Alastor Weekly: Episode 2
Governance drama and CeFi implosions... what else is new?
1. Governance drama at MakerDAO
On Monday, one of the most important (and compelling) dramas in DeFi reached its conclusion. MakerDAO voted not to ratify MIP39c2-SP33, a proposal by Luca Prosperi to create a new Core Unit overseeing lending for the DAO. The proposal was set to pass before a flurry of last-minute re-delegations tipped the scales.
Generally speaking, institutional investors were supportive of the proposal, while the vocal, crypto-native community, including the two founders of the protocol, were not. It got… emotional, to say the least.
The primary arguments in favor of the proposal were that it would establish necessary checks and balances to onboard additional complex collateral for DAI issuance and that Luca was the right person to lead this unit.
The main arguments against the proposal were that it was creating an additional Core Unit (CU) with a large budget that was redundant with existing CUs, and that the additional creation of CUs was antithetical to the decentralized mission of Maker. True or not, the opposition characterized this as a proposal that pitted the VCs against the community, a battle against centralization and “invite-only” meetings.
This felt very much like a proxy battle for the vision and future of MakerDAO and less about the actual creation of a new Core Unit. Was MakerDAO going to remain truly decentralized, or would there be a proliferation of multi-sigs and hierarchy?
Everyone should take the time to read Luca’s post recapping the drama. Caveat that it is written by the author of the proposal that was denied, but it is a fantastic account.
Next up at Maker… a new proposal from Hasu has made its way onto the forums. Simplistically, the proposal is to revamp governance at Maker, effectively moving things from a flat democracy to more of a hierarchical representative democracy. No inside info here but the timing of this post relative to Luca’s proposal not being passed does not feel like a coincidence. Unsurprisingly, the proposal has ignited debate on the forums. Voting blocks are likely to shake out similar to how they did for the prior proposal.
Our 2¢: There is an existential conflict at play in DeFi between “true” decentralization and efficiency. Truly decentralized organizations are naturally less nimble, but the argument is that trust minimization and transparency increases the resiliency of the organization over the long-term.
This dynamic creates a bit of a DeFi paradox - tokens have value because of the expectations of future financial performance, and truly decentralized orgs are likely not the optimal way to maximize profit. The crypto community (myself included) likes to complain about the way things traditionally work… but sometimes there is a reason tradition ultimately settled where it did. The world is all about incentives, DAOs are no different.
DAOs are incredibly immature (no pun intended) as an organizational structure. For them to emerge as a more common form of organization, they are likely going to need to take a “best of both worlds” approach like the one Hasu is proposing. Adopting some of the traditional organizational structures and practices, while preserving the participatory and democratic nature of governance that DAOs enable. Merging economic incentives with a full decentralization maxi ideology is impossible, there will always be tradeoffs.
2. Dominoes starting to fall
As the liquidity plague continues to spread throughout crypto, will BlockFi be the first to officially bite the dust? It would appear so…
If the rumors are true, the $25MM will go to the Series E investors. The rest of the cap table will be wiped out and left with nothing. Hopefully FTX can provide a backstop and mitigate losses of customer deposits.
PSA: BlockFi is not DeFi. It is not even remotely close to DeFi. Celsius, Voyager, and 3AC are also not DeFi. These are centralized entities. DeFi is open-source code. It follows pre-programmed rules. It is auditable. You can’t do deals behind closed doors. It’s an important delineation because the public perception of these implosions appears to be that “DeFi is bad”. But the reality is that these implosions are evidence why DeFi is so important.
Zac Prince, CEO of BlockFi, tweeted out that the rumors were false. But that could mean a number of things. Maybe they are being sold for $50MM. Maybe they’ll end up finalizing the originally reported revolver from FTX. Who knows. Takeaways from the saga are still the same.
3. PieDAO + BasketDAO
The first DAO-to-DAO “acquisition” since Fei/Rari was made official a couple of days ago as PieDAO announced it would be acquiring BasketDAO’s BDI TVL from its languishing DeFi index competitor.
PieDAO is not actually acquiring the governance tokens of BasketDAO, despite indications last year of that being in the works. BasketDAO shut down its operations after an exploit last October and PieDAO has no real incentive to bail out BASK token holders given it likely has no use for the IP and none of the core team would be coming along for the ride.
