Episode 35: May 16, 2019

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# / 00:00:00

Richard Brown

Hello everyone. Welcome to the May 16th edition of the Scientific Governance and Risk Meeting. We have lots to go over today. I say that even before I consider whether we do or not, but it's usually true. So let's just stick with it. We're going to mix up the agenda a bit. It's New York Blockchain Week. People are busy on panels and running to and fro and in light of that Stephen won't be joining us today. He's on a panel right now I believe. We're going to skip the thought of the week and move immediately into my section then we'll talk about risk for a bit and we have a special guest today. Matthew Rabinowitz is going to give us a recap of his weekly thoughts about the system and we'll also hear from Vishesh and then Cyrus will set some context for us.

# / 00:01:01

Richard Brown

As always, if you have a question, please type it in the chat on the side and we'll read it out when you get a chance. You could have access to a microphone, please use it and just jump in and ask away. We're happy to be interrupted. Also, we have a very important discussion thread that goes along with these calls. The general context here is that we have one hour to discuss a lot of really important topics. One hour isn't enough. So the idea here is that we set some base assumptions. We have some interesting debates, we surface a few ideas and then we continue this longer discussion in the subreddits and then act on them from there and, or bring the results back to these calls. So please if you have questions you feel aren't going to get addressed or should be dealt or looked into more deeply, click on that link to the subreddits and ask the question there and we'll get into it over the course of the week.

# / 00:02:05

Richard Brown

All right. So I want to talk about some things today that are largely related to voting and we had some interesting drama with the voting infrastructure over the last couple of weeks. There was an exploit discovered in the contracts. We updated the contracts, we've migrated to a new backend that has the same feature sets, feature parity with the old contract with the function removed. But in order to make that happen, we had to get people out of the old contract and into the new contract. That's was a hiccup because voter apathy is something that we've been dealing with since launch. We had begun to gain some good momentum of getting people into the system and voting with their MKR. That's interruption of the contract. And with everybody being in New York this week voter apathy is now reared its head.

# / 00:03:03

Richard Brown

And I want to point out something which I think is fascinating but also equally alarming. But up until maybe in some time in the last 10 hours, we were about to be introduced to a stability fee that had been set for us by a single admittedly drunk user that's in our chat. And that was going to be the face of MakerDAO as the stability for you for the next week. And so I want that to kind of sink in for a bit because we have a lot of talks about securing the system and the importance of signaling and putting your MKR into the voting portal to ensure that people's will is being heard. Because of the interruptions that I discussed earlier participation was down. And if you're interested in finding or following the chat for this troll you can join us in chat.makerdao.

# / 00:04:00

Richard Brown

But we were in a situation where literally one person was going to set the stability fee for all of us. Happily somebody came in in the last 10 hours or so and deposited another chunk of MKR into the 2% decrease option. And so this is a slightly better situation, but in my books, not much better because now we're in a situation where two people have decided what the stability is. And that raises a lot of questions at this point. Is that engagement low because people believe that these large MKR holders they know better than they do? And they choose not to participate. Is it because they believe that there's too much friction in the system and they just can't be bothered to the belief that the amount of MKR that they hold, it's not going to move the needle and therefore it's a waste of time.

# / 00:04:51

Richard Brown

There's a lot of questions that need to be answered here. And so this is where I want to get into the myths and misconceptions. Part of the talk right now, because we have a lot... Governance is hard in general. It's a capital H hard problem and it doesn't matter whether you're in crypto space or whether you're in the geopolitical space, the real world space, it's very, very hard problem. And the way that voting systems have evolved over time sort of this brute force best efforts kind of a solution which actually works. So people walk to a location, they show some ID that proves they are who they are. They go into a little booth and there's a reason why there're curtains around those booths and they drop a piece of paper into a box. And then other humans can read those pieces of paper, it sounds ridiculous, but there's a reason why representative voting systems look like that, which is a long discussion we probably shouldn't go into today.

# / 00:05:46

Richard Brown

MakerDAO is not a representative voting system. It's not a representative democracy. It's more akin to a shareholder vote in a publicly traded company. And that is a very well understood mechanism as well. People already know how that works. There's expectations and paradigms that go along with that. One of the challenges that we have in this space is that people are still confused by the word vote and we have a lot of people that are engaged in the system that may not be familiar with the traditional business world. And so they think, "Okay, I have a vote that means that it's one person, one vote. And we should all be equally able to move the system in the direction that we want." And it's important for people to realize that that's fundamentally not the way that the system is designed.

# / 00:06:34

Richard Brown

It's specifically designed to not be like that. The way that the risk parameters work in this ecosystem is designed by people with the most skin in the game, getting out, staking their MKR and making the will understood. And if people don't do that then we have problems. So here's some memes and misconceptions that I want to talk about very briefly because I have tendency to speechify and I don't know whether anybody actually listen to me when I do this stuff. One of the things I want to point out is that we have 50,000 ish, a MKR staked in the 2% reduction option in the pool today. That sounds like a lot of MKR. It is a lot of MKR, but it's absolutely in consequential when you look at the rest of the circulating MKR that is available to be used to vote, it's fantastically low.

# / 00:07:29

Richard Brown

There is more than enough circulating MKR right now to easily swamp the two people that they choose to vote and so it's not, we have a tendency to worry about plutocracies and whales in this space and those are very valid concerns, but we need to make sure that we understand what the definition of a whale is. In some contexts a whale is somebody that owns so much of a token that there's literally nothing anybody can do about it. There's some other projects in the space recently that have run into this problem where somebody who owns I can't remember it's 40, 60% of all the outstanding tokens has come in and just sort of had their way with another project. We're not in that spot. There's nobody in our ecosystem that owned so much Maker that five or six other holders can't overwhelm that vote.

# / 00:08:19

Richard Brown

So we have large holders, but we don't have whales that are capable of manipulating the system right now. So if people are sitting out and letting those large holders set policy, then that's, it's more of a choice than an unavoidable outcome. So the message here is that we desperately need everybody to lock up their MKR. Well, we don't need to break down numbers because people here, everybody here better at math than I am, but it doesn't take a lot for a lot of voters to come out. And I would outweigh the one 17k MKR troll that was trying to raise the stability fee by 4% for a couple of days ago. So people need to get out to vote. There's lots of people out there. It's easy for us to do and it just takes a couple of clicks to regain control of the system. And then here's a pull quote for everybody. And I want this to kind of sink in because this is an example. I alluded earlier that there's problems in voting structures and those problems are universal and they've been around since the dawn of time.

# / 00:09:27

Richard Brown

And the core of that problem is that if you're a person who thinks that your vote doesn't matter in this system, then that's a self-fulfilling prophecy because people who do believe that their vote matter, their vote does matter because they're actually voting. And so if people stay on the sidelines because they think that they can't move the needle, people that believe they can move the needle will control the system. So this is a commons issue that is universal, but we need to solve this problem with communication and organization and campaigning. And it's the community that really needs to help us out on this because we need to be as agnostic as we possibly can from the foundation.

# / 00:10:15

Richard Brown

But if community members believe that they need, they very strongly believe that their vote should head in direction X, then the community needs to self-organize and begin to campaign for X and to organize delegate systems for X or subDAO's collect votes for X. There is a lot of ways that the voting system can be optimized. But we're reluctant to make the system more complex than it already is because we're running into a situation where we have this friction. We have basically a two or three click voting process but we already have friction where people aren't engaging. And so if we add thresholding and delegating and liquidity or a liquid democracy or holography or any of the other futarchies. I don't know how to say that out loud. But if we had any one of these enormously complex mechanisms on top of it, we're going to be increasing friction exponentially and then we're going to see increasing drop off. So if the system needs to be moved, then we're looking to the community to come up with ways to move it in the way that they want to see it moved.

