With various DeFi protocols collapsing, yields lower and token prices falling, many DeFi commentators have begun to wonder if we have an open, permissionless, composable, blockchain-based financial potential of the system.
But in some areas, DeFi’s value proposition continues to shine. These flashpoints will also continue to prove that DeFi can achieve things that traditional financial systems cannot.
One of the flash points is meta-governance, which refers to the act of one DAO participating in the governance process of another DAO by using tokens. Meta-governance is an emerging strategic lever for digital organizations to pursue specific goals.
Meta-governance has similarities to investment management in traditional finance, in that asset managers can vote on stakeholder proposals for their asset products. However, meta-governance in DeFi is more transparent and open. This tool is available to holders of any meta governance token. Unlike in TradFi (traditional trading finance) where decisions are made in secrecy, individual investors may also find alpha from this trend.
DAOs are the smart money of DeFi. They are a group of investors with their own unique investment criteria who understand the inner workings of the industry better than retail and institutional investors. Alpha can be found if one can predict or buy ahead of time the tokens of interest to the DAO.
Do meta governance tokens fall into this category of assets? What is the value proposition of meta-governance? Therefore, the DAOrayaki community has put together this “Ultimate Guide to Meta-Governance” and evaluates the utility of meta-governance tokens from first principles.
What is meta governance?
As we defined above, meta-governance is the act of one DAO participating in the governance process of another DAO through utility tokens.
A simple example will help us understand this definition better.
First, let’s assume there are two media DAOs named after the co-founders of anonymous companies: RyanDAO and DavidDAO.
Two DAOs each run a top-notch podcast, hosted by their founders, and issue their own native tokens: $RYAN and $DAVID. Token holders enjoy the governance rights of RyanDAO and DavidDAO respectively. Among other things, $RYAN and $DAVID holders will be able to vote on which guests can join their DAO’s podcast.
In the heat of the war for views, members of RyanDAO voted through Snapshots to make it clear that they want Ryan to be featured on DavidDAO’s podcast. To achieve this, $RYAN holders approve OTC purchases of 100 $DAVID, the minimum amount of tokens required to reach a quorum in (DAVID DAO) weekly voting by which DavidDAO can choose the next a guest on their podcast.
With this transaction, RYAN holders can now vote on DavidDAO’s governance proposals.
When the next guest vote is made, RyanDAO can use its $DAVID holdings to vote for Ryan to appear on DavidDAO’s podcast.
While the competition is fierce, RyanDAO holds enough tokens to help them win votes, and their founders will be featured on DavidDAO’s podcast.
With this simple example, we can see how meta governance works:
One DAO (RyanDAO) participates in the governance process of another (DavidDAO) by using tokens (DAVID).
We can also see that meta-governance is a value tool that helps DAOs pursue their strategic goals.
Meta-governance as a strategic tool
Now that we have some idea of how meta-governance works, let’s dive into some more complex examples. This allows us to better understand how DAOs use meta-governance to advance their strategic interests, and what role meta-governance tokens play in this process.
Well-known examples of using meta-governance to achieve strategic goals to date include: Fei Protocol, Aave, and Index Cooperative. Among them, stablecoin issuer FEI Protocol holds INDEX tokens through DPI and has meta-governance rights, and successfully listed its token FEI on the Aave currency market.
Let’s analyze in detail how this is done.
Fei Protocol is the issuer of FEI, a fully reserved, dollar-pegged stablecoin. In June 2021, the DAO proposed to list FEI on Aave, the largest currency market in TVL on the chain. Fei Protocol attaches great importance to this launch market, because if it can integrate with popular applications like Aave, it can increase the utility of FEI and thus increase the demand for FEI.
However, in order for FEI to go live on Aave, it must comply with the decentralized governance procedures of the money market. Uncertain about how AAVE holders would vote and that a minimum of 80,000 AAVEs (worth around $20 million at the time) would be required to make a governance proposal, Fei decided to purchase 100,000 INDEX tokens (worth around $2.5 million at the time) to complete the project. an integration. INDEX is the governance token of Index Cooperative, an asset management DAO that has created multiple thematic indices and structured products such as DPI (DeFi Pulse Index) and GMI (Bankless DeFi Innovation Index).
While it must be enabled for a single asset, INDEX holders are entitled to governance of the constituent tokens included in the DAO product. So INDEX is a meta-governance token and an asset whose purpose is to transmit meta-governance rights to its holders.
