TL;DR: We should not refer to ourselves as a lender, much less a bank. That’s not an accurate description of what Maker does, invites political/regulatory risk that we are actually not subject to, means that a negative SB should not always result in minting MKR, and recognizes the technical innovation by our PE team of enabling trustworthy self-lending for the first time in human history. (I honestly think that latter one is worthy of an economics Nobel)
This is a discussion I’ve wanted the community to have for a while. On the surface, this will sound like semantics, but it has some very important ramifications, so please bear with me.
The Maker Protocol is not a lender. Maker has two lines of business at present: trading and loan guarantees.
The simpler of the two businesses is what we all know as the PSM. It functions by providing a fixed price at which we will both buy and sell the tokens known as USDC and DAI. DAI issued through the PSM are zero-coupon, perpetual-maturity debt issued by the Maker Protocol. In accounting terms, these should be listed as liabilities and the USDC we hold are an offsetting asset. The net effect on our balance sheet should be zero unless something goes wrong. The reason the USDC in the PSM is an asset is because Maker can control it. It not, however, a deposit, as Maker holds it free of any obligation to return it – we could turn off the PSM at any time if we really felt like it. By the same token, the DAI issued through the PSM is not a loan asset, but debt Maker has issued itself.
The second line of business is that Maker provides a machine – in the form of smart contracts – that allows people to lend to themselves. This sounds strange, but note that Maker does not hold the collateral of the user. It also does not lend out the DAI to the user. Those are both done by the machine – the smart contract – and the property of the user. In, for instance, an ETH-A vault, both the collateral and the loan are on the user’s balance sheet, not ours.
This is analogous to Microsoft providing the Word program, but it does not own the output of that program. You own the words you type in Word, you own the photo you take with an iPhone, you own the bread you bake in your oven. Likewise, Maker neither owns nor holds the collateral or loan associated with a vault. It simply supplies the machine that allows people to lend against themselves – a novel and underappreciated innovation.
To make those loans users borrow from themselves marketable – in the form of DAI – Maker guarantees that debt will be backed by at least $1 in assets. This makes the debt fungible and in some way ultimately redeemable, allowing it to trade in the market at around face value.
If a user’s debt goes bad, the machine begins the liquidation process automatically. Fees collected by Maker in the form of SF or liquidation penalties are akin to the subscription you pay for other software, or a premium paid to a guarantor of your debt.
This has very important implications.
The most obvious is simply that being a guarantor of loans is a much more accurate description of Maker than being a lender. Unfortunately, there’s not concise way to describe that role, so I will admit I am just as guilty as everyone else who uses “crypto lender” as a shorthand for what Maker does.
The next implication is that erroneously referring to ourselves as a lender or even a bank exposes us to future regulatory scrutiny that is unwarranted. Maker is not a bank – we do not accept custodial deposits – and it is not a lender – we only issue our own debt through the PSM and guarantee the debt of standard vault classes. Both of those are subject to varying amounts of regulatory oversight and scrutiny in a wide array of jurisdictions. The business of trading DAI/USDC with our own funds and the business of offering guarantees for loans generated with our software in exchange for subscription revenue/premium due only upon liquidation is decisively less exposed to onerous regulation.
The final implication is that MakerDAO has far more equity than it appears at first glance. If all DAI issued really were loans we held on our books, then our balance sheet looks much, much larger, and holding much, much less equity. I have not attempted to estimate a balance sheet for us recognizing our activities as loan guarantees rather than loans, but the key understanding is the the SB is an asset – our cash reserves – and does not represent the actual equity – or solvency – of Maker. At the moment, these will appear to be very similar to each other in number, as the PSM assets/liabilities will cancel each other out and the SB is mostly the asset that is left. But as CUs become operational, there are both funds inside them that Maker can potentially claim on its balance sheet, and they will have tangible and intangible assets that Maker can claim as well (assuming the CU is not merely a contractor, but that’s another discussion).
This is probably not the time for it, but it also implies we should revisit whether Maker should automatically mint in the event of a negative SB, as that merely implies that cash on hand < outstanding DAI debt issued by the DAO directly to cover expenses or guarantees of bad self-lending debt.
I suggest we begin to consistently recognize and push a form of this self description to both make it clear to our user base what Maker does, and to keep ourselves at arm’s length from unnecessary regulatory risk. Note that philosophical mission statements need not be affected by this recognition of the practical realities of Maker’s business.