Co-Founder Christensen Recommends Maker DAO's DAI-USD Depeg to Limit Attack Surface
Christensen's Argument As to Why MakerDAO DAI-USD Should Depeg
Background
On August 26, 2002, MakerDAO co-founder Rune Christensen published a blog entitled: The Path of Compliance and the Path of Decentralization: Why Maker has no choice but to prepare to free float Dai, the complete text of which may be accessed by clicking here. The stated purpose of the blog is "to outline the argument of why limited RWA exposure and free floating Dai is necessary, and the tools we can use to turn it from a risk into an opportunity" [Christensen. The Path of Compliance and the Path of Decentralization: Why Maker has no choice but to prepare to free float Dai. (Accessed August 28, 2022)].
The full text of the blog is somewhat of a rambling in nature which unfortunately obscures the valid and beneficial points raised by Christensen. In this article an attempt will be made to strip through the ramblings and present to you the basics of his argument.
Christensen begins with the premise he refers to as the 'post-911 paradigm' which "[b]asically [...] is a financial regulatory trend that, when taken to its extreme, divides all financial activity into two boxes: Either you’re fully compliant, regulated bank, or you’re a terrorist. Important to note that it’s a trend, not a black and white reality, meaning obviously there’s plenty of financial activity that isn’t fully regulated as a bank with total government control - but over time the trend is one way and financial freedom will get eroded, never increased as long as this trend remains" [Id].
He continues:
The window of opportunity is an idea that me and many others held: The possibility that the immense potential benefits of blockchain technology and DeFi, when applied to the financial system through RWA integrations, could become the catalyst that finally changed the paradigm of financial regulation away from the post-9/11 paradigm and into a new post-blockchain paradigm. It’s easy to see how the advantages of transparency, credible neutrality, efficiency, inclusion etc. helps solve the problems that makes finance and wall street bros seem so bad in the first place.
[Id].
But, nonetheless:
[...] as you can probably imagine, this window of opportunity has now closed for good. First of all, the blockchain industry completely and utterly failed to produce anything of value during the bull run. Basically nothing was achieved and no new products, services or anything with tangible benefit derived from blockchain technology has entered the mainstream consciousness at any level. Maker is a good example where we had a lot of initial support for Clean Money and a theoretical agreement with the concept - our intentions were in the right place. But nobody cares about intentions, and we were incapable of actually acting on that desire and turning words into action because, as it turns out, operating DAOs and doing useful working in decentralized paradigms is extremely hard. Secondly and much worse than just the fact that crypto has still failed to show any kind of value to society are the human tragedies that the failures of the last crypto cycle produced that have now become synonymous with blockchain and crypto in the public consciousness. Essentially the moment Terra collapsed is really the moment we should have realized that there is simply no possibility that we will be able to persuade the public that crypto should be treated differently from other financial services.
[Id].
So far this leads Christensen to the interim conclusion that "[...] no matter what, whether or not it was ever even possible, it is now over for good and we need to readjust our world views to get in line with reality" [Id].
RWA - Two Core Factors
According to Christensen, "[t]he risk of RWA was always considered justifiable, despite the fact that DAOs have no real legal presence or entity or ability to enforce legal rights (even if governments erroneously think so), because of two important factors" [Id].
The first factor was that any attempt to seize RWA or crack down on crypto’s weak points, such as blacklists or collateral freezes, would be telegraphed in advance in order to allow innocent and legitimate users time to respond. The thinking was that governments wouldn’t just nuke Maker and cause widespread harm to innocent people, they would simply ban Maker from relying on their legal systems if we don’t follow their regulatory regimes. That turned out to be wrong as in the TC sanctions case, it was kept secret right up until the trap was sprung, and innocent users (luckily a small amount) had their USDC frozen in the tornado cash smart contracts. The second factor was the thinking that even if a freeze or seizure of RWA collateral happened, innocent users would have some path to recover their money [...] Unfortunately, that turns out not to be a given as seen with the TC sanctions, where right now it looks those affected by USDC blacklist may have effectively lost their money, and the ETH designated as risky may not have an easy path to legalize their assets, even if they are completely innocent and used TC for financial privacy completely legitimately.
