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Maker SubDaos: Unlocking Scalability
Maker SubDaos: Unlocking Scalability
Maker SubDaos: Unlocking Scalability

Maker SubDAOs: Unlocking Scalability

Raphael Spannocchi profile picture

Raphael Spannocchi

Nov 29, 2023

Humanity has long struggled with organizational complexity. As organizations, enterprises, and societies grow, they inevitably become increasingly complex. More processes, more administration, more friction. Loss of information, gatekeeping, and power games. Delays, power struggles, dead-locks and stale-mates. And yet, at the same time, growth, flourishing, wealth, and security. The perception of resiliency, building resources, healthy redundancies, and overlaps.

“Simplicities are enormously complex. Consider the sentence ‘I love you.’”― Richard O. Moore, Writing the Silences

From those who advocate for a life of voluntary simplicity to those who accept complexity as the cost of doing business, this love-hate relationship spans the entire gamut. Even DAOs are not immune to complexity spirals, as evidenced by MakerDAO.

After a phenomenal run during DeFi Summer, the DAO governing the renowned decentralized stablecoin protocol faced several challenges. These included over 120 full-time contributors, projected operational expenses surpassing revenue, sluggish decision-making, and a lack of transparency in off-chain asset allocation processes. The Terra-Luna collapse and the Bear Market that followed turned up the heat to 11. Something had to be done. Co-founder and ex-CEO of the Maker Foundation Rune Christensen resumed activity and proposed a sweeping vision for guiding Maker into the next century. What he called the “Endgame Plan,” and others called MakerDAO’s inevitable demise, was ratified by token holders after almost nine months of almost non-stop DAO drama.

I won’t go into the politics here nor the details of the Endgame Proposal itself. For those interested, I recommend this five-hour presentation by Christensen himself. Instead, I’ll focus on one aspect not unique to MakerDAO. An invention or process that could help other DAOs scale to infinity without becoming the very thing that any brave soul living on this frontier of organizational development ever wants to be a part of — namely, a colossal pseudo-corporation, just without the HR benefits.

I’m talking about SubDAOs in the particular sense Christensen envisioned them.


What are SubDAOs?

Complex organisms contain multiple organs that fulfill specific functions for the host in return for sustenance and protection. A liver dutifully cleans the bloodstream and, in turn, is kept on temperature, protected against the outside world, and fed. Christensen’s vision is best understood with this analogy.

A SubDAO fulfills a specific function for its umbrella organization and, in return, is protected from governance attacks, equipped with some capital, and can partake in the ecosystem created that way at preferable terms. SubDAOs need to share some of their proceedings and adhere to terms set by the umbrella. The original vision outlined MakerDAO Core as a place that could ossify in quick order, becoming very simple, slow-moving, and hard to change.

All experiments would take place at the edges, that is, in SubDAOs.

If SubDAOs fail, the core will survive. If they thrive, the core and its tokenholders will profit.

With clearly defined parameters for incubation, profit sharing, and a clever tokenomics model tying it all together, this could scale without ever becoming one giant behemoth. The endgame is more like a swarm, with clear rules and tight communications.

One of the first images Christensen published on the Maker forums to explain the concept.


Maker SubDAO Types

Similar to organs in a body performing specialized functions for the wider organism, Maker’s SubDAOs come in two varieties:

  1. FacilitatorDAOs - Ensure the ecosystem works as planned, facilitate governance, and enforce decisions and rulesAllocatorDAOs - Borrow DAI from Maker Core and deposit capital in the form of on- or off-chain assets

  2. Maker Core’s function is subsequently reduced to mint DAI for SubDAOs. (Plot twist: As part of a rebrand, there will be a new stabletoken and a new governance token at some point)

Maker Core governance is only concerned with monitoring SubDAO performance, setting their borrowing rate, and periodically incubating new SubDAOs. Much of this process can be automated so Maker Core moves closer and closer to the vision of an actual autonomous organization. Each SubDAO has its own governance token and governance process but must be aligned with the purpose of Maker Core and helping the ecosystem succeed.

You might be asking yourself how these SubDAOs are tied to Maker Core and how the Core can ensure these “organs” perform their duties. Here’s where it gets fascinating. There are two mechanisms at play:

  1. Junior Capital Requirements

  2. Governance Token Dilution

AllocatorDAOs must deposit “junior capital” as a first-loss buffer if strategies don’t pan out. Maker Core can make itself whole at a SubDAO’s expense, further incentivizing proper business models.

Junior Capital Liquidation Flow (Source: Lucas Manuel)

Should the junior capital not suffice because of catastrophic decisions, Maker Core can decide to mint more SubDAO governance tokens and sell them on the open market, hurting SubDAO token holders by diluting their equity.

Equity Liquidation Flow (Source: Lucas Manuel)


Now that the penalties are clear, let’s look at what SubDAOs have to gain. Performant SubDAOs get access to larger and larger swaths of DAI as their trajectory progresses. They can also deposit level LP pools of their own token and the new governance token, called SubElixir.

Maker Core’s new governance token is inflationary, and some of that sweet, sweet issuance is directed to SubDAOs in proportion to the amount of SubElixir they hold.

To make a long story short: Weak SubDAOs get slashed, and the winners get a ton of rewards.

In true Schumpeterian fashion, a scenario is possible where a weak SubDAO gets diluted so much that another entity can buy enough governance tokens for a controlling interest in the SubDAO and take it over. Like a phoenix from the ashes, if you will.

Okay, okay… this is quite the intro. So, who are these fantastic SubDAOs? Do they even exist?