INDEX meta governance is currently available on the five assets included in DPI: UNI, COMP, YFI, BADGER and AAVE. This means that the DAO does not need to purchase each token individually, but can obtain the governance rights of these constituent assets by purchasing INDEX.
After close cooperation with the two communities, in September 2021, Fei Protocol participated in the formal voting of FEI’s listing on AAVE by holding 100,000 INDEX meta-governance rights, and successfully completed the integration.
In this example, Fei completes “leveraged meta-governance”. The term was coined because DAOs were able to “leverage” or expand their governance capabilities. At the time, about $4 million worth of INDEX was able to influence the voting rights of about $36 million in AAVE held within the DPI.
In short, Fei can control $9 worth of AAVE with only $1 of INDEX.
This vote shows the amazing power and cost-effectiveness of DAOs leveraging meta-governance to pursue strategic goals. Through the INDEX token, Fei was able to buy the required governance rights 9 times cheaper than buying the same amount of AAVE outright.
Not only is this event the first significant instance of meta-governance within DeFi, it also marks the birth of meta-governance tokens as a sub-asset class.
For the intricacies of Fei-Aave-Index meta governance, check out this article by 0xKydo and Shawn Grub.
Practical Cases of Meta-Governance
There are also many well-known examples of meta-governance in the DeFi space.
For example, “Curve War” is a prime example of meta-governance action. Holders of Convex Finance’s native tokens, through meta-governance, can vote on the CRV release and distribution of Curve Finance, the decentralized exchange with the highest TVL.
More than 20 DAOs currently buy CVX outright, or bribe CVX holders every two weeks for some purposes. For example, some stablecoin issuers pay bribes to guide liquidity in order to strengthen the pegging power of their issued currency and the confidence of users.
In addition to use in protocols, we also examine the development of tokens specifically designed to maximize the ability to leverage meta-governance.
An asset currently under development that meets this requirement is REDACTED Cartel’s glBTRFLY.
[Redacted] is a meta-governance DAO designed to create and extract value through DeFI’s governance incentives. [Redacted] is the company behind the creation of the Hidden Hand bribe market, governed by BTRFLY tokens. In the Redacted V2 upgrade, the DAO will adopt a dual-token model, where BTRFLY holders can lock their tokens and get either rlBTRFLY or glBTRFLY.
rlBTRFLY holders are entitled to a share of the revenue generated by the DAO and is scheduled to launch in the coming weeks, while glBTRFLY will entitle holders to meta-governance rights to the [Redacted] Treasury’s underlying assets (worth approx. $47.87 million). However, there is no specific timetable for the release of glBTRFLY.
A Framework for Evaluating Meta-Governance Tokens
Now that we understand what meta-governance is and how it is used across the DeFi space, we can now build a framework for evaluating meta-governance tokens.
Whether it’s a DAO looking to add meta-governance tokens to their balance sheets, or retail investors looking to predict and advance future benefits from these entities, when exploring and determining the efficacy of meta-governance tokens, there are three main Standards to keep in mind:
Standard 1: What are the basic governance tokens?
The first thing to note is the underlying set of tokens that meta-governance controls, and here’s an important point: not all governance rights are equally important or valuable to a DAO. Recalling the above example, Fei just wants to use the AAVE governance rights of the INDEX token to ensure listing. Although the meta-governance token INDEX also controls other types of tokens such as “UNI”, Fei’s strategic goal is not to leverage UNI’s governance power.
Important reminder: Please think carefully about the utility conferred by the underlying governance rights of a meta-governance token, and what kind of DAOs this utility would be attractive to.
Criterion 2: What is the process of implementing meta-governance?
Another important criterion when evaluating meta-governance tokens is the process of implementing meta-governance. Like most on-chain governance systems, meta-governance voting typically requires a certain minimum voting participation threshold or quorum to activate the relevant rights.
While there are protocols that directly incentivize voting through economics (i.e. bribes), this minimum threshold can always be met. But those protocols that don’t have this mechanism, such as INDEX, have seen a tendency to fail to reach a quorum. Voter apathy leads to a waste of governance capacity. As I will mention below, voter participation is critical in determining the availability of meta-governance capital.
Additionally, investors must keep an eye out for voting options based on meta-governance power. For example, some options are “all-or-nothing”, which means that the entire base token can only be voted for one option; or governance rights are proportional among the different options based on the number of tokens voted for each option distribute?
Additionally, investors and DAOs should be aware of the requirements to participate in meta-governance. For example, in order to participate in Convex governance and future glBTRFLY meta governance, token holders must lock their tokens for a certain period of time, whereas INDEX meta governance does not require participants to take this liquidity risk.
