TLDR: MakerDAO reconsiders its partnership with Gemini, which has been paying the DAO a “marketing incentive” to increase its usage of their stablecoin GUSD.

Maker is the DeFi protocol behind DAI, a stablecoin referred to as “the world’s first unbiased currency,” currently pegged to the U.S. dollar. DAI’s peg is maintained in part by the Peg Stability Module (PSM), which allows users to “swap other stablecoins for DAI at a fixed rate.” The fees generated from these swaps go directly to Maker’s DAO.

In September of 2022, Tyler Winklevoss, one of the founders of the established CeFi exchange Gemini, suggested plans to “deepen [their] partnership with Maker“ by proposing to stimulate the GUSD PSM. As mentioned in the original post as well as in follow-up posts, GUSD has been battle-tested “in the wild” since 2018 and is backed securely 1:1 by USD-denominated reserves, which are audited regularly by an independent accounting firm. Gemini itself is also overseen by the New York Department of Financial Services (NYDFS).

Despite the longstanding reliability of GUSD, the thought was that it would benefit from more usage — which stimulating the GUSD PSM would help provide. Gemini offered to provide MakerDAO with a marketing incentive of 1.25% for a period of three months as long as the average balance in the PSM exceeded $100m GUSD. Although there was debate about whether Maker should be relying on centralized stablecoins at all, the community ultimately voted to support the partnership and raised the debt ceiling of the PSM to $500m. GUSD in the PSM rapidly exceeded the $100m minimum, and Maker received from Gemini ~$481k and ~$528k for the months of November and December 2022 respectively.

When FTX (and Alameda) collapsed, implicated crypto lending firms such as Genesis, on which Gemini’s Earn program relied, suffered major liquidity crunches — which remain unresolved. In the wake of a class-action lawsuit and the SEC charging Gemini and Genesis for the “unregistered offer and sale of crypto asset securities” through the Earn program, members of the MakerDAO community have questioned whether a heavy investment in the GUSD PSM is safe and began raising questions in the forum.

Gemini has clearly explained its position to the MakerDAO community — pointing out the ways in which GUSD remains protected in the extreme case of a Gemini bankruptcy — and says they are “happy to consider implementing additional processes for increased transparency.” Nevertheless, some still do not trust the (FDIC-insured) banks holding the GUSD reserves, or the New York Department of Financial Services, or simply feel that the slimmest possibility of a problem with Gemini/GUSD is too much for Maker to risk.

Gemini Chief Strategy Officer Marshall Beard revealed in the forums that Gemini would be maintaining and increasing (to 1.5%) the marketing incentive for the first quarter of 2023. But a Governance Poll was put forward by the DAO to assess the community’s interest in reducing the GUSD PSM debt ceiling — which could in turn reduce or even eliminate the payment of Gemini’s marketing incentive.

The Proposal: Adjust the GUSD PSM Debt Ceiling

This proposal takes the form of an instant runoff vote, which means that MKR holders can rank their choices. The choices are as follows:

• Decrease the GUSD PSM Debt Ceiling from 500 million DAI to 100 million DAI.

• Decrease the GUSD PSM Debt Ceiling from 500 million DAI to 0 DAI.

• Do not change the GUSD PSM from 500 million DAI.

The option that receives the most votes of the three — and represents more than 50% of the votes cast — wins the poll. If a voter has no preference, they can choose “Abstain.” If the winning option represents a change to the status quo — i.e. changing the debt ceiling to 100m — then it will be included in an upcoming Executive Vote (see below).

The poll ended on January 19th with 50.85%* voting not to change the debt ceiling. A concurrent, related poll, “Decrease GUSD PSM Fee Out (tout),” concluded with 73.66% voting “Yes.”

*Chris Blec claims in a tweet that “@paraficapital, a large VC investor in @Gemini, waited until minutes before the vote ended to delegate just enough of its MKR to voter ‘GFX Labs’ to defeat the proposal.” Boardroom has not verified this claim.

Governance Process

MakerDAO has been in existence since 2014, and its governance process is more complicated than that of most DAOs. Anyone can participate in MakerDAO governance by introducing proposals and commenting on existing proposals in the appropriate sections of the forum. There are three general categories for off-chain proposals: Signal Requests (or “signal threads”); Declarations of Intent; and Maker Improvement Proposals. Proposals from each of these categories may proceed to on-chain governance if sufficient positive sentiment is gained in the forum.

On-chain governance has two forms: Governance Polls and Executive Votes, both of which are enacted through the Voting Portal. Participating in either requires that the prospective voter holds the governance token MKR and “locks up” their MKR in the Voting Contract on the Portal. MKR holders can also choose to delegate their MKR to individuals or organizations active within MakerDAO governance.

Governance Polls (such as the one under discussion here) have a number of functions, including ratifying proposals issued from Signal Requests; forming consensus on goals; and assessing sentiment ahead of upcoming Executive Votes. The voting period for Governance Polls needs to be set, though it is usually either three or seven days long. Executive Votes, as the name suggests, execute technical (i.e. smart contract) changes to the protocol. For example, such votes may be used to add or remove collateral or vault types or to adjust system parameters. Unlike Governance Polls, Executive Votes follow what is called “continuous approval voting,” which means that competing proposals can be continuously introduced – and that the voting period for Executive Votes is indefinite (though votes usually expire after 30 days).

To accommodate the often complex interaction of all of the above forms of governance (see this flow chart), MakerDAO has established both weekly and monthly governance cycles.

The Big Picture

“Contagion” is a word much favored these days, following the collapse of firms — such as Three Arrows Capital and Alameda Research — that had invested widely across the crypto landscape and the entangled collapse of centralized exchanges such as BlockFi, Celsius, Voyager, and FTX. Many are fearful that the major misjudgments, errors, and outright fraud that have come to light might undermine or otherwise wound DeFi — which has so far remained impervious to the scandals, thanks in large part to their decentralized design.

While the partnerships MakerDAO sought with entities such as Coinbase and Gemini were seen as promising test cases for synergies that might be found between CeFi and DeFi, the fear of “contagion” — even lacking evidence of anything suspect — has some in the Maker community wanting to pull back entirely to protect DAI and the DAO. Maker, like many other DeFi protocols, is striving to figure out just how careful it should be in this uncertain environment — and whether its position with regard to risk is value-aligned.

In the meantime, however, it’s worth observing that the active, public involvement of Gemini in MakerDAO governance — posting in forums, engaging in dialogue — is one positive sign of the health of this form of governance. Even with all that needs to be improved in DAO governance generally, it is encouraging to see continued constructive involvement with outside parties that want to form partnerships. Such involvement may well be behind recent record levels of governance activity at Maker.

We’ll be tracking this proposal activity closely at Boardroom. Follow our newsletter to stay up to date. If you’re a voter in a protocol, make sure to check out Boardroom Portal.

{{Brief25//makerdao;cHJvcG9zYWw6bWFrZXJkYW86b25jaGFpbi1zZWNvbmRhcnk6OTQy}}