Thread by @CremeDeLaCrypto

1/ We dug in to Maker / $MKR and, in the spirit of the industry, wanted to open-source some questions and concerns that surfaced. Thread below...

First, worth noting that Maker’s traction is impressive, it’s a fascinating experiment and I’m glad that they’re pushing the boundaries of innovation. Most of that is well-covered, so I’ll use this thread to instead surface concerns (and hopefully answers!)

I summarized some of our concerns in a Reddit post (reddit.com/r/MakerDAO/com… ) and was really impressed with the community’s willingness to address difficult questions without seeing it as FUD (thank you!)

Among major concerns is the (false) notion that MKR holders backstop the system: The idea is that if DAI becomes undercollateralized, it will be recapitalized via the proceeds of newly minted MKR sold on the market.

In this sense, existing MKR holders do suffer from dilution, but they certainly don’t backstop the system. The only backstop is the market’s willingness to purchase newly minted MKR (preferably at a high price, then less dilution is necessary).

If anything existing MKR holders are more likely to be *detrimental* to the process (anti-backstop): as they see the system moving toward under-collateralization and risk of dilution increases, some rational MKR holders will sell and depress MKR price

This decrease in MKR price has a direct negative impact on the ability to use the proceeds of newly minted MKR to recapitalize the system.

A separate concern is around the token model for MKR. There’s been an over-reliance on the notion that Burns = Buybacks = Dividends. This is borrowed from the equity world where buybacks *are* ~= dividends.

The reason this holds in equities is because buybacks reduce shares outstanding and thus each remaining share is entitled to a greater portion of future cash flows.

However, in a pure burn model committed to never distributing cash flows, each outstanding unit post-burn is entitled to a larger share of…. nothing. At most, each outstanding unit has a greater probability of being able to sell to the one and only natural buyer: MakerDAO itself

But at what price? My ability to sell MKR to MakerDAO depends on whether I’m willing to sell MKR for a lower price than all other holders. In other words, I have to hope that I value my MKR less than all other MKR holders.

In some ways, that’s similar to equities… EXCEPT that in equities I can always forgo selling at an unfavorable price if my expected present value of future cash flows exceeds the market price. Not so in a perpetual pure burn model.

The pure burn model lacks that fundamental component (future cash flows) to underpin value. 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.

Naturally, this leads to the idea of a cartel. If MKR holders band together and refuse to sell to MakerDAO (which MUST purchase MKR), they can collectively demand $1M+ per coin. That sounds great, but cartels are hard to maintain.

At $1M+ per coin, it would take a VERY long time (decades) for all investors to be able to sell their supply. Therefore all members of the cartel have an incentive to defect and sell below the cartel rate.

As @_alekslarsen pointed out, this means the best (only?) way for MKR holders to realize value is to form a cartel and collect as much rent as possible but, of course, doing so would kill the raison d’etre for the project.

This of course risks instigating a vicious cycle of MKR holders undercutting one another for the right to sell to the one natural buyer (MakerDAO itself). Worse, there is no fundamental bottom (cash flows) to underpin a fair price.

Also had concerns about the move to MultiCollateral DAI (MCD) (& the risk of non-bearer assets) and regulatory risk – to avoid making this thread longer, check those here: reddit.com/r/MakerDAO/com…

What have I missed? How can I think about Maker / MKR differently? Big thanks to everyone that has already provided input! Also congratulations to everyone that’s been part of the story to-date!

Also big thanks to @_alekslarsen, @alexhevans, @cburniske, @cyounessi1, @TrustlessState, @MakerDAO and many others that have been super helpful in the process and, admittedly, have thought much deeper on many of these topics than I have.