DeFi’s student government problem

Decentralized governance is at the heart of the ideological foundation of crypto: equal participation for all actors. The playbook of progressive decentralization is being followed by more decentralized finance (DeFi) projects. Users and tokenholders can now have more control over protocol parameters, treasury spending, and, in general, the industr... See more

---------SIGNAL VS NOISE Social governance in DeFi applications is usually coordinated through online forums and Discord channels. Snapshot applications conduct "off-chain" voting before protocol changes are encoded on the blockchain. DeFi governance evolved organically but created a lot of noise because proposals, discussions, and votes spread acr... See more

---------PROTOCOL LEADERSHIP Kain Warwick, Synthetix's former "benevolent dictator," recently explained a problem arising from the decentralized governance of Synthetix. Warwick recalls stepping away from his de facto leadership position and leaving the Spartan Council, a democratically elected body that approved Synthetix protocol changes and was ... See more

Despite growing acknowledgement that simple token-based governance models have (arguably) critical flaws, the amount of experimentation in the governance realm is low. The key observation is that more experimentation is needed if decentralized governance is going to be sustainable.

Decentralized governance implemented through DAOs encourages open participation in the development of the DeFi industry. By either purchasing or earning governance tokens, actors not only have the opportunity to share in the risk and reward associated with the monetization of a new financial system, but also the incentive to define the economic and... See more

To address DeFi protocol governance, projects such as Compound pioneered the governance token model. Governance tokens provide voting power, allowing token holders to vote on protocol proposals that any community member can submit. Admittedly, this system is not perfect. There are all kinds of problems such as voter apathy, high participation cost

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Token Governance is onerous. It often is subject to voter apathy as underinformed token holders are encouraged to participate in frequent, complex proposals.

---------CONCLUSION DeFi's decentralized governance allows stakeholders to influence protocol development. Decentralized governance with DAOs can replace traditional firms' transaction costs, allowing crypto projects to welcome more diverse ideas and beliefs. To achieve these benefits, operational efficiency does not have to be sacrificed. Incorpor... See more