Investigation on Governance, MakerDAO's Rebranding, and the Influence of Its Founder

Context on the Current Situation

The Rebranding of MakerDAO to Sky

To understand the stakes of this analysis, it's crucial to provide some context. On August 27, 2024, the decentralized finance protocol MakerDAO announced a major rebranding, becoming Sky. This change included the migration of its two main ecosystem tokens: the stablecoin DAI became USDS, and the governance token MKR became SKY.

Beyond a simple rebranding, the new Sky protocol is part of the "Endgame", aimed at implementing policy changes and a comprehensive restructuring of MakerDAO. One notable new feature that is particularly relevant to this research is the Seal Engine.

In simple terms, the Seal Engine is a mechanism that allows users to lock their MKR tokens in a Sky smart contract to receive additional rewards from the protocol. However, users who wish to withdraw their MKR from the Seal Engine are subject to exit fees, designed to “encourage deeper commitment to the Sky ecosystem.”

The Seal Engine also allows users to borrow USDS stablecoins using MKR tokens as collateral, delegate voting power from MKR to an address, or simply seal MKR to generate protocol-related rewards.

However, one aspect of the Seal Engine stands out: the ability to borrow USDS stablecoins using MKR as collateral. This feature had been debated numerous times over the years on community forums but was never approved due to potential risks it posed to governance and the protocol as a whole.

A Dubious Governance Proposal

This raises the question: how was this feature, long rejected by the community, ultimately accepted and implemented in the new Sky protocol?

To understand this, we need to look at governance. The implementation of the Seal Engine was made possible by a vote on the protocol's governance forum, aimed at approving various major updates. This proposal was published on October 17, 2024, and approved by the community on October 19, 2024.

A closer look at the addresses voting in favor of this governance proposal reveals: Julia Chang, vigilant, BONAPUBLICA, Byteron, 0xa16d, and buttkorn.eth, with a total of 44,205 MKR committed. Notably, the top three addresses alone accounted for nearly 100% of the votes (with approximately 15,000 MKR each, equivalent to around $22 million), thus securing a majority approval.

These three addresses (Julia Chang, vigilant, and BONAPUBLICA) are part of the five entities to whom Rune Christensen, MakerDAO's founder, had delegated his own MKR tokens and voting power through his address 0xf65475e74c1ed6d004d5240b06e3088724dfda5d (rune.eth). This leads to the question: what were Rune's motivations for ensuring this proposal passed?

Rune Christensen's Positions

To recall, the Seal Engine implementation notably introduced the possibility of borrowing USDS stablecoins using MKR as collateral directly on the MakerDAO protocol, which was previously not feasible.

For several years, Rune Christensen has utilized protocols like Aave or Morpho to secure multi-million-dollar loans using his MKR tokens as collateral. Specifically, his current positions are distributed as follows: a total collateral of 53,257 MKR ($77 million), total loans amounting to 13,328,000 USDC ($7.5 million on AAVE and $5.8 million on Morpho).

An examination of this wallet also reveals that it holds 1,875 MKR, valued at $2.7 million at the time of writing. Additionally, another wallet linked to Rune contains 61,750 MKR staked in MakerDAO's governance contract, delegated to five entities voting on governance proposals, including the three addresses mentioned earlier.

Finally, a position not displayed by Debank can be identified by analyzing a specific transaction on Rune’s wallet. This corresponds to a $4.5 million loan on Sky, the rebranded Maker protocol, collateralized by 15,000 MKR (valued at $23.6 million at the time of writing).

Thus, with the Seal Engine's implementation, Rune was able to borrow 4.5 million USDS directly via Sky without using third-party lending and borrowing protocols. It should be noted that the maximum borrowing cap per position is set at 20 million USDS but can be adjusted upward through a simple governance vote.

For Rune, this is particularly advantageous for two reasons. First, he could no longer deposit MKR on Aave as the supply cap for this asset had been reached. Second, the ability to borrow with MKR as collateral through the Seal Engine allows him to retain and delegate the MKR voting power, which is not possible with third-party lending protocols.

These 4.5 million USDS were subsequently exchanged for DAI and then USDC to repay part of his loan on Morpho.

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A Mixed Rebranding Outcome

Despite Sky's launch being considered a “success” by Rune, the community seems less convinced. A new governance proposal was published on Maker’s forum to discuss Maker and Sky’s future within the ecosystem.

One of the community's main concerns involved the new policies associated with the USDS stablecoin, which differed from the old DAI. Specifically, USDS includes an “asset freezing” feature that allows funds to be blocked unilaterally.

