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The Tally Newsletter, Issue 63

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The Tally Newsletter, Issue 63

February 4, 2022

monetsupply
Feb 5, 2022
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The Tally Newsletter, Issue 63

newsletter.tally.xyz

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.

Twitter avatar for @bantg
banteg @bantg
MakerDAO down bad. How do I vote against this?
forum.makerdao.comGrant Announcement: KYC/AML Compliance ResearchGrant Announcement: KYC/AML Compliance Research MakerDAO SES welcomes Patrizia Crespi in support of navigating MakerDAO’s know-your-customer / anti-money laundering (KYC/AML) compliance obligations. Background Patrizia joins MakerDAO with 16 years of experience working as a legal and compliance pr…
7:52 PM ∙ Feb 3, 2022
429Likes50Retweets

Along with several joking takes on the issue (like the tweet below), many had real concerns about the imposition of KYC regulations into defi. 

Twitter avatar for @JimmyRagosa
Jimmy Ragosa | Jrag.eth @JimmyRagosa
Goddamn, that was fast! forum.makerdao.com/t/grant-announ…
Image
1:21 PM ∙ Feb 4, 2022
268Likes26Retweets

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. 

Twitter avatar for @wormholecrypto
Wormhole🌪 @wormholecrypto
The wormhole network was exploited for 120k wETH. ETH will be added over the next hours to ensure wETH is backed 1:1. More details to come shortly. We are working to get the network back up quickly. Thanks for your patience.
10:25 PM ∙ Feb 2, 2022
4,741Likes1,114Retweets

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. 

Twitter avatar for @JumpCryptoHQ
Jump Crypto 🦬 @JumpCryptoHQ
.@JumpCryptoHQ believes in a multichain future and that @wormholecrypto is essential infrastructure. That’s why we replaced 120k ETH to make community members whole and support Wormhole now as it continues to develop.
6:13 PM ∙ Feb 3, 2022
3,233Likes449Retweets

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.

Twitter avatar for @labsGFX
GFX Labs @labsGFX
.@justinsuntron recently borrowed 90k $COMP from @compoundfinance (+99% of the borrow cap) and currently has 102K COMP in his alt. He hasn't set it up for voting, but everyone should keep an eye out.
etherscan.ioAddress 0x6782472a11987e6f4A8aFB10dEF25B498Cb622db | EtherscanThe Address 0x6782472a11987e6f4A8aFB10dEF25B498Cb622db page allows users to view transactions, balances, token holdings and transfers of ERC-20, ERC-721 and ERC-1155 (NFT) tokens, and analytics.
5:48 PM ∙ Feb 3, 2022
83Likes10Retweets

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.

Compound Proposal 45

Twitter avatar for @labsGFX
GFX Labs @labsGFX
An unplanned TUSD proposal has been proposed @compoundfinance to set TUSD’s collateral factor to 80% (currently 0%) https://t.co/Xf2oOEKJya
Twitter avatar for @labsGFX
GFX Labs @labsGFX
.@justinsuntron recently borrowed 90k $COMP from @compoundfinance (+99% of the borrow cap) and currently has 102K COMP in his alt. He hasn't set it up for voting, but everyone should keep an eye out. https://t.co/4aWtJUBN92
3:11 PM ∙ Feb 4, 2022
28Likes4Retweets

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.

Twitter avatar for @labsGFX
GFX Labs @labsGFX
An unplanned TUSD proposal has been proposed @compoundfinance to set TUSD’s collateral factor to 80% (currently 0%) https://t.co/Xf2oOEKJya
Twitter avatar for @labsGFX
GFX Labs @labsGFX
.@justinsuntron recently borrowed 90k $COMP from @compoundfinance (+99% of the borrow cap) and currently has 102K COMP in his alt. He hasn't set it up for voting, but everyone should keep an eye out. https://t.co/4aWtJUBN92
3:11 PM ∙ Feb 4, 2022
28Likes4Retweets

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.