Fear not! This mythical creature called a SubDAO does exist. To be exact, there are six in the initial batch whose governance tokens are set to launch during the following year, 2024.

From the outset, there will be two FacilitatorDAOs and two AllocatorDAOs.


And the SubDAOs are …

The FacilitatorDAOs are labeled Zero and One at the moment and do not have their own Discord servers yet. There are two so they can check and balance each other, and no single entity can have a final say. After all, DAOs are about decentralization, right?

Facilitator DAOs are the hardest to get right because, as with AllocatorDAOs there needs to be some financial carrots and sticks. Since their decisions affect billions of dollars of value, these should be appropriately sized.

How exactly this will work is not 100% defined yet, but it is likely FacilitatorDAOs will also operate a portion of Maker’s vaults.

The first set of AllocatorDAOs consists of:

  • Spark Protocol by Phoenix Labs

  • SakuraDAO

  • Quantitative

  • SubDAO

  • Qualitative SubDAO

SubDAO Farming Flow (Source: Lucas Manuel)


Spark Protocol

Spark Protocol is already making quite the impression and has a running product with more than $1.5bn worth of tokens supplied. Spark has forked Aave’s codebase and offers a borrowing/lending protocol for decentralized collateral. As an added twist, DAI holders can deposit their DAI into the DAI Savings Rate there and use sDAI (savings DAI) for further DeFi shenanigans.

With all the optimizations of Aave v3, and a multichain deployment, Spark has been the belle of the ball of the DeFi scene.

Founded by former Maker Protocol Engineering Core Unit members Sam McPherson, Nadia Alvarez from Growth, and Tadeo from Data Insights, the team of three front-ran the SubDAO experiment by launching in February 2023.

Spark will play a crucial element in the SubDAO ecosystem by allowing holders of other SubDAO tokens to borrow against their holdings.

Their own SPK token has been hinted at, but no firm release date has yet been established. Spark has announced that users who provide some ETH to their platform today will be considered eligible.


SakuraDAO

SakuraDAO was announced shortly before the 2023 edition of Token2049, held in Singapore. With a cherry blossom theme, this SubDAO promises to help new users navigate the Maker SubDAO ecosystem by making it easy to understand and by building a fun social community driving volume to their yield platform.

Large parts of Asia are in the process of becoming increasingly crypto-friendly, meaning this could turn out to be a farsighted decision for the growth of the ecosystem as a whole. For now, SakuraDAO is working on its roadmap to bring DeFi to the masses. You can already get yield on your DAI by putting it into the DSR there. The website looks heavily “inspired” by Spark’s. But that is intended, as SubDAOs can code-share their inventions for profit as part of Maker’s SubDAO regime.

Like Spark, SakuraDAO will have its own token once SubDAO tokens launch. Both Spark Protocol and SakuraDAO are focused on on-chain collateral. The two remaining SubDAOs focus on off-chain collateral, also known as Real World Assets (RWAs).


Quantitative SubDAO

The team behind the cryptic name is RWA battle-tested luminaries Allan Pedersen from Monetalis and Sebastien Derivaux from Steakhouse Finance. The Quantitative SubDAO was formerly known as the Viridian Cluster.

The SubDAO will be using specific technological advancements and massive scale to generate value, with tokenized assets and assets and liability management optimization.

Monetalis’ Clydesdale structure is currently managing $1.25 billion in US Treasury Bills at the behest of MakerDAO, as part of the ingenious strategy to use the high-interest environment to funnel millions into MakerDAO’s coffers.

There are no plans to let retail users deposit T-Bills in return for DAI. Nor could they decide how much of their DAI is backed by strategies of Quantitative SubDAO. Instead, Maker Core will allocate Debt Ceilings, or maximum exposure, according to its needs for diversification and to maximize profits.

Will Quantitative SubDAO have a public interface? If so, how will it look? While I don’t know the answers to these questions yet, we know there will be a token, and Quantitative SubDAO will have its own governance.

The RWA SubDAOs could choose to attract TradFi money managers and reward the best proposals selected via token holder polls. This could open up a vibrant field of research and knowledge. I’m just spitballing here, so take this with a grain of caution.


Qualitative SubDAO

Run by a pseudonymous account called Spring, the second RWA SubDAO will work with the BlockTower Andromeda structure currently managing $1.3 billion of short-term US Treasuries on behalf of MakerDAO.

Former Growth Core Unit notable Rajiv was once publicly associated with this group and could bring much value to Qualitative SubDAO.

Even with all the mystery surrounding the account that posts on behalf of this SubDAO, the focus is clear, thanks to two forum posts.

“Qual”, as it is called in short form, is a SubDAO that specializes in advanced off-chain assets and finance. Qualitative SubDAO focuses on institutional adoption and would be happy to expand the possibilities of RWA collateral to structured credit and various forms of financing.

It has a regional focus on the Chinese crypto community and South East Asia

Like any other SubDAO, there will be a token.

Conclusion

As MakerDAO matures, it will incubate more and more SubDAOs, pushing complexity to the edges, all while becoming simpler and more fixed at the core. While FacilitatorDAOs have more to do to herd the various stakeholders, there will be no central point of command, and communication will be via free market dynamics.

How will this pan out? This has never been tried, definitely not at this scale. Some of the open questions we have include:

Will there be demand for the SubDAO tokens?Will Maker’s vital community fragment and lose interest?Does that new paradigm introduce unforeseen attack vectors?

StableLab has applied to support SubDAO governance as an Ecosystem Actor. We are deeply committed to ensuring that Maker paves its path to the next century, as we continuously break new ground.


Onwards.

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