[Id].
Given all the foregoing Christensen realizes (in your author's humble opinion rightfully so) that "[t]his means the consequences of not being compliant and not becoming a bank are extremely severe. They’re not something you can just gamble with, especially not when it pertains to peoples savings" [Id].
Christensen moves forward with his argument by stating MakerDAO has 'two fundamental options': "The path of compliance and eventually, on a long enough timeline, turning Maker into some kind of next-gen fintech product/neobank. Or the path of decentralization which means strictly limiting the degree to which regulatory crackdowns can damage the protocol" [Id].
However Christensen acknowledges a vital caveat:
The path of compliance isn’t even available to us. Why? Dai was engineered that way, as the developers who created it had the foresight to build it in such a way that it could never possibly become a tool of financial surveillance and control, by completely locking out the possibility that a blacklist can be added or that it can be upgraded. Despite all our governance bureaucracy and troubles, Dai is actually a truly decentralized stablecoin in this sense.
[Id].
Christensen believes that based on "certain publicly discoverable facts, that when combined together with the fact that Dai cannot ever be blacklistable no matter how much Maker Governance would want to, makes it clear that there is a ticking clock counting down above our heads, and at some point in the future there is a high probability that Maker will be hit by a severe attack by global authorities targeting any attack surface they can find, through a process similar to what led to the TC sanctions" [Id].
Based on this Christensen reaches the conclusion:
we must choose the path of decentralization, as was always the intent and the purpose of Dai. And just like this was the original design of Dai, choosing the path of decentralization means preparing for the likely possibility that Dai will have to become free floating. The reason for this is simple: the path of decentralization means limiting our attack surface to physical threats, and specifically our RWA collateral as a percentage of the total portfolio.
[Id].
Christensen further notes: "while decentralization has almost only downsides, there is one tangible upside that people actually care about. And it is not just any upside, it is the single most powerful thing that brought most people into the crypto space in the first place: The ability to create tokens. As also described in the Endgame Plan post, the creation of blockchain tokens is by far the most powerful form of meta engineering, and it is in fact so powerful that even governments recognize this power and try very hard to shut it down and control it. With a decentralized currency, the creation of a decentralized economy run by decentralized businesses governed by tokens becomes possible, and it cannot be shut down or controlled by authorities regardless of how much they’d like to - as long as you have a real, actually decentralized currency underpinning it" [Id].
Final Thoughts
The final point raised by Christensen in this blog is probably the most 'eye-opening' to those with an interest in cryptocurrency. In his opinion it is important to discuss "how this all fits into the broader, global meta caused by the state of irreversible, accelerating decline that exists in modern globalized society" [Id].
There are multiple factors, including overshoot, overpopulation, climate change, peak oil, peak farmland, peak fertilizer, post-truth social media etc. It is likely that modern global capitalism cannot overcome these problems of its making, and the most immediate consequence is that politics will become increasingly polarized and unhinged. The world is going to enter a new, much more chaotic and unpredictable equilibrium dominated by anarchy, ecofascism, deglobalization and large scale human suffering.
[Id].
He proposes two reasons why this matters to Maker:
- "[...] broken states and limping zombie economies, or states obsessed with capital controls and general authoritarianism, tend to be more likely to crack down on crypto [...] This means that as the global economy and socioeconomic stability increasingly falls apart across most places in the world, the likelihood of a physical attack by state actors against Maker goes up. As this trend is accelerating and irreversible, this by itself adds another strong argument on the pile of why Maker has to prepare to go fully decentralized and expect the worst against it’s RWA collateral, requiring it to become free floating [Id].
- "[...] such a chaotic and dystopian future is exactly the reason why Dai and crypto as a whole exists. People will need tools to navigate the future when government and the elite can no longer be trusted to even keep themselves from collapsing, let alone keep the best interests of the people in mind. The most important and powerful tool in such a situation is going to be collapse-resilient, decentralized money" [Id].
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