Although Sky and its founder, Rune, argued that these new features were necessary to comply with anti-money laundering laws and enable broader adoption of the protocol and stablecoins, this sparked heated debates within the community.

The governance vote presented three options to MKR holders:

• Keep the rebranding. No action needed.
• Refocus branding on MakerDAO but retain Sky. Introduce minor brand updates.
• Refocus branding on MakerDAO, reversing the rebranding.

Despite the community's mixed opinions, the vote concluded with a decision to retain the rebranding as Sky. Examining the individual votes reveals the same addresses to whom Rune delegated his MKR tokens.

These entities—Cloaky, BLUE, JulieChang, vigilant, and BONAPUBLICA—accounted for 76,750 MKR out of a total of 80,513 MKR that voted (with vigilant voting "Abstain"). Furthermore, PBG, who also voted to keep the rebranding as Sky, was among the former entities to whom Rune had delegated his voting power.

With almost 95% of the votes in favor of this governance proposal, one might expect a unanimous success for the rebranding and token migration. However, on-chain statistics show that most users chose to retain their DAI and MKR without migrating to SKY and USDS.

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Key Takeaways from This Research

The findings presented here are theoretical and do not pose an immediate risk to the protocol but must be considered for its long-term viability.

Maker’s governance

Maker's governance is highly centralized. Out of the last 50 polls, nearly all were resolved unanimously, with the entities to whom Rune delegated his tokens voting in line with Rune’s stance.

Identified wallets show that Rune holds approximately 116,000 MKR, representing 13% of all tokens in circulation. Of these, 76,750 MKR are staked in MakerDAO’s governance contract.

Looking at the Bubblemaps of the token, about 11% of all circulating tokens are staked in this governance contract, totaling approximately 96,000 tokens. Thus, Rune's tokens account for nearly 80% of the staked tokens in the contract. In other words, most decisions are almost guaranteed to pass unanimously on the forum, which can hardly be described as “decentralized.”

A Parallel with Michael Egorov’s Liquidation

MakerDAO’s story echoes that of Michael Egorov, founder of Curve, from November 2022.

For now, Rune’s loans are sufficiently collateralized and do not pose an immediate risk to MKR or the protocol. However, it's worth noting that Egorov's loans were also well-collateralized at the time he opened his positions, and sudden market shifts are always possible.

Comparison with LUNA and UST

During the initial Maker governance proposal allowing DAI borrowing against MKR, many drew parallels to the LUNA and UST crash.

However, this situation is unlikely, as DAI is over-collateralized by a variety of assets, whereas obtaining UST required burning LUNA instead of collateralizing it. Hence, the parallel with LUNA is not particularly relevant in our view.

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Conclusion

The situation of MakerDAO is an interesting case to study because, since the launch of DAI in 2017, this protocol has held a crucial place in the DeFi ecosystem on Ethereum. DAI, and now USDS, are benchmarks in the decentralized stablecoin sector within our ecosystem, which can now be deployed on Solana in addition to Ethereum.

As an industry, our decentralization standards must align with the ambitions of our promises. However, currently, according to the conclusions of this research, with over 80% of the voting power on the protocol, decisions are being made by a single individual.

The implementation of the Seal Engine within the rebranded Sky protocol plays a major role for the founder Rune, who has multiple open positions on Aave and Morpho using MKR as collateral. The borrowing cap of USDS is regulated by governance votes, which he controls.

Thus, as we can see, Rune takes advantage of the implementation of the Seal Engine to transfer and reduce positions on other decentralized protocols in order to shift the debt to Sky. We can see that after taking out a loan position of 4.5 million USDS on Sky, Rune repaid part of his debt on Morpho. Therefore, we can expect this trend to continue in the following weeks.

Lastly, one more thing to consider is the liquidity in the MKR and SKY token market. With the rebranding, Rune seems to aim at refocusing MakerDAO's brand around Sky. With the increased importance of Sky, the liquidity of the MKR token could help mitigate potential liquidations in the event of a significant price drop.

To improve the current situation, it would be preferable to decentralize Maker's governance towards independent parties, incentivize the participation of other MKR holders in governance, and ultimately clarify the role of the SKY token within Maker's governance, which currently appears to be quite complex.

We tried to contact Rune Christensen on Twitter, but did not receive a response. Therefore, we are publishing this analysis without his comment.

If you have additional information or corrections, feel free to send them to [email protected] or on Twitter @Artem_Oak.

Tools used for this research: impersonator, etherscan, makerburn, bubblemaps.

Acknowledgments: a big thank you to @PaperImperium and @godsflaw on Twitter for helping clarify parts of this research.