The Pain of DeFi Governance: How to avoid being trapped by oligarchy?

DeFi governance is one of the hottest topics discussed in the DeFi industry recently. From Uniswap’s proposal to fund 1 million UNI for the DeFi Education Fund, to Sushiswap’s proposal to sell tokens to some investment institutions at discounted prices, and to the listing of BOND on Aave a few days ago. The coin proposal was rejected by a handful of giant whale addresses with a 99% opposition rate, arousing public concern about the abuse of governance power by some DeFi oligarchs.

Immutable Capital partner Zaheer Ebtikar recently analyzed the problems exposed in the DeFi governance process on the Deribit blog. He believes that the governance participation of most DeFi protocols is generally too low. The reasons include high participation costs, too many proposals, and governance Excessive power is tilted towards token holders rather than the main contributor to the community, and corresponding solutions have also been proposed.

At that time of the year again, that annoying kid on campus brushed his face all over the campus and asked you to vote. You read the list of commitments on the campaign flyer and want to know why anyone is upset about these student union positions (I know, because I used to be the kid on campus).

The game opposes any form of governance: no one really cares about the decisions made, except for a few people; the real power is in the hands of a few people-teachers and administrators.

Just like school government, DeFi governance is largely seen as a trick to convince participants that the process is democratic. In fact, many decisions are usually made by senior management, and at the expense of end users. A system that forces aristocrats to become “angels” usually does not have the feasibility of long-term decentralized governance.

Why most users did not participate

Staring at the campaign speeches outside, you realize that most people really won’t be bothered by what’s happening around campus. Too many city halls are because you don’t really care or don’t have enough bandwidth to attend. In its simplest form, cryptocurrencies face the same problems as the rest of the world, and they mainly come from small governments. The vast majority of people will not participate at all. The following data can confirm:

The Pain of DeFi Governance: How to avoid being trapped by oligarchy?

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 begin to consider positive methods to incentivize good governance. Simple solutions include using a small amount of token vaults to incentivize dedicated members of the agreement to vote on key issues and help find meaningful ways to understand new proposals.

One of the main problems with the resolution of the agreement comes from the poor implementation of a large number of proposals. The benefit of anyone involved in governance is that they can propose changes to the functionality of the core protocol. The resulting problem is that meaningless and interesting proposals are mixed in endless governance proposals, and in the end there are too many proposals for most people to care about them. Conversely, it may be beneficial to have motivated members reach a quorum for new proposals and filter the list of resolutions.

Finally, the gas cost and the issue of smaller users. In general, token founders and DAOs should try to minimize the barriers to entry for the smallest participants, including gas transaction costs. At the basic level, founders can use part of the token funds to incentivize good governance and subsidize Gas fees for principals below a certain threshold.

Oligarchy

The governance of oligarchs and nobles seems to be one of the most common natural forms of primitive government. The idea that civilians should transfer their voices to elites and knowledgeable people is an attractive idea in any society (for the rich), but it rarely leads to better results for most people. DeFi is no exception.

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 carry out coherent governance and ultimately will not 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 votes are usually distributed by 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:

The Pain of DeFi Governance: How to avoid being trapped by oligarchy?

Now this does not apply to all tokens (fair distribution, airdrops, etc.), but usually tokens will be transferred to the entity with the most resources. The problem is that this process usually kills the smallest users, even though they may find the agreement or project the most useful.

A simple solution to this problem is that Compound uses their votes to delegate products created by governing politicians. The idea here is that the community can delegate their votes to certain politicians who act on their behalf for governance, and smaller users can pool their votes. The problem is that in today’s world, Compound’s governance still largely reflects a very heavy caste of voters, of which 4 of the 5 largest holders are venture capitalists.

The Pain of DeFi Governance: How to avoid being trapped by oligarchy?

The problem is that this measure still does not actively allow small agreement users to easily unite behind a small number of users, and it still results in a small number of users with a large number of voting rights. Interestingly, in some governance structures, large token holders still do not participate in governance forums, which makes a large number of votes useless or easy to be swayed by other users in controversial proposals. In general, this process alienated most users and sacrificed those “in” users.

Proof of contribution

The agreement should not focus on the largest token holders, but should seek so-called proof of dedication, but the term should not 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 split through the distribution of tokens, but is issued like multiple types of stocks, where ownership and voting rights are not evenly distributed.

This process can be accomplished in a way that restricts voting rights to dilute large inactive participants and prioritizes the minimum of smaller voting groups for new proposals. In addition, the agreement can use its longest holder/stakeholder to obtain more or less voting tokens/credits to incentivize long-term participants to take governance issues more seriously.

in conclusion

DeFi is still in its infancy and is a part of our ecosystem that has just started, and it has gradually met most of its needs and uses. In this process, challenges such as governance and people’s participation are predictable and a sign of significant growth.

If the industry can take enough steps to create a streamlined proposal and change process, lower the barriers to entry for small participants, and incentivize the wider ecosystem to participate in the governance of its agreements, then we are likely to see a completely transformative The system realizes decentralized autonomous decision-making.

 

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/the-pain-of-defi-governance-how-to-avoid-being-trapped-by-oligarchy/
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