Ethereum founder Vitalik Buterin is convinced that the main task of many blockchain projects in the next few years will be to switch from a central to an effective decentralized governance structure – how can that succeed?
On August 16, Vitalik Buterin published an article in which he dealt in detail with the governance of decentralized protocols. The Ethereum founder is of the opinion that the existing administrative mechanisms (governance) are flawed and, in particular, prevent protocols from Decentralized Finance (DeFi) from reaching their full potential.
Currently, the majority of DeFi projects manage their protocols with so-called governance tokens. For example, at Uniswap, the holders of UNI tokens can submit proposals for protocol changes and vote on which upgrades should be implemented and which should not. Other examples of DeFi projects where these governance mechanisms work similarly are Yearn Finance (YFI), Synthetix (SNX) and Compound (COMP). But there are also a multitude of decentralized protocols outside of the Ethereum ecosystem that have to make governance decisions. Regardless of whether it is a question of financing infrastructure, introducing an upgrade or other improvements; Governance in DeFi-Space is omnipresent and essential for the success of a project, says Vitalik Buterin.
Vitalik Buterin criticizes decentralized governance
DeFi projects have come under fire again and again because they allow large whales to determine what happens to a project on their own when it comes to governance votes. Many accuse them of having large amounts of governance tokens that they use to only make decisions that are in their own interest.
In addition, too high a token concentration can lead to projects falling victim to hostile takeovers. A recent example of such a case is Tron’s acquisition of Steem. Together with several crypto exchanges, Tron used a large number of STEEM tokens to specifically influence decisions within the decentralized platform. You can read here what exactly happened back then.
Vitalik Buterin is of the opinion that such attacks on decentralized applications are inevitable and will increase rather than decrease in the future. He therefore considers it important that decentralized governance must be further developed and go beyond the coordination processes currently based on governance tokens.
The most important thing that can be done today is to move away from the notion that governance token voting is the only legitimate form of decentralized management of protocols.
Otherwise, according to Vitalik Buterin, there are always malicious actors who manipulate the governance systems of decentralized protocols by “buying votes”. But what solutions does the Ethereum mastermind have for these complicated problems?
“Decentralized governance needs to be taken to the next level”
In his contribution, Buterin advocates research into three governance systems, the idea of which we want to take a closer look at below:
1. Limited governance
One way to solve the above problems would be to implement certain governance limitations set out in the code. This could, for example, stipulate that certain properties of a decentralized protocol, similar to those in a constitution, may not be changed. Uniswap is already doing this by only allowing governance to decide on the distribution of UNI tokens and the fee structure. Another would be to implement delays in introducing a new upgrade. A governance decision made at time T only takes effect after T + 90 days. This allows users and applications who find the decision to be unacceptable to switch to another application.
2. Governance without tokens
Another option proposed by Buterin is to forego governance tokens altogether. Instead, a governance system could be introduced in which only users or active members of a decentralized application are allowed to participate. In such a system, each user would have one vote, which enables “fairer” voting. In addition, the votes of extremely active users could be weighted more heavily than those of less active users. Vitalik Buterin named ProofOfHumanity and BrightID as examples of projects dealing with such governance systems.
3. Skin in the game governance
As a third approach, Vitalik Buterin suggests changing the rules of voting in order to change the fundamental problem of token-based governance systems.
Token-based governance decisions fail because voters are collectively responsible for their decisions, but not every voter is individually responsible for the consequences of their own decision.
Currently, all voters are collectively responsible for the outcome of a decision in governance votes. Therefore, should everyone make a damaging decision, the value of their tokens will fall. On the other hand, those who supported such a decision suffer no more than those who opposed it. By changing these dynamics and punishing individuals for bad decisions, one could fundamentally change the dynamics of governance decisions. In this way, voters would also be individually and not only collectively responsible for their decisions.
In conclusion, Vitalik Buterin pointed out that the governance of decentralized protocols was still in its infancy. For this reason, the community should currently focus on experimenting as much as possible with the different systems of governance.