Hello Compound community!
I’d like to gauge sentiment on reducing the cMKR borrow limit (currently set to 25,000 MKR). I think this could help mitigate risks to the Compound protocol and wider defi ecosystem, without negatively impacting protocol usage and financial KPIs.
Background
MakerDAO controls the DAI stablecoin system through a governance mechanism directed by MKR token holders. Broadly, there are two governance mechanisms available for MKR holders to influence:
- Governance module: This component has administrative control over the Maker protocol. The majority of assets and admin privileges are safeguarded behind the “pause proxy”, which imposes a delay period before passed governance proposals can be enacted similar to Compound’s governance timelock. During this delay period, proposals can be cancelled with a new proposal that overtakes the queued proposal’s voter support.
- Emergency shutdown module: This component allows MKR holders to burn their tokens to trigger global settlement (currently requiring a 100k MKR threshold of tokens burned to be triggered). All outstanding debts are settled against collateral at current oracle prices, and DAI becomes redeemable for a pro rata share of collateral (but may begin to shift in value from $1 due to market movements).
The use of a timelock delay (currently set to 2 days) with possibility to cancel malicious proposals significantly mitigates risk of attack on the governance module. But the emergency shutdown module has no delay on activation by design - the intent is that it could be used in case of a critical bug or oracle problem, where standard governance would be too slow to react. So the risk of malicious triggering of emergency shutdown has become the primary attack vector for Maker governance.
Maker has tried to mitigate this risk by raising the emergency shutdown threshold (minimum amount of MKR required to trigger ESM), from 50k to 75k and now to the current 100k threshold (roughly 11% of circulating supply). Further increases might be untenable, because they would reduce the ability of MKR holders to trigger shutdown in cases where it’s really necessary (eg. critical bug that could lead to collateral being stolen/minting unbacked DAI).
Maker primarily evaluates these thresholds from the perspective of rational attackers - eg. could an attacker earn a profit by maliciously shutting down the system? An attacker’s costs include cost of acquisition of necessary MKR tokens for the attack, while potential sources of profits include short positions in MKR, defi tokens, or other related crypto assets.
The availability of borrowable MKR tokens can significantly reduce the cost of attack - while the borrowed tokens would be burned as part of shutdown, the cost to repurchase MKR and close the loan could be much less after an attack vs purchasing MKR beforehand. By reducing the maximum MKR borrow limit, Compound could help reduce the risk of malicious shutdown. This would in turn make MKR and DAI less risky as collateral assets, which would reduce tail risk faced by the Compound protocol.
Proposal Ideas
Option 1: Deactivate MKR borrowing entirely
Comptroller > _setBorrowPaused > cMKR > True
This would remove the ability to borrow MKR from the cMKR market (similar to setting the borrow limit to 0 MKR). Existing positions would be unaffected, but no new borrowing positions could be opened.
Option 2: Reduce MKR borrow cap from 25,000 to 5,000
Comptroller > _setMarketBorrowCaps > cMKR > 5,000 E18
5,000 MKR is lower than the current supplied amount, so this wouldn’t have any immediate impact on the cMKR market. This would still allow for some amount of borrowing against this market (and more than enough to meet historical borrow demand across Compound and Aave), so Compound can continue to earn MKR reserves.
Cost Benefit Comparison
Benefits of limiting MKR borrowing:
- Reduce tail risk of MKR and DAI collateral on Compound
- Benefit wider defi ecosystem by reducing risk to DAI stablecoin system
- Improve relationship with MakerDAO (partnership potential is already deepening with Compound D3M proposal, and this could further solidify friendly ties)
- Gain business from MKR whales (many large holders may be reluctant to collateralize their MKR due to increasing governance risk, and reducing/eliminating borrowing could address these concerns)
Drawbacks of limiting MKR borrowing:
- Reduce reserve growth of cMKR market
- Marginally reduce utility of Compound money market (eg. users who wanted to borrow large amounts of MKR for non-malicious purposes like trading or market making wouldn’t be able to)
On balance, I think reducing or eliminating MKR borrowing would probably lead to an improvement in Compound’s financials. The cMKR market would see reduced reserve accumulation, but an influx of MKR collateralized borrowers could more than offset this with stablecoin and ETH reserve growth. Considering that the cMKR market has accumulated only around ~$1,000 worth of reserves in the 6 months since launch, this should not be a tough threshold to meet.
Assuming 3% stablecoin borrow rate and 7.5% reserve factor, offsetting the lost cMKR reserve growth (~$2,000 per year) would require only about $900,000 in net new stablecoin borrowing, which seems easily attainable.
Initial sentiment poll (non binding):
- Yes (Option 1): Eliminate MKR borrowing entirely
- Yes (Option 2): Reduce MKR borrow cap to 5,000 MKR
- No: Don’t change current 25,000 MKR borrow cap
- Abstain
If this gets significant support from the community, I’ll push this forward through the Compound governance process (including any needed technical or risk review, along with making formal on chain proposal).