The Role of Governance in Decentralized Finance

With the rise of DeFi, a new form of governance has emerged specifically designed for decentralized systems. Here, we will explore the role of governance in DeFi, leading protocols, and how it differs from traditional forms of governance.

Key Features of DeFi Governance

One of the key features of DeFi is its emphasis on community-driven governance. In traditional finance, governance is often centralized, with a small group of people or organizations making decisions that affect the entire system. This can lead to problems such as inequality, corruption, and lack of accountability. In contrast, DeFi governance is decentralized and participatory. Anyone who holds a certain amount of the underlying asset can participate in governance decisions, which are then made through a transparent and auditable process.

There are several key ways in which DeFi governance differs from traditional governance. Firstly, DeFi governance is decentralized and open. Anyone can participate in governance decisions, regardless of their background or location. This means that DeFi governance is more inclusive and representative than traditional governance.

Secondly, DeFi governance is transparent and auditable. All governance decisions are recorded on the blockchain, which enables them to be transparent and immutable. This allows anyone to see how decisions were made while building trust and accountability in the system.

Lastly, because DeFi governance is built on smart contracts and is programmable, it is possible to automate the processes involved. This can make governance more efficient and less subject to human error or bias.

Having the right governance structure is vital to providing full decentralization and community engagement. There are many DeFi projects that have constructed successful governance models that allow token holders to participate with full transparency and acquire unique benefits.

Let’s compare some of the most successful DeFi DAOs and how they have been devised:

Leading DeFi DAOs | MakerDAO

At the heart of MakerDAO is its governance model, which is based on a decentralized community of MKR token holders. These holders have the power to vote on the platform’s key decisions, such as the collateralization ratio, debt ceiling, and stability fees. They also have the ability to propose and vote on system upgrades and changes.

MakerDAO operates through a series of smart contracts that enforce the rules and regulations set by the community. These smart contracts are transparent and publicly auditable, ensuring that the platform’s operations are secure and transparent. MakerDAO also includes a risk management system, known as the “emergency shutdown” mechanism. This system allows the community to vote on whether to shut down the platform in the event of a significant market disruption or other risk events. The power to initiate an Emergency Shutdown resides with MKR token holders, who can initiate the process by depositing MKR into the Emergency Shutdown Module.

Within the MakerDAO ecosystem are its Core Units, a decentralized workforce that is fully ran by the DAO. The Core Units are its groups that carry out the necessary tasks and functions to achieve MakerDAO’s goals. These Core Units are each responsible for a specific area of functionality. The units are managed by one or more Facilitators who coordinate and provide payment to the contributors working towards the unit’s long-term goal. The Facilitators of a Core Unit are responsible for defining the unit’s long-term work areas and ensuring the protocol’s security and success. Their focus and responsibilities cover a wide range of areas. Proposals for new Core Units are made by community members within the MIP framework and are voted on by MKR holders, the same as any other decision that could potentially impact the Maker protocol. The MIP framework is also used to propose budgets for each Core Unit. The Facilitator must provide a detailed explanation of the unit’s strategy, future plans, and next steps to justify the amount of DAI requested as a budget. To onboard a new Core Unit, three MIPs must be created: the Core Unit MIP, the Budget MIP, and the Facilitator MIP. The Facilitator MIP proposes the individual or individuals who will manage the unit. All of these MIPs and proposals must go through the MakerDAO Governance process. Anyone can propose the need for a new Core Unit, and anyone with MKR can vote or delegate their vote on Core Unit proposals. It’s an elegant yet complex process but the end result is how the next generation of decentralized workforces will potentially operate.

MakerDAO’s voting mechanism is unique in the fact it offers multiple variations for the community to participate in. First off is their off-chain solution which enables anyone to weigh in on various topics through their forums. On-chain voting allows MKR holders to evaluate proposals and incorporate them into the protocol when necessary. These can either be done through a signal request or Maker Improvement Proposals (MIPs) on the MakerDAO website.

Leading DeFi DAOs | Synthetix

The Synthetix DAO structure is designed similarly to MakerDAO’s in the sense that it is based on a community of SNX token holders who hold the power to vote on the platform’s crucial decisions, such as the creation of new synthetic assets, the issuance of new SNX tokens, and the setting of fees. They also have the ability to shape the future of the protocol through votes and proposals.

The Synthetix Protocol is governed by several key bodies and artifacts. These include the Spartan Council, Protocol DAO, Synthetix DAO, Ambassadors DAO, and Grants DAO. The Synthetix governance process uses Synthetix Improvement Proposals (SIPs) and Synthetix Configuration Change Proposals (SCCPs) to outline proposed changes to the Protocol. These proposals can be submitted by anyone and are voted on by SNX token holders.

In addition to its governance model, the Synthetix DAO also includes a risk management system known as the “debt ceiling”. This system sets a limit on the total amount of Synths that can be generated, ensuring that the platform remains stable and solvent. This allows users to confidently trade and access synthetic assets without the fear of over-collateralization or other risks.

Leading DeFi DAOs | Metronome

With the launch of Metronome 2.0 came the Metronome DAO, which provided a new structure for the Metronome community to participate in the development and expansion of the ecosystem. The goal of the MET DAO is to empower the community to help shape the future of Metronome and contribute to its growth. This new governance model allows for greater participation, transparency, and accountability in the decision-making process.

The Metronome DAO follows a roadmap toward complete decentralization and community-led governance. Currently, community members can create proposals and participate in sentiment votes, and the multisig will act on the outcome of these votes. In the future, Metronome will transition to a system where community members can create binding proposals and votes that directly determine the development of products and decisions. This form of progressive decentralization will enable the Metronome community to play a more active and influential role in the governance of the ecosystem.

Much like MakerDAO, Metronome uses an antifragile framework comprised of autonomous workstreams. Currently there are three workstreams: Engineering, Growth, and Operations. The engineering workstream is responsible for maintaining the Metronome smart contract structure and conducting further development on the framework. They also ensure platform security by monitoring for risks and working with auditing firms to maintain high code standards. The growth workstream focuses on building the Metronome DAO community and establishing the product-market fit. Through marketing efforts, partnerships, and collaborations with other protocols, the aim is to build a user base for the Metronome DAO. The operations workstream coordinates between the other workstreams and the Metronome DAO. It handles administrative tasks such as treasury management, operations, and legal. If more workstreams are needed, the community can propose and vote on this through the Metronome DAO.

This is all made possible through Snapshot which allows Metronome to vet, propose, and vote on governance proposals, known as Metronome Improvement Proposals (MIPs). Users can vote on proposals using their MET holdings, with their voting weight determined by the amount of MET they hold. This allows for a decentralized and participatory governance process that is transparent and accountable.

The Metronome DAO currently hosts its community on Discord, where individuals can communicate with other token holders and team members to learn about the protocol. The Discord community includes support, FAQs, governance forums, general chat, and a Town Hall for coordination between the team and participants.

Summary

Overall, the role of governance in DeFi is to ensure the integrity and stability of the decentralized financial system. By being decentralized, open, transparent, and programmable, DeFi governance allows for greater participation, accountability, and efficiency. As the DeFi movement continues to grow and evolve, we can expect to see more innovative and effective forms of governance emerge.