Decentralized Autonomous Organization (DAO): The case of MakerDAO

The foundation proposal

With the technical aspects of decentralization largely solved in the first stage, one major question would remain for the MakerDAO team: “Can the Maker community succeed in making decentralized governance work?” The success of decentralized governance for MakerDAO ultimately depends on the ability of its community members to work together effectively, make informed decisions, and contribute to the organization’s development.

Christensen had decentralization in mind even during MakerDAO’s bootstrapping phase as he was forming the Maker Foundation. In June 2018, as a first step toward decentralization, Christensen published the Foundation Proposal. This proposal was revised in August with the Foundation 2.0 version, which described the five main principles of the Maker governance philosophy and announced the first-ever public governance vote.

The five pillars of the Maker governance philosophy included (1) Scientific Governance, (2) Serving the Underserved, (3) Sustainable Finance, (4) Gradual Decentralization, and (5) Driving Dai Adoption. These pillars served as a framework for MakerDAO’s decision-making, ensuring that the organization remained focused on its core mission and values.

The principle of Scientific Governance emphasized the importance of data-driven decision-making, with MakerDAO prioritizing transparency, accountability, and a rigorous approach to risk management. Serving the Underserved highlighted the importance of creating a financial system that is accessible to everyone, including those who are unbanked or underbanked. Sustainable Finance emphasized the importance of building a stable and sustainable financial system, with MakerDAO committed to creating a stablecoin that could withstand market volatility.

Gradual Decentralization was a key principle for MakerDAO, with the organization recognizing that true decentralization would take time and effort. This principle emphasized the importance of taking a gradual and measured approach toward decentralization, with a focus on building a strong and sustainable governance structure. Driving Dai Adoption emphasized the importance of promoting the adoption of Dai, MakerDAO’s stablecoin, as a key component of a more decentralized and equitable financial system.

In conclusion, the Maker governance philosophy, as outlined in the Foundation Proposal and the Foundation 2.0 version, served as a guiding framework for the organization’s decision-making, ensuring that MakerDAO remained focused on its core mission and values. By emphasizing data-driven decision-making, accessibility, sustainability, gradual decentralization, and adoption, MakerDAO, through the initial efforts of Christensen and the Maker Foundation, laid the groundwork for a more decentralized and equitable financial system.

The first vote

In September 2018, the MakerDAO community held a vote on the Foundation proposal, which outlined the organization’s governance philosophy and approach toward decentralization. To be eligible to vote, community members needed to own MKR tokens, the governance token for MakerDAO which was introduced in August 2015 (see Exhibit 5 for more details on how to vote in MakerDAO).

MKR tokens are publicly traded and can be obtained on any major crypto exchange. They are used to actively maintain and adapt routines and resources controlled by the MakerDAO community, and MKR token holders are responsible for ensuring the stability of Dai and the health of the Maker Protocol.

There are several reasons why someone might want to hold MKR. It allows for an active role in MakerDAO and the ability to propose and vote on changes to the organization. MKR holders can also earn rewards through profit made due to the margin calls of undercollateralized vaults. Additionally, some see it as an investment opportunity and have high hopes for the future value of the voting rights.

Voting in MakerDAO can be on technical and non-technical aspects of the DAO, such as changing the parameters in the collateralization process or adjusting the configuration of smart contracts. Votes can be conducted through governance polls, which measure sentiment, or executive votes, which enable the community to make actual decisions.

Off-chain processes, such as the MakerDAO forum and Discord channel, are used to discuss ideas and proposals and gather consensus. These off-chain governance tools help to prepare for the on-chain decision for implementing a proposal.

The vote on the Foundation proposal in September 2018 was a significant milestone for MakerDAO and decentralized governance. Over 99% of the votes were in favor of the proposal, demonstrating the unity and common vision of the MakerDAO community. This vote also served as an example for other organizations in the field, highlighting the potential of decentralized governance.

Balancing centralization and decentralization: which pill to take?

The path toward decentralized governance and self-organization for MakerDAO was not without its challenges. Despite the rapid rise of Maker as a sustainable stablecoin project and a future leader in the DeFi world, the heterogeneity of personal interests among its members came to light and created tensions.

After the Maker Foundation was established, multiple streams of thought emerged regarding the future direction of the organization, reflected in a series of key votes over time (see Exhibit 6). Christensen pushed for better integration and corporatization, commonly referred to as the “red pill” approach. This approach emphasized the importance of building a strong and centralized organization to ensure Maker’s long-term success. It was argued that without clear leadership and a strong organizational structure, Maker would struggle to compete in the rapidly evolving DeFi space.

Christensen: “Our main focus should be on government compliance and integration of Maker into the existing global financial system.”

On the other hand, Nikolai Mushegian, a Co-Founder, had a different vision for MakerDAO. He wanted to invent a new form of organization, commonly referred to as the “blue pill” approach, which aimed to be fully autonomous and independent from existing corporate structures and the global financial system. This approach emphasized the importance of decentralization and community involvement in decision-making. The differences between the two leaders caused a lot of tension. As a reflection of this tension, at one point during this period, Mushegian stated that “Currently, the Maker development team is going through its most difficult challenge that I have witnessed during my 3.5 years with the project.”