# / 00:11:27

Richard Brown

All right, I'm going to wrap this up, speed this up a bit. One of the memes that we need to address in the wider community is that MKR holders are increasing the stability fee in order to line their own pockets. And this one is particularly annoying to me because it's a fundamentally untrue and empirically provably untrue because all you have to do is overlay a stability fee on the price of a MKR over the last two or three months to see that every time a stability fee goes up MKR generally goes down. And so this is for me, one of the most heartwarming stories of MakerDAO recently is that we have a series of the most highly engaged stakeholders with the most skin in the game choosing a long term success of the project over short term game. And that's something that we need to ensure that people understand that nobody immediately makes money when the stability fee goes up.

# / 00:12:28

Richard Brown

The next beam that I want to address or more of a reminder's that with this voting system, we look for two different signals. There's the signal of MKR staked, that's what sets the direction of these executives and that's what determines the stability piece. But there's a secondary signal that is extremely important to us and that is that the voter turnout, we need to know as a group whether two people or two large holders have pushed this poll forward. But in another option, there is a vast, the higher number of smaller voters that didn't acquire the number of the weight to prioritize that selection. So we need to know if there's a disconnect between turnouts and we'll have the larger voters. And the only way we can get that is if people actually engage with the system.

# / 00:13:20

Richard Brown

Let's see, what else did I want to get into today? I think that we'll probably cut it off there. Just as a general overarching theme, it's very important for people to reengage with the voting portal, stake your Maker and make sure that you follow the calls and look at the discussion threads, look at Vishesh's graphs and make sure that your whale is hurting the system because otherwise [inaudible 00:13:51] controls from chat will determine your fate and nobody wants that. All right. Cyrus, I'm going to hand it off to you at this point. If, actually, sorry David they did say that? Just a side chat or do people have questions for them?

# / 00:14:04

David Utrobin

Yeah, it was just a side chat and Mateo Leibowitz saw posted a pretty interesting link to a coin funds governance model that assigns like a waiting the different tiers of like token amounts. So it was pretty interesting, like a lot of complex suggestion to a modification to our governance system.

# / 00:14:25

Richard Brown

Yeah. I'd be happy to spend like a minute or two talking about this if people are interested because we had another post in the subreddit that suggested finding the average between the two largest options or finding a median I guess in the poll. My concern there is that, yeah, I don't know if I have a concern, it feels a bit weird to me that perhaps we have one person, we'll simplify the model one person votes 1001 for a negative for one person votes 1001 for plus four. Is zero an equitable mid-point or is that an option that nobody prefers?

# / 00:15:04

Cyrus Younessi

I think there's all different ways of doing it, right? Like getting rid of the outliers then running some function on the remaining votes to come up. I mean, I'm sure there's ways to come up with a robust estimates.

# / 00:15:21

Richard Brown

I love to have those discussions and, but it comes back to something that I think that people might feel is a bit simplistic and maybe on the surface makes it appear that I'm missing the point here. But one of the things I want to reiterate that we're in a very complex space. We have a lot of really cool ideas. This is crypto so we're going to reinvent and engineer our way out of every problem that human nature has ever had. That sounds awesome and let's give it our best. But there's some significant issues involved with complexity and if we have a polling system and that polling system requires people to read a page and a half of documentation and algorithms to understand how that works. I have concerns about the success of an operation like that. People don't like to read.

# / 00:16:13

Richard Brown

They don't like to engage in systems. They don't like to stake their tokens. And the necessity of us trying to explain to them that you go to for X, but because your A, B and C and person who voted for why is an X, Y, and Z, explain to them why their vote is worth less than and, or more depending on circumstances and there's going to be a significant hurdle.

# / 00:16:38

Josh Wisniewski

The other problem with all that is that depending on what system you use, if it's not just pure coin vote, then people can always split the coins, multiple addresses. There's all those different ways to cheat.

# / 00:16:51

Richard Brown

Yeah, precisely. That's a great point Josh, because it ultimately comes down to civil protection, these things and almost every solution to the problem of governance has to do with somehow get it identity onto the blockchain or the other solution is... actually I just lost it. Oh yeah, sorry. Let's get identity onto the blockchain. That makes everything easier, but that's huge problem itself. Or listen, incentivize people to vote. And that's a huge problem as well because as far as I'm aware, and I say this a few times, but I'd love to hear somebody to correct me. There is no robust in iron clad identity solution on, I know that there's some really great ones and I'm a fan of, some of them, but I'm not unaware of rock solid identity solution on the blockchain and I am completely unaware of any incentivization model that's ever been applied to a voting mechanism that hasn't been immediately and disastrously exploiting for gain so, but that's not me shutting down the conversation. I'm actually asking. So if anybody does know of an incentivization model for voting, I would dearly love to hear about it.

# / 00:18:02

Cyrus Younessi

Do you have a target for how much MKR you want to see being voted or what kind of distribution of users or account addresses that are voting?

# / 00:18:13

Richard Brown

Well, this is where I have a tendency to, I don't want to say things too outlandish because Christine is here and she's going to do a cool quote, but I don't necessarily think the plutocracy is a bad thing for layer two, layer three, this is an application, right? It's skin in the game. These are highly engaged stakeholders, at the protocol level I think it's an absolute disaster. But as far as what I would like personally, I think it would be nice if we had enough of a distribution in the voting system that's, I don't know a 40, 60, 70% of the people that turn out have more MKR than the 30% of the largest holders possibly. So we know that this isn't just the ship being steered by two or three accounts. If we knew that there was enough people agreeing and, or being able to outweigh the top five holders or something I think would be healthy place to be.

# / 00:19:09

Josh Wisniewski

But I think the point is as long as the incentives are aligned, then plutocracy is okay because they're the ones that are going to lose the most money for a bad vote. Otherwise, if plutocracy is not okay because of the incentives and you have to go identity.

# / 00:19:29

Richard Brown

Yeah, I agree. And that's a great point because this is why I said earlier that I was felt so heartwarming that people have increased the fee and I know that a lot of people weren't happy with that, but that fee increase in my opinion stabilized or helped to increase the stability of the peg and make our holders in general took a haircut because of that because they understood that their incentives align with every other actors in the systems incentives, maybe whether they agree or believe it or not, it's we need to have a stable peg. You might find in the future that additional groups of stakeholders arise that have competing incentives and that will be a tricky situation. But yeah, you're right Josh, if we can agree that everybody's incentive's probably align and we talk then plutocracies are actually quite nice sometimes. [crosstalk 00:20:29] did you want to add something?

# / 00:20:37

David Utrobin

Yeah, I can read it out if you want.

# / 00:20:38

Richard Brown

Another victim. Sure.

# / 00:20:40

David Utrobin

Yeah. Mateo wrote in the chat "Rune has previously stated that turnout itself is not important as don't necessarily know whether majority's voting for the 'correct outcome.' Also, I don't think we can put much weight towards individual address. Participation is eventually that will just be exploited to", yeah, that's the point which I was making earlier. "More important is that there is always sufficient voters ready to vote for emergency shutdown. Yeah."

# / 00:21:07

Richard Brown

I think that, I agree with all of those points. I think that, the state, you have to start assigning numbers to some of these groups of people? So how many yeah, so I think in principle I agree with what Rune says.

# / 00:21:22

Matthew Rabinowitz

Yeah. And then that's, today you're voting on the stability fee or the DSR. I mean the question really is as the evolution, are we voting on the stability fee or are we going to be voting on the tuning of equations that do it for us?

# / 00:21:36

Richard Brown

Yeah, I agree. We need to clarify too, and this is sort of a loaded term recently, but this is scientific governance and whether you like or dislike that term, but the point of it is that ultimately we need to get to a space where opinions don't matter. So there's either empirical evidence or there's not empirical evidence that one or the other decisions are correct. And once we get into a model where we have that sort of black and white as much as possible, a black and white model to look at, it's far easier to find outlying opinions that would expose themselves as being an attack on government. So if we spend a few weeks looking at these python scripts and clean datasets and graphs that clearly state that X needs to happen. And then we have a poll where there's a large voter comes in and votes for Y and that brings us to a situation where we can start looking for trolling and or tax and then have some uncomfortable conversations about what governance attacks look like at that point. But the emergency shutdown is critically important to this.

