The MakerDAO Governance Attack and the Debate Around Governance Transparency

Othman Gbadamassi -

Last week, Sky (formerly MakerDAO) was at the center of a significant governance debate following the swift passage of an emergency proposal aimed at adjusting risk parameters for MKR token borrowing. The proposal, introduced without prior notice, has raised concerns about governance transparency and potential centralization within the DAO.

Key aspects of the emergency proposal:

  • Increased borrowing limits: The maximum debt ceiling for MKR tokens was raised from 20 million USDS to 45 million USDS, allowing MKR holders to borrow more against their tokens.
  • Reduced collateral requirements: The liquidation ratio was lowered from 200% to 125%, enabling higher leverage for borrowers.
  • Stability fee: Increase by 8 percentage points from 12% to 20%.
  • Shortened governance delay: The Governance Security Module (GSM) Pause Delay was decreased from 30 hours to 18 hours, reducing the time frame for executing governance decisions.

The stated rationale for these changes is to protect the protocol from potential governance attacks. Reducing the liquidation ratio allows users to borrow more with less collateral which increases capital efficiency as well as the liquidation risks due to price volatility. The stability fee can discourage excessive borrowing, potentially stabilizing the system, but may burden borrowers and reduce overall loan demand. Some community members, including representatives from GFX Labs, have expressed concerns over the expedited process and lack of clear evidence supporting the urgency. Notably, individuals voicing opposition reported being banned from official forums during the proposal's discussion, intensifying debates about censorship and governance integrity.

Governance Drama

Community members have raised several concerns suggesting potential foul play in the recent emergency governance proposal by MakerDAO:

There is a lack of concrete evidence for governance attack. The proposal was justified as a preventive measure against a possible governance attack. However, the evidence provided—primarily "screenshots and whistleblower reports"—was deemed insufficient by many. The proposal itself acknowledged a "very little likelihood" of such an attack succeeding, leading to questions about the necessity and urgency of the changes.

There are also allegations of censosrship. During the proposal's discussion, several community members and organizations expressing dissenting views reported being banned or muted on official platforms, including Discord and the governance forum. Notably, representatives from GFX Labs, who voiced opposition, experienced such restrictions, raising concerns about the suppression of critical discourse within the DAO.

The proposal was introduced and passed with unusual haste, bypassing standard governance procedures. This rapid progression, coupled with the lack of prior notice, led to suspicions that the process was manipulated to favor certain outcomes without allowing adequate time for community review and discussion. These procedural irregularities also can be seen as a form of censorship.

Some community members highlighted that the changes might disproportionately benefit specific individuals or groups within MakerDAO it. For instance, the adjustments could enable large MKR holders to consolidate voting power, potentially facilitating a more centralized governance structure contrary to the DAO's decentralized ethos. Some have gone as far as accusing @RuneKek of trying to increase his power in the DAO:

The emergency proposal may have been influenced by internal power dynamics, leading to actions that undermine the principles of transparency and decentralization central to MakerDAO's governance.

Do you smell foul play? What are your thoughts on how to maintain the the integrity of one of the most active governance ecosystems in crypto?

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