This week, the MakerDAO community completed a series of on-chain, token-weighted polls related to the assets which will be added to the forthcoming multi-collateral Dai upgrade. Each asset had a separate poll. Participants could signal support or disapproval. Ether itself was included and received unanimous support. Augur's REP token and Brave's BAT also received healthy support, though it's worth noting none of the polls had more than 4.5% of all Maker tokens participate. The polls were on-chain, but they're not binding in the smart contract system in any way. Instead, the Maker team, which chose the seven assets unilaterally, promised to prioritize their inclusion based on the results. Link.
While this particular set of polls wasn't binding, MakerDAO does frequently run so-called "executive" token-weighted votes, which directly impact parameters in the Maker system. Most importantly, the holders of the MKR token vote to adjust the stability fee, i.e. the interest charged on collateralized loans which generate new Dai. Just this week, a vote completed to keep the stability fee at 18.5%. While not often talked about, these stability fee votes might be the highest stakes example of a Decentralized Autonomous Organization in action we've seen to date. Link.
Maker is not the only DeFi project experimenting with decentralized governance. The team behind Compound, for example, announced earlier this month that they'll be holding an on-chain vote to select which assets will be added to the peer to peer lending protocol. Compound is the second largest DeFi project in terms of value held in smart contracts. As of this writing, over $100 Million are locked. This makes the upcoming vote, which is expected to take place around the end of the month, particularly high stakes as well. One interesting aspect of this vote is the way its weighted. Each participant's voting powered is based on their usage of the system, as measured by your interest earned and paid. In theory, this should make the vote more resistant to manipulation. Link.
There's no doubt decentralized finance has received a ton of attention as it's emerged over the last year or so. Most of the focus has been on the nature of the products offered and the assets held in smart contracts. With the value of those locked assets now hovering at around half a billion dollars, it's easy to understand why this has been the focus. But as I've hinted at already, I think the decentralized governance aspects of these projects has largely flown under the radar.
Maker is, as usual, the prime example. The Maker team made the risky decision of letting the community set the stability fee, rather than defining it themselves. Despite this, Dai held its peg through a 94% drawdown in the price of the underlying collateral (ETH). It then began to lose its peg as the price recovered, but the Maker community responded by sharply raising the stability fee. The peg is mostly holding, even as volatility in the price of Ether has increased, requiring many subsequent adjustments to the fee. This is quite the achievement for a fluid community of stakeholders dispersed across the world.
Of course, not everything we've seen is so encouraging. For example, even the most contentious of Maker votes have struggled to approach the double digit threshold for participation (in terms of MKR supply). Moreover, some votes have had only 40 or 50 unique addresses participate, despite that being an easy number to game. There are also lots of unanswered questions and risks, such as what happens if a centralized custodian chooses to vote using its users tokens, what could be done if a large supply of tokens was acquired in a hack, or what should be done if a nefarious actor buy up tokens in an attempt to sway votes in an intentionally malicious way.
While I'm not sure the current crop of solutions are sustainable, I'm glad projects are experimenting with decentralized governance in DeFi. There's clearly something to the idea of DAO's, but we need to work out the best practices. Ideas like Compound's "usage weighted" voting show there is plenty of room for innovation. As DeFi grows, much of the focus will be on the value locked. I'll be keeping my eye on the evolution of the governance aspects as well.
Build Blockchain Tech
Want Blockchain Without The Bull?
Go beyond the hype and separate the signal from the noise. Subscribe to receive a weekly dose of blockchain reality, with a heavy bias toward the technical.