Criterion 3: What is the potential leveraged governance capacity (LGP) of each token?
Last but not least, investors must assess whether they meet the criteria of a “good deal” when purchasing meta governance tokens. In essence, it is to determine whether the DAO can exert greater governance by purchasing a $1 meta-governance token than by purchasing a $1 base token alone.
Like Fei’s case, does a $1 meta governance token have more governance power than a $1 native token? And, based on voter participation and the value of the underlying assets held, to what extent can this leveraged governance power be exercised (LGP)?
Meta Governance Token Analysis: INDEX
Now that we have a framework for evaluating meta governance tokens, we can apply the framework to the evaluation of INDEX tokens. In this way, it helps everyone understand how to analyze meta-governance tokens in practice.
Basic governance rights
As mentioned above, INDEX holders enjoy governance rights over the five underlying assets of the DeFi Pulse index (UNI, COMP, YFI, BADGER and AAVE).
We can see that the total value of the underlying assets is currently $27.1 million. Of these assets, the most strategically valuable are probably AAVE and COMP, as they can be useful in securing listings in TVL’s two largest currency markets.
The process of implementing meta-governance
INDEX holders can vote on governance proposals for the above five assets through Snapshot. In order to reach a quorum, 5% of the INDEX liquidity must be voted. At current price and circulation, that’s roughly $1.2 million worth of voting rights. The INDEX meta-governance voting option is “all-or-nothing”, which means that all of the underlying assets will be used to support one of the voting options.
If the vote does not reach a quorum, a meta-governance committee of five Index community members will step in and vote. Any INDEX holder can participate in meta governance and does not need to lock tokens to vote.
Estimate the maximum leveraged governance capacity of each INDEX
Now, let’s calculate the potential maximum leverage governance capacity per $1 of INDEX in governance.
It is important to point out that these values are estimates. As mentioned earlier, in INDEX meta-governance voting, voter participation rates vary widely across proposals, with many minor proposals failing to reach a quorum. Therefore, using a single average participation rate for each meta-governance vote would not be valid data.
Because of this, we will use different ranges of voter participation rates to understand different LGP situations.
5% governance participation rate
To determine the lower bound of the LGP scope to enable INDEX meta governance voting, we will use a minimum 5% voter participation rate as the quorum.
As we can see, based on the current value of tokens that can participate in governance, the total amount of highest governance rights that can be affected by $1 INDEX reaches $21.98; including $7.4 AAVE and $2.46 COMP. It’s important to point out that if it’s an important or contested vote, the turnout won’t be so low.
25% governance participation rate
As shown in the table above, as the number of tokens in circulation participating in voting increases, the maximum governance capacity per $1 of INDEX decreases.
If the number of tokens in circulation participating in voting reaches 25%, the total governance power that can be affected by every $1 of INDEX will drop to $4.4. While this drop may seem exaggerated, a closer look reveals that in this case only Uniswap and Aave are cost-effective to use INDEX meta-governance, as only in these two projects a $1 meta-governance generation The influence of the coin exceeds that of the native token of $1.
Takeaway: We can find that with low voter participation, DAOs can greatly leverage meta governance tokens through INDEX. But this leveraged power is mainly concentrated in the two assets “UNI” and “AAVE”. For potential DAOs looking to successfully list on the currency market, this imbalance limits their interest in purchasing tokens.
Innovation is not dead in DeFi.
While TVL numbers may be stagnant, meta-governance represents a new and exciting way in which DAOs can participate in DeFi governance. By leveraging its governance capabilities through meta governance tokens, DAOs can pursue strategic goals at a lower cost. Furthermore, we have scratched the surface in evaluating and analyzing meta-governance tokens as a DeFi sub-asset class.
However, with great power comes great responsibility. Since an entity can exert enormous influence by leveraging meta-governance, it is also reasonable to worry about whether the ecosystem will be subject to more governance attacks.
Stakes: The author holds the governance rights of CVX through GMI.
REDACTED Guide to Bribery: https://newsletter.banklesshq.com/p/how-to-earn-governance-bribes
Smart Money in DeFi: https://newsletter.banklesshq.com/p/what-smart-money-is-buying?s=w
“Leveraging Meta Governance”: https://twitter.com/sdalcega/status/1448723816826359840
“Curve War ：https://newsletter.banklesshq.com/p/wtf-are-vetokens?s=w
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/the-ultimate-guide-and-analytical-framework-for-meta-governance/
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