The swap is pretty simple, PieDAO swaps out BasketDAO’s BDI index holders with its own similar index token, DeFi++. PieDAO gets ~$1.5M in TVL for its troubles (maybe a bit more depending on the swap participation) and maybe some new community members to boot. BDI holders not only get Defi++ but also a Pie gov token (DOUGH) 12-month option. BASK/BMI holders (as far as I can tell) get nothing and are left to die. RIP.
Here’s the funny part: this whole deal was priced back in April, before DOUGH price crashed from ~$0.25 to ~$0.05. Not only are DOUGH holders giving away DeFi++ (at no meaningful cost to themselves as far as I can see) in an attempt to nearly double their TVL, but the max amount of DOUGH they can give away if the BDI folks HODL out for their options to vest (thus solidifying the newly acquired TVL and basically bribing them not to take their newfound liquidity and run for the hills) is worth ~$25k. I suppose we’ll see how it goes but not a bad customer acquisition hail mary. ¯\_(ツ)_/¯
4. A buyback with a crypto twist
Earlier this week, FIP-77 was passed which proposed using $20MM worth of FRAX stables to buyback FXS, their native governance and utility token. The proposal only encompassed the specific buyback, and not what to do with the tokens after (burn, retain, or distribute).
What’s the crypto twist? The implementation was done on Fraxswap, a Time Weighted Average Market Maker (TWAMM). The idea is that this would still allow open discussion on the forums, without opening the door for bots and MEV extractors.
The justification for buying back the tokens was that they are undervalued, which is a very logical reason to buyback tokens. The justification for them being undervalued was that “FRAX still makes over $80m annual revenue while FXS has dropped out of the top 100 Coingecko rankings. Thus, FXS seems to be the most undervalued out of all other volatile assets FRAX could hold on the balance sheet.”
This statement might very well be true… but the DAO would be well-served to sharpen their pencils a bit before executing. A couple of useful exercises they could do:
Pull together a table of comparable protocols comparing Aggregate Token Value / last-twelve-months Revenue (net, not gross). That would put some actual data behind the statement that FXS is undervalued
Analyze treasury runway based upon a range of annual expense levels and various upside and downside case FXS token prices. This is particularly important in bear scenarios. Frax should have a clear sense for how this impacts their treasury runway in the event of a significant decline in FXS token price from here
None of this analysis is complicated, but it provides data points to evaluate if FXS is truly undervalued, and a framework to assess the financial and operational implications of the buyback.
5. More drama in CeFi
In a script fit for crypto land, CoinFLEX halted withdrawals because a counter-party defaulted on a $47MM loan and is refusing to repay it. Who is that counter-party? Roger Ver, CEO of Bitcoin.com, who also happens to be a shareholder in CoinFLEX.
Roger fired back that not only does he not owe CoinFLEX $47MM, but they are the ones that owe him
Regardless, withdrawals of customer deposits are still halted and CoinFLEX is attempting to stave off a full-scale meltdown by issuing a token which will allegedly pay 20% APR to holders. Buyer beware….
How are the other CeFi players doing? Not too well.
FTX reportedly took a look at buying Celsius but passed because of a $2Bn hole in the books, Genesis is reportedly facing 9-figure losses due to its exposure to 3AC and Babel, and Voyager issued a notice of default to 3AC for failure to repay $670MM in loans.
6. Is USDC on the brink of collapse?
I don’t know. Too much doom and gloom for one post. Maybe they’ll implode next week.
But, here’s a good tweet thread on USDC is on the brink of collapse for all you sadists out there
About the Authors
Sam Bronstein and Jordan Stastny are co-founders of Alastor, a crypto-native strategic and financial advisory firm for the Web3 world. They were previously M&A advisors at Qatalyst Partners, where they advised on over $150Bn of M&A volume across some of the most significant deals in the technology industry, including the sales of Slack, LinkedIn, Mailchimp, Qualtrics, Glassdoor, and others.
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There are some nuances here around market cap vs. FDV that we’ve wrote about in the past, but not worth getting into here