# / 00:22:55

Josh Wisniewski

I have a quick question. I know you guys last week, I think it was, you talked about the changing state based off of the pole and the executive vote. Has that sort of been looked into or resolved or any solutions come forward?

# / 00:23:12

Richard Brown

I'm not sure I understand what you mean.

# / 00:23:14

David Utrobin

I think maybe it was about cadence. Do you mean-

# / 00:23:18

Richard Brown

Oh, I see...

# / 00:23:18

Josh Wisniewski

Yeah, voting cadence.

# / 00:23:20

Richard Brown

Yeah, that's actually a great question as well and I was going to get to it today but I was afraid that I was talking too much so I've cut it. We have some mechanical restrictions or there's functional restrictions in the existing voting portal right now we have a new version is coming up very soon. It has far more flexibility, but unfortunately right now we're in a position where we can only have active vote at a time and that includes polls and that's part of the reason why the cadence looks the way it does. My hope was that we would take the breathing room that the contract upgrade update provided us last week. Then we would have a discussion about what new cadences will look like, this week we would have a poll from Monday to Wednesday with the same all default options for Thursday morning. The same all default options and then immediately we would kick off another pole that would discuss do we want to alter the cadence? Do we want to think about executives on Monday or Tuesday, Friday cadence or Monday Thursday cadence or do we move to a 14 day cadence?

# / 00:24:28

Richard Brown

The problem is that the voting portal right now doesn't support that mechanism and so it's going to have to wait until I think two weeks before we can reevaluate them. Does that make sense? Did I lose you Josh?

# / 00:24:50

Josh Wisniewski

Well I was just wondering like I'm trying to understand the problem because last time you mentioned that changing the cadence longer isn't really a solution because it can always fail regardless how much time. So I don't really understand exactly what the issue is technically.

# / 00:25:10

Richard Brown

Sure. Well the problem here, there's some murkiness because we're kind of talking about three different issues. One issue is the speed or the length of the cadence is it, do we have a seven day governance cycle or do we have a 14 day governance cycle? The other issue is do we start executives on a Monday and give people the business week to get their hardware wallets at a storage or deal with their custody solutions in order to engage with the system? Because right now we have executives on Friday and presumably people have things to do on the weekend other than vote on MakerDAO issues. So there's the wish day we kick things off on, another issue that we wanted to address is, is the range of options that we provide in these polls are still valid because we want it to go from a 1% increments from negative four to positive four but doesn't make more sense to do that 2% increments and then simplify the UI a bit.

# / 00:26:12

Richard Brown

The other issue we have is that we have a system that's designed around continuous approval voting. And what that means is that in executive system, we have a vote that has been accepted by the MKR holders that represents the state of the system. But it's basically a picture of all of the stability or risk parameters locked in and been applied to the system. When we have a poll, people choose an option. We convert those options into a single executive vote and then we vote on that. And here's the issue that you're addressing. So we ran into the situation where we've gone into this paradigm, I guess, of assuming that as a new poll gets put into the executive system, this is new and because it's new, it's improved and therefore we all assume that people will be moving their MKR from the old picture, the old state of the system into the new executive.

# / 00:27:08

Richard Brown

And we got lulled into that expectation because it generally took about 10 hours for people to do just that. And a couple of weeks ago we had a situation where that didn't happen, where the new executive didn't get ratified or MKR didn't move from the old executive to the new executive all weekend. And we were in a position where we're designing or writing up the pole for the following week and we're asking ourselves because this poll is suggesting for the zero to 4% increase, but increase of what? The old stability fee represented in the old executive of the stability if you represented in the new executive? Which hasn't been ratified yet. So we can't release the poll without understanding what the state of the system is. And so the idea is that if we go to-

# / 00:27:56

Josh Wisniewski

So then-

# / 00:27:56

Richard Brown

Sorry, go ahead.

# / 00:27:57

Josh Wisniewski

So then, is that not just as simple as saying that instead of having the polls go plus or minus some percent, you go an absolute value, like we want to be at 15% and next week, do we want your polling for 19%? Not plus whatever, but not plus four, but [crosstalk 00:28:14].

# / 00:28:16

Richard Brown

Moving from a relative to absolute values was put out there too. We still have this issue where an executive can be decided halfway through the length of the polling in period. So if somebody says... Okay, sorry. So I guess that ties back to your absolute solution, with a relative solution we have that issue where executive voting could still be happening during the poll, which raises confusion. If we have absolute values, then we need to make sure that the number of options that represent those absolute values are possible depending on what the previous executive is. So it compensates our range.

# / 00:29:02

Aviv Milner

May I [crosstalk 00:29:02] question.

# / 00:29:02

Richard Brown

All right, go ahead. Yeah.

# / 00:29:07

Aviv Milner

So if we throw up an executive vote [inaudible 00:29:09] could change the stability fee, what does it look like if it doesn't pass?

# / 00:29:18

Richard Brown

Well, that's what I mean about the ambiguity. So we have this situation where I've been calling them weak executive. So we have an existing state of the system. We have a poll that presides, provides us with a new potential state of the system, a new executive vote. The assumption is in the community that okay, well, we'll just wait until the largest MKR holders ratify this thing and now we know what student's system looks like. That's the situation we ran into during that weekend where for whatever reason this, this new executive didn't get ratified. And so it created ambiguity. We had this weak executive vying for supremacy in the system. And the assumption we have to start asking ourselves a bunch of questions, like, why did that poll succeed? Why did the new executive and not get ratified? What is it about the old executive that people found more enticing? Is this just a matter of apathy or people schedules not aligning with our voting mechanism that we ran into a situation where there's so much ambiguity we don't know what's happening. I don't know how to answer that question.

# / 00:30:23

Aviv Milner

If I can just rephrase the question here. My question is, should there be finiteness like a time period where the executive vote ends to allow for it to fail and then we know that it failed and then it's over?

# / 00:30:40

Richard Brown

Yeah. [crosstalk 00:30:41].

# / 00:30:40

David Utrobin

Can I actually speak to that? I have kind of a theory. So if you see what Rich called the weak executive vote, where there's not a lot of people piling in their MKR so as to overwhelm the previous a hat or the previous proposal, then what you're going to see is because the previous proposal can be overthrown by a lower amount of MKR. People from the failing proposal will actually have to go back into the old proposal to kind of strengthen the status quo. That's kind of what I'm thinking to game theory is going to be the more proposals come out that don't actually pass that threshold amount so.

# / 00:31:18

Richard Brown

I can speak to this a bit because we tossed around a bunch of ideas about this. And so this is where we started talking about thresholding and time limits and timeouts. And so one of the ideas was we are thresholding a series of algorithms to the polls, or if it's less than X% of turnouts or less than X% higher results for one option, the poll doesn't go through and then we just don't have an executive. Yeah. Other solution that was moved for the executive was if the executive doesn't pass, if the new executive doesn't pass over the course of the next two or three days, anybody who voted for that executive just has their MKR returned to the previous option. And so we sort of clean out this weak executive idea.

# / 00:32:08

Josh Wisniewski

So I have a quick technical question. Because I don't understand this about the system or about the voting. If are all executives always active? So if an old one from like six months ago happens to have 50,000 MKR in it and the newest one that we pull only has 49,000. Does that mean that the six month old one is active?

# / 00:32:35

Richard Brown

[crosstalk 00:32:35].

# / 00:32:35

David Utrobin

Yeah. No, it's not. Once the hat has been lifted on a previous proposal, you can't reactivate a proposal once it gets surpassed.

# / 00:32:54

Josh Wisniewski

Okay so-

# / 00:32:54

Richard Brown

Yeah, the model here is [crosstalk 00:32:54] think about is that the executive vote is a set of configurations for a program and that program is MakerDAO. And so we can't allow, we can't revert the settings on a system that might have been upgraded in the background such as this. You can't apply old settings on a new system and so there's no backwards movement here. So once the executive has been approved, you can't go back.