Twitter avatar for @justinsuntron
H.E. Justin Sun 🅣🌞🇬🇩 @justinsuntron
@labsGFX @compoundfinance Hi @labsGFX, I discussed with @compoundfinance team before I borrowed any COMP from the pool. The proposal was well discussed for 6 months and @tusd_official has been launched in Compound for 9 months now. @tusd_official works perfectly in @AaveAave for a long time now.
12:07 AM ∙ Feb 5, 2022

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:

Twitter avatar for @voteWithTally
Tally @voteWithTally
Lets all give a hearty welcome a beloved roasted sweet potato Finance (@YamFinance) to the Tally Dashboard! withtally.com/governance/eip…
Image
7:25 PM ∙ Feb 1, 2022
6Likes1Retweet
  • Check out Tally’s DAO Challenges report here!

DAO Ecosystem

  • Fei added to Compound lending market after successful proposal:

Twitter avatar for @feiprotocol
Fei Protocol @feiprotocol
The Tribe community hit another milestone The vote passed to add $FEI to @compoundfinance compound.finance/governance/pro…
Image
9:01 AM ∙ Feb 3, 2022
115Likes14Retweets
  • Assange DAO is the latest project to raise using Juicebox DAO crowdfunding mechanism:

Twitter avatar for @AssangeDAO
AssangeDAO @AssangeDAO
Cypherpunks Unite! Julian Assange needs our help. Our JuiceBox fund raising page has gone live in which we will distribute our governance token JUSTICE. All ETH contributed will be used to acquire the 1/1 Julian x @muratpak NFT!
juicebox.moneyJuiceboxCommunity funding for people and projects on Ethereum.
10:37 PM ∙ Feb 3, 2022
214Likes121Retweets
  • Gamestop and Immutable under fire after grant funds immediately dumped:

Twitter avatar for @polarply
polka @polarply
Today in Crypto; Gamestop received a grant from @Immutable on the sum of ~100M$ on signing the partnership, and goes on to immediately dump 30M$ on Huobi, OKex and Binance. Proof is on-chain: etherscan.io/token/0xf57e7e… The wallet received the exact awards as in the milestones below.
Image
12:12 PM ∙ Feb 4, 2022
1,267Likes336Retweets
  • Inverse Finance ratifies Inverse+ proposal to pursue stablecoin growth ambitions:

Twitter avatar for @InverseFinance
Inverse+ @InverseFinance
Inverse Plus is now live! 🔥🔥🔥Please read through this article for more information on what you need to know. Don't miss the next frontier of Inverse Finance. medium.com/inverse-financ…
medium.comAnnouncing Inverse PlusTL;DR: Inverse is upgrading its INV governance token with minimum 100% APY continuous staking rewards and revenue sharing rewards for xINV…
4:50 PM ∙ Feb 4, 2022
67Likes26Retweets
  • Balancer DAO mulls transition to ve token mechanism based on Curve governance:

Twitter avatar for @bantg
banteg @bantg
Introducing veBAL tokenomics
forum.balancer.fiIntroducing veBAL tokenomicsSummary BAL is a governance token that has been successfully used to define important parameters of the Balancer ecosystem. The community believes that there is further room for improving the tokenomics of BAL and some sort of staking/locking should be implemented. Staking of BPT has already been pr…
11:02 PM ∙ Feb 3, 2022
206Likes42Retweets
  • GFX Labs proposes contributor contract to Compound community:

Twitter avatar for @labsGFX
GFX Labs @labsGFX
GFX Labs is offering its services to improve @compoundfinance and build a concerted effort for the community. We have in-depth experience in Compound, the competing money markets, DeFi, and crypto markets as a whole.
comp.xyzGFX Labs’ Proposal To Become ContributorsGFX Labs’ Proposal To Become Compound Contributors Objective Mission Compound’s objective is to provide a market where users can lend and borrow against their assets in a permissionless, trustless, and secure way. Feature A core tenet of Compound is that participants can use the protocol to ente…
7:22 PM ∙ Jan 29, 2022
33Likes4Retweets

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

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