The two conflicting approaches, the “red pill” and the “blue pill,” created tension and disagreement throughout the larger MakerDAO community. The community was faced with a difficult decision on the future direction of the organization, and this led to controversial actions in the following months, happening across multiple proposals that were hotly discussed by MakerDAO participants in their forums.

Ultimately, MakerDAO committed to a renewed focus on decentralization and community involvement. The tension between the different approaches to governance and organization served as a reminder of the importance of finding a balance between centralization and decentralization in creating a sustainable and successful autonomous organization.

Maker Improvement Proposals

Following the intense developments of the pills discussion, the Maker Foundation refocused on taking specific actions toward decentralization (blue pill discussion) while retaining certain degrees of centralization in some areas (red pill discussion). Christensen and his team recognized that this process would take multiple years and involve a challenging balancing act between decentralization and centralization. As a starting point, the Foundation introduced the first 13 Maker Improvement Proposals (MIPs) in April 2020, seeking to provide standardized ways of interacting with the DAO and proposing changes.

The introduction of MIPs was a significant step in establishing a more formalized governance structure for MakerDAO. They provided a clear and consistent way for community members to propose changes to the system, making it easier for contributors to engage in the DAO’s development. The MIPs covered a range of topics, including technical changes, risk management, and community development, among others.

By providing standardized ways of interacting with the DAO and proposing changes, the MIPs have helped to establish a more democratic and inclusive governance process for MakerDAO. They have facilitated greater participation and engagement from the community, ensuring that the DAO’s decision-making is more representative of its stakeholders.

“For MakerDAO to evolve into a fully decentralized and self-sustainable organization, a formalized process of decision-making is required. In a permissionless protocol, everyone should be able to propose changes and improvements.” ²

Overall, the MIPs represent an important step toward decentralization for MakerDAO. They have helped to establish a more formalized and democratic governance structure, making it easier for contributors to engage in the DAO’s development. As MakerDAO continues to navigate its path toward full decentralization, the MIPs will remain a vital tool for ensuring that its governance remains transparent, inclusive, and effective. By summer 2022, the Maker Improvement Proposal (MIP) process had become a key component of MakerDAO’s governance, with over 70 MIPs introduced and mostly accepted.

Introduction of the Core Unit Framework

In early 2021, MakerDAO took another step toward decentralization with the introduction of the Core Unit Framework. This framework is designed to transfer fundamental activities and governance tasks from the Maker Foundation to MakerDAO’s Core Units. The Foundation recognized that MakerDAO’s structure was too ill-defined to integrate these tasks successfully, and a new architecture was needed for MakerDAO to achieve full autonomy.

Each Core Unit is responsible for a specific area of governance and has its own budget, managed by a Facilitator. Facilitators act as intermediaries between Maker Governance and contributors, assigning tasks and paying contributors for their work. Community members can propose to add, remove, or edit Core Units, and these proposals are decided through on-chain voting. The mandates of Core Units can overlap, and the goals of each may not always be clearly defined.

With the introduction of Core Units, there are now multiple opportunities for individuals to work for MakerDAO and help maintain its technology and organization. Anyone who joins the DAO voluntarily can become an active stakeholder and contributor to its maintenance and evolution through co-governance.

Overall, the Core Unit Framework is an important step toward decentralization for MakerDAO. It provides a clear and structured approach to governance, allowing for greater participation and contribution from the community. This framework ensures that MakerDAO can continue to operate effectively without relying on centralized entities, further advancing its vision of becoming a fully decentralized autonomous organization.

Toward a fully decentralized organization?

On 3 May 2021, as an act of handing over MakerDAO to the community, the Maker Foundation returned 84,000 MKR from the Development Fund to the Maker Governance, an important step toward decentralization. This transfer gave the Maker Governance full control over how to use these tokens, without any conditions or expectations attached.

Finally, on 20 July 2021, MakerDAO announced its full decentralization. With over USD 8 billion locked in the vaults, it was now up to individual members to govern and advance the organization. However, this step did not impact the percentage of individual ownership, and Christensen still held almost 20% of the MKR tokens, giving him significant power.

Not all DAO members were convinced of the decentralization announcement, particularly as MakerDAO became temporarily unprofitable during the ongoing crypto winter in 2022. Multiple stakeholders proposed changes in the governance, with Christensen pushing for changes in his Endgame Plan. He recognized the complexity of the situation and proposed actions to build a sustainable MakerDAO that could take the lead in the industry.

A key aspect of Christensen’s plan was to restructure the Core Units into smaller and specialized subDAOs, which would introduce new tokens to incentivize users to contribute. However, some members were skeptical, claiming that this approach would only serve to strengthen Christensen’s position of power.

Meanwhile, Sam McPherson proposed a radical change called LOVE-001 in June 2022, which would create a board of directors to provide more information and guidance on upcoming proposals. The proposal was put to a vote, with a record turnout of over 30%. However, it was ultimately rejected by over 60% of the votes.

The vote was a crucial step in guiding MakerDAO’s short- and long-term future, as it showed that the majority of members were not in favor of McPherson’s proposal. As MakerDAO continues to navigate its decentralized future, it will need to strike a balance between decision efficiency and decentralization to ensure its long-term success.