or had their interests adequately represented in decision making, and so forth. When, say, a portion of block rewards are re-directed towards funding development work, undermining mining profitability, that action, when legitimate, reflects a compromise among the protocol’s developer and mining communities, whose interests would be affected by the change. Transitioning to community-led decision making then is important, in this sense, for justifying decisions to the stakeholder groups whose long-term support the project decision relies on, and would support Maker’s claim that the project’s “long-term security and sustainability” depends on the voting community taking charge.

A transition towards community-led governance can also be viewed as instrumental to moving towards “true decentralization”, understood as prohibiting entrenched stakeholders from making decisions that would privilege their own interests at the expense of other stakeholder groups—to, as it were, realize a protocol’s innate potential to enable a ‘level playing field.’ On this conception, it is stakeholder groups’ ability to check such overly self-interested uses of power that makes protocols an attractive place to build on. Vigilance against executive overreach, however, requires more active participation by those with oversight powers, and competency with the technical and systematic nuances involved with parameter present barriers to participation that have historically been obstacles to full participation within DAOs. Maker appears to acknowledge this, through its claims that “As the community takes a greater role, it will be more important than ever that all MKR holders have an active stake in the ecosystem” and creation of ‘elected paid contributor’ task forces.

Yet, the circumstances surrounding Maker’s announcement of the transition should prompt readers to consider carefully Maker’s motivations. While Maker’s announcement’s rhetoric of “no single point of failure” is not uncommon, its timing raises the question of how much considerations of liability play into the Foundation’s decision. Following March 12th’s liquidation failure,MakerDAO users are set to file a class-action lawsuit. According to the suit, the Maker Foundation, Maker Ecosystem Growth Foundation, and the Dai Foundation “intentionally misrepresented the risks associated with CDP ownership” which subsequently led to a total loss of $8.325 million for the users. The lead plaintiff, Peter Johnson has filed negligent misrepresentation, intentional misrepresentation, and negligence counts against the defendants.

In the wake of a system disruption, one might also ask whether a move to a more decentralized process of governance is in the right direction. The incentives to shield both the core team and the entire project from direct liability certainly make sense; indeed the generous reading is that the team wants to ensure the protocol will survive if the team itself is embroiled in a lawsuit. But one could argue that the past two months have shown that the protocol still has a big unplumbed surface area for attack. The damage could have been far worse. At such a time, when a growing portion fo the industry relies on DAI, is vacating executive leadership in the best interest of the protocol's short-term progress and development? Indeed, Prysm’s Dr. Cathy Barrera raises just such a question when she argues that crisis governance needs to be specified ahead of the crisis and that the Maker team should have been empowered to make parameter changes in the event of such a scenario.

This is not to argue for the superiority of centralized decision-making but rather to acknowledge that all distributed protocols, starting with Bitcoin, have been incubated by qualified dedicated leaders, and that their maturation reflected such leadership, not a lack of it. Likewise, while it is worthwhile to acknowledge the role considerations of liability could play in prompting the proposed shift in governance, it would be overly cynical to focus on it to the disregard of other reasons favoring the transition. Like other aspects of decentralized technology, governance processes too can make tradeoffs among the values they are designed to realize. While asking Maker to decide between decision legitimization, level playing fields, and liability diffusion would be to present it a false dilemma, looking to Maker to clarify which ideals it will prioritize in its transition is a reasonable question, one projects likewise considering such shifts in leadership would do well to consider.

Maker is seeking to embark on a governance transition that it likely needed to go through eventually. Circumstances might have forced the hand of its leadership. How it balances the many competing objectives—protocol development, liability, resilience, legitimacy—will likely hold lessons for the entire industry.