# / 00:33:15

Josh Wisniewski

So this is only an issue with the most recent executive versus the newest executive. So basically it's the problem of one week or one version to the next.

# / 00:33:31

Richard Brown

Exactly. All right. I wasn't expecting so much engagement because usually people don't care about this stuff. So I'm actually quite encouraged. We need to continue this conversation though because I just realized that I've just eaten up 10 minutes of risks time, which you're not going to be happy about. If people want to continue this discussion, please click on the r/mkrgov subreddit link that I posted in the chat and let's try and figure out a solution to this problem.

# / 00:33:53

David Utrobin

At the same time, we're going to be doing the post call discussion as well, right? It's for people that want to stay a little late.

# / 00:33:58

Richard Brown

Yeah. If you want to hang out afterward. But before we get down another rabbit hole, Cyrus, sorry, I apologize. I'm going to hand this off to you now.

# / 00:34:06

Cyrus Younessi

No worries. So good discussion. I'm actually going to just hand it straight over to Vishesh right now. I think we're going to see some interesting stuff today given that DAI is above a dollar for the first time in a while.

# / 00:34:24

Vishesh Choudhry

Yeah. All right. Let me share my screen. Okay. And I will also share a link to this sheet just [inaudible 00:34:48]. Awesome. Okay. So rod strokes a lot has changed in the last week. I think the overarching connecting narrative here is just going to be that like it's weird. I think seeing a lot of full circle events from a lot of the leverage behavior that's been accumulating over the past few months that we've been dealing with the DAI price peg problem. And as everybody is aware, the entire ecosystem surrounding Maker has kind of changed a bit given what's been going on at the bull market and ETH prices. So I think good to take a lot of the same things that we've been looking at, but in a different context. So as far as ETH price, yeah, I mean ETH price has come up to and over the peg. So there's an apology. There's a 24 hour delay on these stats, but I do have the fresh stats as well.

# / 00:35:59

Vishesh Choudhry

So essentially stability fee has kind of come up and up and up from 11.5%, mid-April up to 19.5% to about two weeks ago. And then since then we've held the stability fee steady but the DAI price has sort of continued to come up. Now it's impossible to talk about this without talking about it in the context of what's going on with the ETH price. So we had kind of seen this fairly consistent inverse relationship between what had been going on with ETH prices and what had been going on with DAI prices. And I mentioned this a bit on the previous call in terms of the ratio of short term ETH price to long term youth price had been pretty well correlated to the DAI price that had been primarily in my opinion as a result of kind of what overall bullishness on ETH leading to a lot of that leverage behavior.

# / 00:36:56

Vishesh Choudhry

What's interesting is that it's really broken the pattern in the past two weeks given ETH price kind of skyrocketing. Now that is also explainable and it makes actually a ton of sense if you consider that a lot of what we've been looking at here is missing a big component, which is what is the demand for DAI and what those use cases are. Now, part of that is because it's hard to measure and track DAI demand and where exactly all that DAI is going and how it's being used. But what we've definitely measurably seen in the past I would say fourish days is just huge trading volume on DAI. And even this has a bit of a delay, so I'll just share what's been going on in the last 24 hours.

# / 00:37:45

Vishesh Choudhry

So DAI supply has come down to... It was at 85, had come down to about 80.9 a million and a PETH supply has also come down a little bit further. The collateral ratio has come up 60 points in the last 24 hours or so primarily as a function of ETH price. But this had in the intermediate range spiked up over 600 and then come back down a bit. So that tends to happen around ETH price movements is, you'll see here, the collateralization ratio will tend to spike just [inaudible 00:38:31] the collateralization ratio will tend to spike and then come back down a bit because mathematically it goes up when the ETH price goes up and then people kind of stabilize to a level they're comfortable with. Well in the last 24 hours or so that had shot up way over, it was at like 440, 450% that had shot up to 600 some percent given the ETH price change.

# / 00:38:55

Vishesh Choudhry

And then people were kind of comfortable with it stabilizing down around 580%, which is huge. I mean, that's a tremendous collateralization ratio. I think that is evidence of some deleveraging behavior, so, and this is corroborated with what's been going on with a lot of the trading volumes. In the past 24 hours or so 15 million DAI have been traded. So, and if you just slid that 24 hour range back a few more hours, it was something like 20 million. So what's interesting about this is a tremendous amount of DAI/ETH trading volume, but usually DAI/ETH trading volume is associated with a drop in DAI price. What we've seen now is DAI price skyrocketing with tremendous trading volume.

# / 00:39:47

Vishesh Choudhry

So what that actually says is a lot of folks selling ETH that they had been levered up on cashing out some of those profits in DAI terms and then not immediately selling that DAI for US dollars, which is A, like an extremely positive sign for Maker in that crypto people specifically see and understand the value of DAI as kind of a temporary shelter against volatility but also given it's stability, a good unit to sort of take those profits in.

# / 00:40:17

Vishesh Choudhry

I know there's been a lot of discussion around whether that's for tax purposes or whether those people are kind of waiting to again lever up. And I think we can only speculate this to the reason, but definitely a positive indicator for Maker as a system. I think people are showing a lot of confidence in the system. So what we saw was in the last 24 hours, a lot of this trading volume and happened on Oasis, ETH2DAI, but also a fair amount on Uniswap. I also bucketed out sort of at what prices these trades were happening and how many of these traded trades were happening at which prices? So most of the trades have been around a dollar to dollar one and then the volume it weighted average just like $1.09

# / 00:41:06

Vishesh Choudhry

So I think overall what we're seeing is people are okay with taking a little bit of a haircut on selling ETH for DAI in terms of doing that at like $1.02 cents because they're primarily cashing out on 40, 50% profits on ETH. And so that tiny amount of cost for trading DAI above the peg is worth it for them. What is going to be interesting is I know there's been a lot of discussion that, oh, DAI is above the peg and so we should definitely reduce the stability fee. A lot of this is primarily a function of cashing out those profits and not having taken another step after doing that. I think it's going to be an important discussion about what we think people will do with that DAI and how long they will sit with that DAI.

# / 00:41:58

Vishesh Choudhry

My guess is because people have been so levered up for so long and because fundamentally nothing other than ETH price has economically changed in the past two weeks. That there's a very good chance that a portion of that DAI will then when ETH price drops down or stabilizes a bit, gets sold again for ETH. So I think we should be careful about making too many reactionary changes right now because the most recent trend in the system over the past four or five days is not likely to just sit or hold where it is. I'm not saying it'll reverse entirely, but I think a little bit of wait and see is probably a smart strategy. So going back over to draws & wipes. So what we initially saw was a large quantity of DAI being minted. Again, after this line ends, there is an even larger quantity of DAI burned bringing the supply down to almost 81 million.

# / 00:42:57

Vishesh Choudhry

The circulation of that has been outstanding recently. I mean a large quantity of old debt had been closed out and a large quantity of new debt has been minted. And then subsequently a large quantity of new debt was closed out. So it was really interesting to see over the past few days, the age of debt has really significantly dropped, age of open debt. Compound, so what's been going with some of the secondary lending markets is the rates kind of ran up a little bit, which makes sense in terms of how much DAI demand has been over the past week or so. The rates ran up and then dropped down a bit. I think this makes sense in the context of and some of what's been going on with Nuo, some the other platforms has an interesting effect on Compound.

# / 00:43:49

Vishesh Choudhry

But effectively as the secondary lending platforms become more of a primary source of DAI for people that want to access to stablecoins. I think that there's been a lot of discussion about whether that helps hike price or not, but it definitely gives people access to that DAI without changing the overall supply. So at least in terms of supply, there's a positive effect there. And then the total loan supply and borrow volumes have not changed significantly but the rates have been fluctuating significantly. So I think there's just a lot of refinancing and people kind of changing hands but net the overall supply levels have stayed relatively stable. I mean there has not been very many draws recently, but a lot of the draws recently have just been on preexisting CDPs not a lot of new CDPs have been opened in the past 30 days or so. Yeah. So I'll kind of stop it there. I know that was long. And then if people have questions, I'm happy to double click on anything in particular.

