The Tally Newsletter, Issue 63
February 4, 2022
Welcome back for issue 63 of the Tally Newsletter, a publication focused on defi and DAO governance. We’ll keep you updated on key proposals, procedural changes, newly launched voting systems, shifting power dynamics, and anything else you need to know to be an informed citizen.
This week we cover:
MakerDAO KYC/AML Research Under Scrutiny
Solana’s Wormhole Bridge Receives Bailout After Hack
Justin Sun Launches Surprise Compound Governance Proposal
Plus brief updates from the DAO ecosystem!
Maker’s Regulatory Research Causes Concern about Decentralization
TL;DR: While Maker remains committed to maintaining permissionless access to DAI, it has growing regulatory exposure as it ventures into real world assets and institutional lending agreements.
While DAI was initially backed solely by ETH, inability to meet stablecoin demand with only this asset has led Maker to support an increasing list of collateral assets and borrowing arrangements. In addition to other large crypto assets such as LINK and bridged crypto tokens like WBTC, Maker’s collateral portfolio has grown to include a large share of fiat backed stablecoins such as USDC.
DAI’s stablecoin backing is problematic from a few perspectives. It lowers public perception of DAI’s censorship resistance (there’s a risk of stablecoin issuers being forced to freeze Maker funds), involves potentially considerable credit risk from the issuers, and doesn’t contribute any revenue to offset the risk. So while it has offered an important outlet to balance supply and demand for DAI, reducing excessive stablecoin backing is a key priority within Maker governance.
With standard crypto vaults seemingly unable to make up the difference despite continuing borrowing rate reductions, Maker has turned to real world assets (RWA) and institutional vaults as key sources of future supply growth. RWA includes lending against real estate and invoice financial collateral, while institutional vaults allow known counterparties like trading firms to access large credit lines with reduced fees.
Each of these mechanisms offers the benefit of sustainable revenue and credit risk diversification, but they also introduce new legal and regulatory questions. For example, certain RWA or institutional vault onboarding processes might create a “customer relationship” that falls within the scope of financial regulations.
This brings us to the current controversy over KYC regulations at MakerDAO. Maker recently funded a $4,500 grant to explore potential regulatory risks and specifically KYC/AML recommendations issued by the Financial Action Task Force, an intergovernmental regulatory organization. While this initially attracted minimal attention, it raised more concern after being surfaced on Twitter by Yearn contributor Banteg.
Along with several joking takes on the issue (like the tweet below), many had real concerns about the imposition of KYC regulations into defi.
One the one hand, regulatory research can be a valuable way for protocols to reduce risk and maintain their core values (such as permissionless access and decentralization). But research could also indicate a tacit acceptance of regulation, when many within the crypto space are vehemently opposed to KYC and financial surveillance as a matter of principle.
Wormhole Bridge Receives Bailout for $320 Million Hack Loss
TL;DR: Trading firm Jump Crypto backstopped the roughly 120k ETH stolen in the heist, avoiding losses for users and Solana defi platforms.
The Solana ecosystem saw its largest ever hack this past week, with roughly $320 million stolen from the prominent Wormhole bridge. A faulty contract with missing validation checks allowed a user to mint 120k worth of unbacked whETH (Wormhole bridged ETH on Solana). The majority of this was then immediately bridged back to the Ethereum side, depleting roughly 90k ETH from Wormhole’s escrow, while remaining ETH was market sold into decentralized exchanges on the Solana side.
This could have caused a cascade of insolvencies and breakdowns across key Solana defi projects that integrated with Wormhole ETH, most notably lending protocols such as Solend. But luckily for these protocols and users, trading firm Jump Crypto agreed to backstop the lost funds and ensure full backing and redeemability.
While this incident showed the relative fragility of the Solana ecosystem, with far less experience to draw on for safe contract development, it also shows how well funded project backers can significantly reduce risk for end users. Jump may have lost a percent or more of their capital, but the rest of the ecosystem was able to continue with minimal disruption.
Justin Sun Returns Catches Voters Off Guard with Compound Proposal
TL;DR: Like in earlier encounters, Sun is using borrowed governance tokens to try to increase adoption of the TUSD stablecoin.
Earlier this week, defi and governance consultancy GFX Labs raised the alarm about a suspicious COMP borrowing transaction. It emerged that Justin Sun, best known for launching the Tron blockchain, had borrowed 90k COMP tokens and had reached the required threshold to submit governance proposals.
This mirrors a previous proposal, Compound proposal 45, where Sun similarly borrowed COMP tokens in order to meet the required proposal threshold and support the vote for TUSD integration. While that proposal was broadly supported by voters due to low risk, as TUSD was onboarded without accepting as collateral, the current vote may be more closely contested.
The proposed 80% maximum loan to value ratio for TUSD would mirror the more widely used USDC, and the proposal also seeks to add COMP incentives to the TUSD lending pool. Sun stands to benefit from this both directly (he is often the largest TUSD liquidity provider across protocols), and indirectly (he is also reportedly involved in the new ownership consortium that purchased TUSD issuer Trusttoken in 2020). TUSD has been integrated across Aave and Maker for over a year without losses, but this would still impact Compound by exposing the protocol to credit risk from an additional stablecoin issuer.
The most controversial aspects of the proposal relate to the way it was initiated. While Compound explicitly permits users to borrow COMP tokens, community sentiment seems strongly opposed to use of borrowed tokens for voting purposes. And the community has also come to expect greater transparency from proposals, typically including a public forum post and discussion period before moving forward with a vote.
With the proposal largely sidestepping these standards and catching voters by surprise, we may see a wave of opposition on principle even if the target parameter changes are acceptable on their own merit. Sun’s recent public response indicates that the importance of these soft governance standards are becoming better understood.
In Brief:
Tally News
The Tally team will be at EthDenver from Feb 17 through Feb 20. We look forward to seeing you there!
Welcome defi summer innovator Yam Finance to the Tally site:
Check out Tally’s DAO Challenges report here!
DAO Ecosystem
Fei added to Compound lending market after successful proposal:
Assange DAO is the latest project to raise using Juicebox DAO crowdfunding mechanism:
Gamestop and Immutable under fire after grant funds immediately dumped:
Inverse Finance ratifies Inverse+ proposal to pursue stablecoin growth ambitions:
Balancer DAO mulls transition to ve token mechanism based on Curve governance:
GFX Labs proposes contributor contract to Compound community:
Thanks for joining us for Tally Newsletter issue 63. Be sure to check out the Tally governance app and join us on Discord for the latest updates!
Anything we missed? New developments or protocols you’d like to see covered? Drop us a line at newsletter@withtally.com
Best,
Nate, Tally