A weekly selection of important governance threads to follow:

EDSR Decreases to 5%

Rune is proposing a modification to MakerDAO’s EDSR. Initially, Maker set the EDSR to 8%, decreasing to 5.8% when the DSR utilization hit 20%. The EDSR has been so successful that within 48 hours of launch, the 20% threshold has almost been hit, and the DAI supply has increased by 500M. However, setting the EDSR has caused some issues to arise that the proposal seeks to address. Large-scale borrow-arbitrage occurred where users borrowed DAI at lower than 8% and put it in the EDSR – which, in Rune’s estimation, crowded out smaller DAI holders and benefitted ETH-whales who did this arbitrage. As such, the proposal recommends dropping the max EDSR from 8% to 5% but extending it through 0%-35% utilization and changing tier 2 to 35%-50%. Setting the EDSR to 5% removes a lot of borrowing arbitrage potential. However, these changes could present some challenges to Spark Protocol and its early users. In compensation for the challenges, Rune recommends rewarding them with a retroactive subdao token farming airdrop for all users using Spark Protocol.

Maker DAOs EDSR and DSR have been very successful in creating DAI demand. Our analyst, Joo, highlighted the program’s success in his latest AF post. But as always, there are unintended consequences. As a program was meant to support organic DAI demand, there is still room to grow. Most of the program benefits went to those who could borrow DAI at low rates and capture the spread rather than organic DAI users. As such, decreasing rates to remove the borrowing arbitrage could help redirect the benefits to organic users. Of course, reducing the yield could drive DAI holders away. Only time will tell. The DSR was exceptionally clever of MakerDAO and is shaping to become a foundational piece of DeFi. I recommend users follow threads and actions regarding it.

Saddle Finance Riding Into The Sunset

Saddle Finance, a Curve-like Dex, proposes to either wind down its protocol by pausing all pools, distributing treasury assets to governance token holders, and disbanding its community multisig or passing ownership of the protocol to the community. The market value of the protocol treasury has now exceeded the SDL market cap, so now seems like a good time for the community to decide if they want to continue with the protocol. Most importantly, regarding asset distributions, are the 1.5M ARB tokens Saddle Finance received from the Arbitrum airdrop. According to an initial vote in the forum, most of the community favors winding the protocol down.

Given how DeFi has struggled to gain and retain its market, I am not particularly surprised to see this thread. Many smaller protocols are running up to the end of their treasury, struggling with a lack of users, and have no clear way to navigate continued bearish conditions (at least in DeFi). Unless conditions change drastically – like thousands of new users entering the space to use these protocols to help generate revenue – I expect more threads like this to come up. The combination of security risks and bearish conditions also creates a situation where many teams are probably reevaluating if the security risks of their protocol are worth it. I am guessing few are thinking it is. Regardless, Saddle Finance could be a harbinger of more protocols winding down in the future unless conditions change.

Honorable Mentions

• Arbitrum is considering a delegate incentive program to boost governance participation and engagement.
• Chaos Labs proposes amending their service agreement with Aave to include GHO and V2 markets and increasing compensation by an additional $400K.
• GMX debates using their floor-price-fund GLP tokens to add liquidity to their v2 pools to allow for bigger trades.
• TrueFi is debating creating a 25M TRU incentive program to attract portfolio managers to its platform.