# / 00:45:01

Cyrus Younessi

Cool. Thanks for Vishesh. I have a ton of questions.

# / 00:45:08

Richard Brown

Do you want to dig into questions that relate specifically to that or in ecosystem in general? Sorry, I want to-

# / 00:45:14

Cyrus Younessi

Just-

# / 00:45:15

Richard Brown

... Try to get Matthew before we run out of time.

# / 00:45:18

Cyrus Younessi

Oh, no in general so let's have him go first.

# / 00:45:23

Richard Brown

All right, cool. Yeah, I'm really looking forward to this. Matthew has been doing some really great recaps for us in the subreddit that are worth a read. I'll post the link in a second, but Mathew, I'm going to hand it off to you to set some context for us.

# / 00:45:37

Matthew Rabinowitz

All right, sure. Thank you. Yeah. This is some iterative academic exercise. Some of its empirical, some of it's well, hopefully logical but I believe it to be true. And then we're on the same path as everyone to pursuit of knowledge and some of that just more of so overtime time as we engage differently and learn different points specifically to me learning more about automation my point has totally shifted on that over time. So that said, let's just jump in. So the stability fee, it is where it is. It's 19 and a half. The poll now shows it decreasing by 2% we have seen that rally that we just talked about in the underlying collateral base in DAI has gone up, right? There is a risk however of the price being squeezed, the point Vishesh brought up is a really good one of what will people do now that they're in DAI, how long will it take before they sell back into ETH? It's an excellent point. That also being said, we also probably cleared out most of the market makers inventory. And in doing so where the price is right now, we also take the exact chance that the price actually can elevate much higher right now in any more increases for that same reason.

# / 00:46:48

Matthew Rabinowitz

So for those kinds of reasons, backing off the stability fee, which I only saw the poll 20 minutes ago, it looks like it's going to happen, or now it'll be a vote. That's a good thing. So I guess the basis where we always start on this is that CDPs in general, for the most part, rightfully should be acting on their selfish behalf. They should always be out for their own interest. So they'll take out a loan only if they gain value from it. The stability fee is too high economically, they'll contract their exposure. Conversely, if they can make money by taking out that loan with a lower rate or any rate, they will, all things being equal, they don't care about the system as a whole, nor really is that they're objective. They're just an end user.

# / 00:47:32

Matthew Rabinowitz

That's the basis for what we start the foundation of kind of the understanding of why people would act in a certain way. So when we see the rally in ETH and the outstanding DAI rally as well, and then back down, kind of means that the blended rate of a return of people using the system for leverage on ETH, the blended return for those participants, if the DAI is continuing to contract means that their return is probably really close to the stability fee, if not slightly below because that's why this the outstanding DAI is continuing to contract.

# / 00:48:06

Matthew Rabinowitz

So I mentioned this in some other post somewhere, it's a little bit like ski slaloming, you wait to start pivoting our weight, in this case, the stability fee earlier to try to not to overcorrect, not to have too much of that, the emotions, but when we see these other empirical data points coming up, we want to make sure we try to stay on the peg, not move after the peg is moving after us. That makes sense. So following on that thought, running out of DAI inventory's a bad thing for market Makers, not too much, not too little, just the right amount. So we should lower the stability fee accordingly and just slightly that looks like that's in our future. So if they truly run out of inventory and I have to yield to market makers to comment on that, we really need to watch that because that was... It's kind of the converse thing that Joe mentioned one time about when you see icebergs and trading where it looks like there's no more inventory and then somebody just keeps putting blocks of trades in at a certain price and it feels like it never ends.

# / 00:49:10

Matthew Rabinowitz

We might be at the very end of that. And if we're at the very end of that, that's really bad thing. Now everything I just outlined that really only makes sense kind of in a single collateral structure. So kind of onto the future of what I understand the DSR and Multi-Collateral DAI to be. And that is absolutely an educational moment for me because I am learning because I don't know the technical roadmap, I'm only using from what I've determined thus far. So the DSR throws much of what I just outlined out the window. It's just a critical tool for us to implement. So let's just take a moment and a shout out to everybody who designed it and wrote it and developed it because it's going to help us, please everybody volunteer, do something to help make that a reality, can't happen soon enough and it is still 'coming soon.'

# / 00:49:58

Matthew Rabinowitz

Right? So why is it so important? Because we're going to be establishing effect of a direct transfer of value from the borrower to the saver. We're now going to be implementing both aspects of the core of economics and that's that incentives work. Further, we'll address the vocal few that believe that Maker has elevated rates to further enrich themselves. It provides direct evidence to contradict that thesis. All right. So in this case we have an incentive to cost, which is the penalty to not spend so much on interest and incentive to earn by saving with the DSR. Clearly one is negative and one is positive. Each has its own elasticity and its own set of its own potency. So let me just share. I just, I put together a very basic chart and this is nothing like Vishesh's. So humor me, let me know when you can see it.

# / 00:50:52

Richard Brown

We can see it.

# / 00:50:57

Josh Wisniewski

Me too.

# / 00:50:58

Matthew Rabinowitz

All right. So in my mind this is going to be just an iterative game of how we get control of this animal and bring the overall stability fee back into a realm of usefulness for society. Right now it's being used primarily for leverage. It's primarily for on chain. It's primarily to make trading at trading bots and engines money as they optimize and create efficiencies and liquidity and all of that's useful and needed. All right, so then what? In a multi-cultural world, some of the collateral will have an end use that is going to be on chain, but some of it will be off. Now I struggled a long time and I still do with this multidimensional component about how some of the capital will be taken off chain in which directly degrades the price of DAI to US dollar somewhere.

# / 00:51:44

Matthew Rabinowitz

So we have to have a system that's going to help adjust for that. And for me, this is where my thinking has kind of evolved into why this PID algorithms are so essential and why they need to be implemented, not initially in a complete solution but rather as input to this type of governance call. So it would get rid of the emotion, get rid of the naysayers and just focuses on the empirical math. And the question also turns into what we were talking to at the very beginning is do we have weekly voting or does the algorithm change components of the DSR or the stability fee on a weekly basis, daily basis? Or am I actually more of an advocate for even at all the way down to the level of when DAI's being minted or burned.

# / 00:52:39

Matthew Rabinowitz

And not only but with an aspect, if you're going to mint 3000 DAI is very different than if you want a mint 30 million DAI, then further it makes a difference if you're planning to take that off chain or on chain, depending on these are the risk teams that are going to hopefully include this concept of if you're doing it for real estate, which is clearly off chain, there will be an impact on the price. The question will just be what will it be? If we follow this concept of having an algorithm do a PID, which is basically the same thing that cars use, autonomous cars when they are driving in a lane or your cruise control from 30 years ago. We need to always have humans veto the output, hence the emergency shutdown concept. How much voting we have? That's going to be a perpetual question. To me, it's much more on a turned into a voting to tune the algorithm over time and then ultimately vote if we don't like the output.

# / 00:53:37

Matthew Rabinowitz

All right, so for clarity. I'm not here to tell the Maker team or anybody how to do it. This is just my thoughts, what I believe makes sense. And ignorance is really bliss because I have no 'inside information' on the technical roadmap. So there's always going to be a concern about how a PID system or any system for that matter, how folks could 'game the system.' That concern will never disappear ever. It will however be able to make some folks an arbitrage profit. That's true. But then over time other folks will figure out how to front run the initial folks to get rid of it. At some point, all of the arbitrage folks for the most part, end up putting themselves out of business. But what they did in doing so inserted something amazing, which is efficiency in market depth, something right now we sorely need.

