Crypto Pragmatist founder: Crypto governance has failed

In the early days of this bear market, I spoke to a crypto protocol expert who became a good friend of mine. At the time he looked tired and pessimistic, eager to vent his concerns about the state of the industry.

In addition to predicting Luna’s debacle months in advance, he had some ideas I hadn’t really thought about before; most of them had to do with cryptocurrency governance.

The concept he came up with was that we treat a cryptographic structure as a behemoth that is actually only as strong as we give it governance value; only if it can withstand the whims of short-term stakeholders. It is powerful. A large number of cryptocurrencies are controlled by on-chain governance, and members can vote on decisions. Sometimes it’s a good thing that we can use governance to create productive assets for token holders – like Redacted Cartel’s BTRFLY token.

But the process is fundamentally flawed.

governance issues

The fact that it is immutable is a key feature when we propose the idea of ​​decentralized finance on a public immutable ledger like Ethereum. For a platform like Ethereum to have any legitimacy, it has to be permanent. If my ETH coins disappear because of an on-chain outage, attack, or governance vote, I won’t put those funds there anymore; it not only undermines the legitimacy of the protocol, but the fundamentals of the cryptocurrency itself value proposition.

Let’s talk about a few cases where governance went wrong and see what happened and what the impact was. Since the greedy crypto crowd has a tendency to panic and default to mob rule, we should also keep the following points in mind.

1.  Juno whale

I think the first governance proposal that was truly disruptive to the idea of ​​cryptography as we know it happened on the Juno blockchain. As a Cosmos parachain, Juno decides to allocate ATOM to stakers based on how much each wallet stakes, with a hard cap of 50,000 tokens.

After distribution, one person/entity is found to be staking in multiple wallets, and then the tokens held are merged into one wallet. This wallet owns about 10% of the tokens of the entire network, and then someone proposes to confiscate and redistribute the tokens.

The proposal went through and the tokens were confiscated – while some say it’s fine, projects like this are good for retail investors, but if one day whales join forces against retail investors, I wonder what will happen: confiscation is confiscation, and stealing is theft.


2. Hacking of Rari Fuse

Rari, a protocol designed for a decentralized lending marketplace, took a dramatic turn when the project was hacked in late April. The agreement owed $80 million in bad debt. Immediately after the hack, a vote was taken to repay lenders/capital providers. Although the vote was passed at the time, the team made a 180-degree turn, and now they have changed their decision and will not repay the bad debt to the lender.

If the crypto market fails to maintain our fundamental property rights under common law that have been established over the centuries (in which case shareholders should risk zeroing capital to protect lenders), then it will not be considered at all Legal and safe economy.

So, in addition to coming up with a 180-degree turn (effectively rendering the voting process useless), the protocol actually decided to try to minimize the impact on Rari shareholders, not the lenders that the protocol relies on. This is the equivalent of taking money from your savings account to the CEO to cover the loss after a bank robbery.

Unsurprisingly, the U.S. Securities and Exchange Commission (SEC) is investigating the matter, and the Rari team is said to have received a subpoena for records of account trading activity with related parties. We’ll see how this storm plays out, but ironically, dealing with this disaster is likely to have bad outcomes for both lenders and token holders; after all, the project is already extremely delegitimized.

3. Cancellation of the Yield Guild SAFT Agreement

Yield Guild is a gaming guild/investor in crypto games. The project invested in a Metaverse project – Merit Circle DAO. A few months later, a proposal appeared on the governance forums calling for “to cancel SAFT (Simple Agreement for Future Tokens), refund their early investment, and remove their seed round tokens.”

In short, the group reneged on a legal commitment after implementing a governance vote, depriving their investors of the right to own tokens in the project. Not only does this damage the organization’s image in the eyes of future investors, but it puts the entire industry in jeopardy: if DAOs can casually skip their investor obligations, no new venture capital firm will be willing to contribute to innovation in the space funds.

4. Take over Solend account

Finally, recently, we saw Solend, the Solana-based lending platform, propose a governance vote to proactively take over a whale’s account. This account borrowed $108 million in stablecoins with a $170 million Solana position. As the account’s collateral slowly flowed out, the team became increasingly panicked, as a forced sale of $170 million on-chain would cause a liquidation linkage, crash the price of Solana, and potentially bring down the chain.

So the protocol introduced a proposal to take over his account without the whale’s permission and try to de-risk it in hopes of keeping the account from liquidation, but at the expense of all the crypto ideas that brought us here and philosophical tendencies.

What is the place of democracy in cryptocurrency?

When people think of democracy, they think of:

l 1 person = 1 vote, or in cryptocurrency:

l 1 Token = 1 vote

Those votes can then be used to support any type of decision the mob takes. But most of the time, as the examples above show, the decision sets a dangerous precedent for breaking the fundamental idea of ​​breaking down the core concepts behind cryptocurrencies themselves.

Governance that can void previous commitments by a simple vote is almost equivalent to no governance. Not really; democracy is not a structure for changing the rules, but a structure for maintaining the rules.

A reasonable conclusion from this is that we are in a very tough situation where those interested in the short-term gains of their tokens have fallen so hard that they are willing to sacrifice the general ethos of the entire crypto market. I think the deepest concern is that the systems we are creating are simply operating under a resilience scam while being as subject to human flaws as ever.

Over the past few months, the crypto industry collectively breathed a sigh of relief as we saw the building blocks of DeFi collectively suffer Live the stress test.

But, again, it was the human element that failed us: governance voting focused on short-term play to save value, rather than long-term endgame.

So what does this leave us with ?

I think it is necessary to be optimistic about governance: maybe it has to get worse before it gets better; maybe the darkest hour is before dawn. I don’t know the solution, maybe before moving forward from a technological innovation perspective, we need to develop and regulate governance structures.

Some alternative governance structures are currently being proposed, with the new Ethereum L2 network Optimism creating a bicameral voting system that allows token holders and long-term consistent delegates to vote.

Innovations that minimize identity, credentials, and governance will also help. If nothing else, it will be interesting to see these new governance structures in action.

why you should pay attention

Some dangerous and important precedents are now being established, and you as an investor should take heed: look for projects that are ideologically aligned with the permissionless, peer-to-peer, governance-minimized protocols that represent the backbone of the industry.

Look for founders who want to do good for the community first and token valuation second. Doing the right thing in crypto is our only chance – without it, the industry will end up in the rubble of history.

Posted by:CoinYuppie,Reprinted with attribution to:
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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