Autonomy of DeFi: How to believe that the process is democratic?

As a new type of financial system, DeFi is being used more and more widely. With the continuous development of DeFi, the number of participants has become wider and wider, and we have also discovered more and more problems that need to be solved, especially the problem of decentralized governance.

This article will discuss the analysis and suggestions on how to avoid oligopoly in DeFi’s decentralized governance.

It’s the beginning of the school season again-a college campus is filled with posters running for student union positions, and when various student union competitors ask you to vote. You read the list of pledges on the campaign flyer and wonder why anyone is bothered by these student union positions.

This game essentially opposes any form of governance:

  1. Only a few people really care about the decisions made.
  2. The real power is in the hands of a few people-teachers and administrators

     

Just like the student council, DeFi governance can be seen as a trick to convince participants that the process is democratic. In fact, many decisions are usually made by senior management, and the interests of end users are not valued. Such a system that requires managers to be as kind as “angels” usually cannot maintain decentralized governance for a long time.

*Disclaimer: I will use real-life governance metaphors in the encryption discussion in this article. Although I will criticize or praise some governance systems, my views on governance have nothing to do with my overall outlook on the project. This is just thinking about how to solve the problems that arise in DeFi governance.

Decide, decide…

Staring at the campaign speeches outside, you will realize that most people will not participate in campus governance, and you do not really care about or have enough energy to participate in many management meetings. In its simplest form, cryptocurrencies face the same problems as the real world, and they mainly come from small governments. The vast majority of people will not join governance at all, the data confirms:

Autonomy of DeFi: How to believe that the process is democratic?

Source: forum page, duneanalytics.com

The most obvious problem with current protocol governance is the interests of the final voters. Why do they spend time voting?

Generally speaking, most people have the motivation to participate in governance, whether it is based on economic or ethical guidelines. Similarly, agreements that want better governance results should seriously consider effective methods to incentivize good governance. The simple solution involves using a small number of token libraries to incentivize dedicated members to vote on key issues and propose new proposals that help solve the problem.

One of the main problems with the resolution of the agreement comes from the poor implementation of large-scale proposals. Anyone involved in governance has certain powers to propose changes to the functions of the core protocol. The resulting problem is that meaningless and meaningful proposals are mixed in endless governance proposals. In the end, there were too many proposals overwhelming most people. Instead, it may be beneficial to have motivated members participate, reach a quorum for new proposals, and filter the list of resolutions.

Finally, the gas cost and the issue of small-scale position users. Generally speaking, token founders and DAOs should try to minimize the barriers to participation of small-scale position users, which of course includes gas transaction costs. At the basic system level, founders can use part of the token funds to incentivize better governance and subsidize gas fees for principals below a certain threshold.

Oligarchy

Autonomy of DeFi: How to believe that the process is democratic?

The governance of oligarchs and nobles seems to be one of the most common natural forms of primitive government. The common people should pass their voice to the elite. This idea is an attractive idea in any society (for the rich), but few people will bring better results for most people. DeFi is no exception, Ric Burton also mentioned this issue.

Like any new field, most of the early DeFi was initiated by venture capitalists who wanted to support new forms of financial technology. But with the growth and development of DeFi, there have been some structural problems about the true decentralization of protocols, mainly because they cannot conduct coherent governance and may eventually operate like a cartel.

In DeFi, governance is usually conducted by voting, and a proposal must reach a certain voting threshold before it can be passed. These voting rights are usually distributed according to token ownership. The more tokens an entity holds, the more votes it has, and thus the stronger its influence. On paper, this seems to be standard democracy. But this simple mechanism contains the seeds of the sluggish DeFi governance.

The token and development process are as follows:

Autonomy of DeFi: How to believe that the process is democratic?

Now this does not apply to all tokens (airdrops and other forms will be different), but usually tokens will be transferred to the big players with the most resources. The problem is that this process usually kills users with smaller positions, even if they are equally important to the project.

A simple solution to this problem is Compound, whose votes are delegated to the governance committee. The idea here is that the community can delegate their votes to certain representatives who speak for them, and smaller users can centralize their votes for governance.

The problem is that under current circumstances, Compound’s governance still largely reflects a very heavy caste of voters, of which 4 of the 5 largest holders are venture investors.

Autonomy of DeFi: How to believe that the process is democratic?

The problem is that the measure still does not actively allow small-scale position users to unite easily, and will still result in a small number of users with a large number of voting rights. Interestingly, in some governance structures, large token holders do not participate in governance, which makes a large number of votes useless or easy to be used by other users in controversial proposals. In general, this process alienated most users and sacrificed the enthusiasm of many users.

Prove

The agreement should not only focus on larger token holders, but should seek so-called proof of contribution. But the term should not only be used as a consensus mechanism, but should be applied to governance weights.

In theory, the governance structure should focus on both the main users with the highest community participation and the largest token holders. A simple mechanism may be that governance can be achieved through differentiated token distribution, which is issued like multiple types of stocks, where ownership and voting rights are not evenly distributed.

This governance process can be accomplished through the same vote with different rights, that is, restricting voting rights to dilute large inactive participants, and giving priority to more active participants for new proposals. In addition, the agreement can use its long-term holders/stakeholders to obtain a certain percentage of voting tokens to incentivize long-term participants to take governance issues more seriously.

in conclusion

DeFi is still in its infancy, and it is a part of the encryption ecosystem that has just begun, and it has gradually expanded the use of encryption technology. In this process, challenges such as governance dilemmas and public participation are predictable, and are also a sign of the significant growth in the application of this technology.

If the crypto industry can take sufficient steps to create a simplified proposal and change process, lower the barriers to entry for small participants, and incentivize the wider ecosystem to participate in the governance of its protocols, then we are likely to see a completely transformative System decentralization and autonomous decision-making.

 

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/autonomy-of-defi-how-to-believe-that-the-process-is-democratic/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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