# / 00:54:22

Matthew Rabinowitz

So what is interesting is that if anyone wants to game the system, they can actually do that right now because we are live streaming this and for folks that want to change the stability fee, they can act accordingly, right? That they can actually take those decisions depending on how much MKR they have. So in an ironic world, we may actually want to have a PID tool and want people to gain the system. It sounds counterintuitive but it may end up helping us because we desperately need the liquidity and market depth. As for the chart, really the notion behind it was that the DSR initially as we implement it is raw alpha. It does something that's really different where it's directly removing the DAI supplied. So during the last three, four months of these calls, as we've tried to increase the stability fee to cause the reduction in supply, the DSR does it directly just simply because of the savings aspect.

# / 00:55:20

Matthew Rabinowitz

In doing so, we will find when we start off at 100 basis points, capturing that data is just essential. We will find, I don't know what the top point of the DSR will be, but it will get to the point where it will just be silly for hedge funds not to participate in just raw alpha. But once we do that, once we can control the DSR by incrementally decreasing it, then the stability fee and going back and forth one than the other, so we can identify the signal between the two. We'll be able to hone and pull both of them back down into, around what I call the sweet spot over the next three to five years where I can see a world where the savings rate will be basically competitive and outperform banks and the stability fee will outperform the lending side of a bank. And the risk premium in between is basically what Maker token holders embrace.

# / 00:56:17

Richard Brown

I want to jump with a question here actually. Sorry. Did I cut you off? Did you say that's all?

# / 00:56:21

Matthew Rabinowitz

No, no. That's all. Thank you.

# / 00:56:22

Richard Brown

All right. No, that's great. I have a few questions and one of them is going to be a basic question. Can we get a refresher on PIDs?

# / 00:56:31

Matthew Rabinowitz

Yeah.

# / 00:56:31

Richard Brown

We're all talking about?

# / 00:56:33

Matthew Rabinowitz

Yeah. PID stands for Proportional Integrational and Derivative. Hang on a second. Think I put some links at the bottom here. I'll send this out in a little bit, but I'll share my screen on something else.

# / 00:56:53

Josh Wisniewski

So PID is, it's a control loop. So it's used if you have a thermostat, it's used in thermostats, it's used in ovens. It's used in cruise control, everything.

# / 00:57:09

Matthew Rabinowitz

Precisely. Yeah. Ovens, thermostats, that would be the P in PID. That's just proportional. It's really on and off. So imagine if you were in your car going down a lane and you hit autopilot mode and it just pinged back and forth, it will drive you crazy. No one would want to use it. But in a true PID controller, and I mean this is raspberrypie.org, right? So this site using an autonomous car that they have sample code on here that we can use or anybody could use for that matter. The point is that you start using integral and derivative control to then to damp in the oscillation back to hone in to the ultimate target. So for me the ultimate target is to get back down to those 2%, one and half percent numbers that I showed on the previous PDF. And a PID would allow us to do that. The question would be just tuning it and that is not an easy that, a working group needs to be set up in my respectful opinion to help start to develop this and use it on these governance called based on the data we get then ultimately migrate that code and tune it off chain, bring it on chain and continue to vote on the tuning equation. The tuning variables.

# / 00:58:22

Josh Wisniewski

Yes. So what are you thinking about inputs? Because I think that's the hard part is what is the air? Where's that signal coming from? Is that just price or is that a bunch of-

# / 00:58:34

Matthew Rabinowitz

No, no, no, no, no [crosstalk 00:58:35] well it would definitely be the DAI price. That's obvious, that's a no brainer. But it would also be the amount of the DAI stability fee, the amount of DAI that's in that, the amount of DAI that's locked up, the amount of the current stability fee, the amount of DAI outstanding. I mean those first four or five, you need more than that. But that's a great place to start.

# / 00:59:04

Josh Wisniewski

I mean, right think about [crosstalk 00:59:06].

# / 00:59:07

Matthew Rabinowitz

Yeah, I mean just think about right now of a car drive. I mean, the old ships use to use PID systems on how to sail. And most of those are just based on wind and where they're located. We need other inputs but a significant portion of what we need, we have in front of us.

# / 00:59:26

Josh Wisniewski

Right. I am a controls engineer by trade programmer. So I've used PIDs lots, there's probably one within 20 feet of everybody in this chat right now. But basically they're used on every motor and machine, but so basically your proportional gives you your air correction. That's like a fixed multiplication amount. So if the DAI price is down 10 cents, then you'd do 10 cents times some value, which would set stability fee. The integral, I can't remember what that does exactly, but derivative is air over time. So the last 1000 samples are basically interpreted so that you don't get a dead band so that the stability fee isn't fluctuating or flickering for no reason week to week because the air goes to zero or something. So if it's at a dollar, you don't start dropping the stability fee.

# / 01:00:40

Richard Brown

Okay. That's great context. I actually, the reason I asked is because I wanted to, I assumed it wasn't the same thing I knew from electronics, but apparently it is. So that's good. That's good feedback. I want to touch on something that you mentioned at the beginning of your talk, Matthew about the impact that empty inventories from market makers might have when and or if we see that people are going to start flooding the market with their flight to safety DAI that they're collecting right now. And the general consensus seems to be, or the impression I'm getting is that you think that there might be something bad that's going to happen then because inventories might be depleted at that point. But isn't there a counter argument that we might be looking at a more healthy price discovery system at that point where people are actually not fighting against market Makers that are looking to dump all the cheap DAI that they bought in house?

# / 01:01:41

Matthew Rabinowitz

Yes and no. Right. I mean you could make the opinion. It's a good point. You could also take the view that when you have kind of an artificial amount of supply hanging out there that somebody has to buy up before you have real price discovery. We didn't have it before and if we're getting past one right now, then if the price keeps going up, that means stability fee is artificially too high because we had to chew through that supply to get there.

# / 01:02:09

Vishesh Choudhry

So just to chime in there, I think that's a really good point is when we're talking about like a PID style, like automated management system, then it does of mess up the signals and it makes it harder to tell what the true values of those inputs are or the realized values I would say. Right. So if you have a highly illiquid DAI market, then there's kind of the DAI price at which the trades are occurring and then there's kind of a realized DAI price, which is based on a certain amount of volume that you're looking to trade, what actual price would you be able to get overall? And that's a function not only of what the most recent DAI price is, but also how liquid that DAI price is. That being said, like if the goal is management of the system and sort of clear signals, et cetera, it is good to have a more liquid markets so that you truly know what's going on.

# / 01:03:02

Vishesh Choudhry

But if we're just talking about DAI price, it's not necessarily bad for the DAI price for there to be low market maker inventory because that illiquidity is more than anything likely to drive up the price. So it's kind of like what goal you're talking about there, but illiquidity is not necessarily a bad thing to just make that a little bit harder to properly fine tune those variables.

# / 01:03:23

Josh Wisniewski

So one of your criterias in the PID could be that your market makers are at 50% on both sides. And then if they're at 75% to one side, that's part of your air, you get 25% air then because your target's 50, 50.

# / 01:03:42

Matthew Rabinowitz

I think that's a good, good thing for us to chat about in a reddit area. I don't know exactly what components we would all put inside of it because it also depends again, when how often does the PID, the algorithm run? If it's run once a week. You can make it really comprehensive and really, really thick in what code it executes, it may cost more gas, but who cares, right? If you put it down all the way at the level where DAI gets minted or burned, you want to have it really light and thin. Right. So I can imagine both angles being useful.

# / 01:04:32

Richard Brown

Okay. Thanks Matthew, that was great and it's fun and interesting conversation. I think that we're going to be having again and again in the future. Cyrus, so you mentioned before I cut you off couple minutes or 10 minutes ago that you had some questions you want to ask.

# / 01:04:46

Cyrus Younessi

Yeah, I mean I just wanted to talk about the DAI price and some of the data Vishesh presented. First question is, do we know why demand for leverage has dropped despite the continuing ETH rally and do we care to try to figure out speculator behavior? And the reason I ask is because we used to fear the price rallies as being damaging for the ETH price back when DAI was trading like 96, 97 cents and it seemed like we were on the cusp of a break out in the markets. There was this urgency to raising the stability fee, so that DAI is not harmed more. But now if we're just going to kind of accept that it's random, then does that mean we just kind of ignore this correlation in the future if it's going to be unpredictable anyways?

