DAO Drama in Sky Governance

DAO drama has once again hit Sky (formerly Maker) governance, characterized as a risky power grab or a “potential governance attack,” depending on who you ask.

The debate kicked off when GFX Labs’ PaperImperium — a long-time Maker community member and regular critic of the project’s recent direction — raised concerns over a fast-tracked governance proposal which relaxes restrictions on borrowing against the MKR governance token.

The changes, according to PaperImperium, would have the effect of doubling the credit line for MKR holders, raising the loan-to-value (LTV) ratio from 50% to 80%, and they argued that these changes bypassed due process.

PaperImperium also claimed that they and GFX Labs had been banned from the governance forum during this proposal process.

Risk management and censorship concerns aside, the thread cautioned that skirting the standard governance process could “delegitimize” Maker’s reputation for “boring, process-driven governance with its own legal code.”

The post generated significant interest in decentralized finance (DeFi) circles, reminding many of the risky actions of Curve Finance founder Michael Egorov, who faced liquidation after borrowing millions against highly leveraged collateral.

The context in which the emergency “Out-of-Schedule Executive Proposal for Community Security” was made was not detailed in the original thread, but the changes aimed to provide “greater flexibility and responsiveness to emerging threats while maintaining community oversight.”

Concerns regarding “malicious governance actions” within Maker were based on “screenshots and whistle-blower reports,” albeit the evidence suggested “very little likelihood” of success according to the proposal made “out of an abundance of caution.”

Despite the majority calling for further explanation, the vote was passed before any additional details were provided.

Screenshots shared by Phoenix Labs’ CEO Sam MacPherson showed plans to accumulate MKR voting power and conduct a “takeover” of the protocol’s governance. Additional screenshots included Maker founder Rune Christensen discussing a supposed plan to “force liquidations” of MKR positions to obtain governance tokens backed by a fund with a history of “leeching” off DeFi protocols.

DeFiLlama’s “0xngmi” summarized the proposed changes from a third-party perspective, indicating that Rune has MKR/SKY loans but couldn’t vote with those tokens, thus wanting to move loans to Maker for stronger governance control.

Governance Attack or Activist Investing?

This is not the first instance of a DeFi protocol embroiled in discussions about voting power accumulation in on-chain governance systems.

In 2023, projects like Rook and Aragon faced scrutiny from a group known as the RFV Raiders, which identified DAOs with treasury holdings exceeding the price for a controlling stake of governance tokens.

Last year, Compound DAO faced a similar situation when a proposal passed moving half a million COMP tokens to a vault controlled by the Golden Boys, who had garnered enough tokens to influence the changes. The group’s leader, Humpy, denied the accusation of “stealing” funds, stating the “Trust Setup” multisig only allows fund withdrawals if approved by the DAO, concluding with gratitude to those who voted for their proposal.