# / 01:05:49

Vishesh Choudhry

I would love to chime in on that. So this was actually a question that was raised a couple of days ago in the Maker chat. But I wouldn't say it's quite random. So just because it hasn't followed the sort of simple trend that we've expected doesn't necessarily mean that it's random. What I think has happened is we don't actually know if the demand for leverage has necessarily significantly decreased because what I think is more the explanation is there is a larger signal that is definitely outweighing that even if it potentially positive. And so that larger signal is just the tremendous amount of ETH/DAI trading, particularly people cashing out ETH and then holding onto that DAI. Now we have in the past 'feared' rises in ETH price because ETH price had overall like on a long term weighted average been what people I think considered cheap.

# / 01:06:54

Vishesh Choudhry

I think the point is in the short term ETH price and this is why I've kind of tried to look at that ratio short to long term rather than just simply ETH price. Because the point in time I don't think necessarily tells us anything. It's more about what is the trend that people are perceiving. And so what I think is going on right now is in the short term ETH price is very high. It is unclear what people's sort of if you think about like GBMs and random walks and stuff like that, what peoples expected trend is over time for ETH price at this point. And that's where I don't think it is necessarily productive to guess at what the speculators are doing or what they're thinking. But as far as explaining what has been going on, I do think that that sort of selling ETH signal and cashing out on some of those profits has significantly outweighed anything that we would be able to see in terms of a depressive effect on DAI price from even if there were more lever seekers than in the past. Does that make sense?

# / 01:08:00

Cyrus Younessi

Yeah. That makes perfect sense. But that's kind of two things. One is it's kind of backward looking, right? We only know after the fact whether speculators taught ETH was cheap or not cheap. And then secondly, like what if they're wrong? I mean, what if they think ETH is not cheap anymore, but then he continues to rally up like crazy. How does that affect policy tools that MKR voters need to consider?

# / 01:08:34

Vishesh Choudhry

Yeah, I mean, 100% and this is why it's not easy to manage monetary policy and why I've kind of cautioned against too much short timescale reactionary changes because that time can be our friend in terms of helping us understand what's actually going on. But it is 100% by definition, backward looking. And I think a lot of what we've been doing with DAI price is a can seriously be considered backward looking in that when DAI price suffers and we see ETH price going up, we draw this correlation and say that, okay, well one is either related to the other because of the other or whatever.

# / 01:09:16

Vishesh Choudhry

Now when we see this sort of significant jump in ETH price, we have to I think expand the scale of what relationships we're looking at. And so the best that I think we'll ever be able to do in terms of looking at data like that and managing a monetary policy and actually a PID system is to some extent a backward looking by nature. The best that I think we'll be able to do in any sort of reasonable level of effort that we can implement within the next few weeks is looking at a better function for what's been going on with those ETH prices and how it's been related to the DAI price. And I think the key there and we're never going to be able to properly estimate people's perceptions. But the key there is probably going to be looking deeper into the relationship between short and long term ETH price is my guess, but a great answer I know.

# / 01:10:16

Cyrus Younessi

Yeah, no that makes perfect sense. I think we're on the same page there. Okay. So I guess slightly shifting topics. I also am curious about people's opinions on... I mean, the policy..., our response to a expensive DAI price is not necessarily the same as that to a cheap DAI price because the risk profile is very asymmetrical soaking up excess... trying to soak up die from a system is very different from trying to create more of it. And obviously right now there's about 20 million DAI room left in the debt ceiling. I mean technically they're supposed to be this incentive for people to print DAI right, if DAI is trading above the dollar? It's kind of like a incentive design that doesn't necessarily exist on the deeper side, do we factor that in or do we just say, I mean if DAI price is above a dollar then MKR holders should vote for a few degrees?

# / 01:11:35

Richard Brown

Well that's a great question too because I think that this is something that we've been wrestling with for a while is whether... part of the system design was CFPs using or using CDPs for DAI arbitrage. Right? Then I'm not convinced that the benefits that people can see from that outweigh benefits they can just find on the open market with their DAI or with their ETH so.

# / 01:11:58

Cyrus Younessi

And this is why I'm speculator demand for leverage is so important. If we could forecast it then we could forecast if we think traders are market makers will print up that remaining debt ceiling to push the DAI price down. For example, like if ETH was at $100 right now, they would probably print it and push the DAI price down. But it looks like, I mean so far in the last two days, they haven't actually been doing that DAI supplies from going down. We saw that one huge wipe in a few days ago.

# / 01:12:37

Vishesh Choudhry

Yeah. So I think it's a really good point. I mean and I know there's been a lot of like the stupidest, simplest formula that we could use to manage monetary policy is to say if DAI is above the peg increase or decrease the stability fee, if DAI is below the peg increase it. The whole point of why we're all spending so much time and effort trying to work on these problems is to get to better answers than that. And so like, I think it's an extremely important point to consider that Maker is not a perfectly symmetric system and it is much harder to bring the DAI price back up than it is to bring it down. There is a built in arbitrage mechanism. One DAI is above a dollar and everyone is incentivized, I'm incentivized to draw DAI out and sell it when DAI is above a dollar. The only case where that is-

# / 01:13:33

Matthew Rabinowitz

Only if you're accepting the stability fee.

# / 01:13:35

Vishesh Choudhry

So this is where time becomes really important as it depends on your time exposure to that stability fee. Right. So it could theoretically not matter if I'm able to, with limited transaction cost, take that DAI, sell it for ETH and then sell it back and pay back my debt. I could effectively just collect a simple arbitrage profit minus some transaction costs minus the time that I'm exposed to price volatility in ETH. And I think that's a really important point to consider is like, what's the liquidity of DAI? How many trades are on the order book, what's the potential that in that time period I am exposed to significant price changes.

# / 01:14:21

Vishesh Choudhry

Just to answer that question on the chat group. Like, no, I've got tiny balances on everything about doing anything in any significant volume. But yeah, I mean I think the time that you're exposed to that price volatility is a significant factor in how profitable it is to arb DAI. But overall I think by and large, it's going to be profitable. And so at least for most people and so I do think there is a natural mechanism that is built into Maker for when DAI is above a dollar to have sort of a downward price pressure. We assumed that there was going to be a similar, I think the initial white papers assumption was there's going to be a similar natural case when DAI's below a dollar for people to pay back their debts at a discount.

# / 01:15:10

Vishesh Choudhry

The thing, and this is where the whole conversation has been about is people have not necessarily been willing to do that because they were kind of holding on for some other bigger profit. And what is interesting is, and to me this is like kind of a big this week. It's kind of a big moment for Maker because what I see is a lot of that leverage behavior over time now kind of coming out, people cashing out on a lot of those levers and paying down a lot of bad debt to really bring down the DAI supply. I think down to 80, 81 million was a significant amount. But what is-

# / 01:15:48

Richard Brown

[crosstalk 01:15:48] yeah, I'm trying to figure out the impact of the stability for you versus third party lending markets versus X, Y and Z or versus the bull run. Like what stabilized the peg and people, depending on where they're most invested, have different ideas. I'm beginning to wonder though if the stability fee is, in my opinion, the stability fee is the primary motivating factor. And I think that we've seen some activity right now where people have been watching that stability fee creep up and this bull run has given them the perfect opportunity to get out of a CDP that they don't want to be in anymore. So the bull run open the door to allow the stability for you to be more effective. Am I looking at this from a naive perspective or does that make sense?

# / 01:16:31

Vishesh Choudhry

I mean that makes total sense to me. It's a holistic equation, right? It's not like any one thing. This was kind of the point of that calculator that I had shared a while back is there is an overall profitability equation. The expected increase of ETH price from where we are currently is one variable. The stability fee is another variable. And something that I didn't capture that is very hard for any of us could capture at the moment is the liquidity of DAI and the liquidity of ETH and the volatility in those time periods is also a complicating variable in terms of it changes the likelihood that you get knocked out of your CDP and it changes the likelihood that you can realize that theoretical profits that you're making. So it's complex is the answer, but that's definitely a part of it.

# / 01:17:23

Matthew Rabinowitz

Yeah. And the question also will be, once we have the DAI savings rate, will there be a corresponding effect? Because my humble opinion is the DSR will be a far more potent tool than the underlyings then the stability fee in terms of getting rid of outstanding supply. So where you were just outlining a moment ago that it's much easier to than getting the price of DAI to get back up was more challenging than it was to let it fall back down. I would venture to bet we're going to be having a similar argument, but at the other side and in six months.

# / 01:18:00

Vishesh Choudhry

All right. I would already agree with that. I think that the DAI savings rate like fundamentally changes the economics and is a economically more rich counterpart to the stability fee. This stability fee is kind of like a simple interest rate, it doesn't actually inherently necessarily have the effect that we would want it to. But the DAI savings rate is kind of like a bigger and better lever if you think about it that way.

# / 01:18:26

Josh Wisniewski

What about-

# / 01:18:27

Matthew Rabinowitz

It's a lever for the masses. I mean the stability fee, people are willing to endure all sorts of pain because the underlying collateral can generate 40% return in three days. So if you had to pay 20% a year, that's not really, so it's just an annoyance right now. It's not a super motivation to close out your CDP. It's an annoying as hell if you don't, or if you're not one of the folks that are generating those kinds of returns and you decided to buy a car with it. It can of course be annoying if you compare it to the market, but when you get to the underlying DAI, the DAI savings rate and the number of people globally that would be able to use it, it will be very potent.

# / 01:19:08

Vishesh Choudhry

Agreed.

# / 01:19:12

Josh Wisniewski

What about I don't know if it's been looked into, but not quite going back to the PID conversation, but you can have simple mechanisms like if DAI is a 99 cents, then you can sort of oppose that off the peg so that printing it, you have to have, you basically use up a dollar and one debt denominated in DAI, but you really only get a market value of 99 cents out of that. That basically instantly steals that penny of profit away from a CDP printer. So if they're off by 10 cents, then they're basically printing it. They're creating it at a dollar 10, but the market value would be 90 cents if the market value is 90 cents at that time.

# / 01:20:19

Vishesh Choudhry

Hey, sorry, just real quick. I don't want to necessarily change the topic, but I did think we kind of skipped over one item was regarding the current state of things and how high the collateralization ratio is and given the amount of DAI inventory that is sort of sitting with all the different traders that cashed out on ETH. To me that is a economically precarious moment because what's potentially positive about the high collateralization ratio in that scenario is that people are confident in Maker, DAI is heavily backed. There's been all these beautiful graphics that people have tweeted out. How many dollars there are to every DAI. But what I fear is that there's a significant collateralization ratio within the system because people fear a drop in ETH price and they don't necessarily want to get liquidated.

# / 01:21:19

Vishesh Choudhry

And so what I think to me that actually says is at the... And this is where there was actually an earlier like four or five weeks ago conversation about what can we learn from the collateralization ratio that could be Cyrus, what you were kind of looking for in terms of how can we estimate how bullish people are, is kind of like a translated or an adjusted metric of the collateralization ratio in nominal dollar terms. So sort of relative to ETH price how much collateral is in the system and maybe that's something that we can look at because I think right now actually people are afraid of DAI price, they've seen the DAI price come up so much, they're afraid of it coming down a bit and getting liquidated. And so they've kept this massive buffer of collateral in the system.

# / 01:22:08

Matthew Rabinowitz

Yeah, I would take the other side of that which is saying that the reason why DAI was mentioning before about like the blended return, the reason why we only have one side, the stability fee right now and if the DAI supply is decreasing that means on a selfish level itself, CDP on a blended level is not returning 19.5% per year. Right? But that also means to me when you see an ETH underlying collateral accelerate and you have higher collateralization, if we were, and discount the moment for what would happen to the DAI price for a moment, but if we reduce the stability fee today back down to 1% just as a gross example, I think we would see DAI being minted like mad. I think the challenge is right now the only CDPs that have significant exposure out now have whatever algorithm they've got that's generating a return that's blended at 19 and a half or slightly lower. I think if we had the other side of the equation, the savings side, and we wouldn't, we could have a way to control the price that that's the rate that to me, that's the core issue right now is what would happen if we set it down to five, DAI would be minted like mad today, but the price would get degraded and that's not what we want.

# / 01:23:25

Matthew Rabinowitz

We need that corresponding component. But if we had that, the outstanding DAI in my opinion, you've probably just add another zero outstanding to it or multiply by three or four.

# / 01:23:41

Primoz Kordez

We [inaudible 01:23:42] one interesting observation based on the spreadsheet that you provided, there was about 122 Ether being withdrawn from the CDPs. That's about 30 million in DAI, but the supply fail I think by about four or 5 million. So I'm questioning myself. Why would people not pay their debt if they're withdrawing their collateral? Now, a theory that I have is that they might be migrating to other coins such as Bitcoin and the other theory is that these guys, I mean, they should have paid their debt because they're paying interest on it. But there's one idea that these guys could be waiting for Ether to crash because it's like it grew crazy like crazy and they'd believe once it crashes, they might step back into Ether from the DAI they seats on. So we should have this positive effect if you ask me if this happens, what do you think?

# / 01:24:50

Vishesh Choudhry

So yeah, I mean, I had mentioned that earlier. I think like the amount of DAI that's sitting out. Just one quick thing to note the DAI, like a lot of DAI was paid back in the last 24 hours. So that is happening and that is reasonable. You lever up on the ETH, you draw out a bunch of DAI, ETH goes up a bunch, you pay back some of that debt like that makes sense. That also says is that given the current stability fee right now, kind of what Matthew was saying is right. DAI like the overall profitability is probably about where it should be. And so maybe we can learn from that, that the stability fee given a non-DSR environment is about right? But to your point, a lot of that DAI I think is just kind of sitting there and there's a huge buffer of collateral because people are kind of waiting to get back into ETH when ETH price goes down a bit from where it's at. So I think that is also a sentiment indicator was my point, which is I think people are kind of at least a significant portion of CDP holders are expecting the price to go down a little bit from here soon or at least kind of hedging against that possibility.

# / 01:26:05

Vishesh Choudhry

And so for the capability to wait out that scenario, they are okay with paying the current stability fee as well is another way to look at it.

# / 01:26:21

Primoz Kordez

Yeah. these are exactly my thoughts on that, I believe they will buy back into Ether because otherwise they would just repay the that. So it's kind of a positive sign on the supply perspective. I mean back perspective if this happens.

# / 01:26:37

Vishesh Choudhry

But also like if we kind of think about what we're doing here, this is a use case for a stablecoin. This is part of what DAI exists to do is to have this kind of stable shelter, stable unit of account that people can kind of shift in and out of so that they can take advantage of or hedge against volatility. And then there is a certain percentage cost that people are willing to pay to have access to that opportunity. And then we're just kind of fine tuning what that cost is. But yeah, I agree with Cyrus. This is going to be so much more complex with multiple assets.

# / 01:27:15

Richard Brown

All right, I want to jump in. It's right the hour and a half mark and I have a hard stop so I'm going to need to stop recoding and everybody is welcome to hang out and continue to chat if they like.

# / 01:27:33

Cyrus Younessi

Unfortunately, I got to get going too.

# / 01:27:35

Richard Brown

All right. I want to thank Vishesh, Matthew and Cyrus and all the rest for the great questions. Thank you Josh a new face. The video audio video will be posted to this. I'll edit it in a couple of hours. We'll have a summary of all the most important points that we discussed and once again, please continue the discussion there so we can continue the conversation. The executive vote, Aaron, it is going live tomorrow at 4:00 AM or 4:00 PM UTC, so 9:00 PSD. All right. Thanks everyone. See you next week.