The role of governance in the burgeoning decentralized financial sector is emerging, and There is ongoing discussion of industry metrics about their purpose and what governance might look like in the future.
Sam Bankman-Fried from FTX, recently shared that Your company’s participation in DeFi will “be motivated by short-term benefits and not intended to have long-term impact on protocols through governanceHe simply argued that They are using DeFi protocols for their intended purposes.
This is not necessarily the case. Some mining programs are designed that way, and Bankman-Fried sticks to the rules. If the project does not want this type of participation, it must design its program accordingly.
Decentralized governance is one of the main tasks of DeFi
DeFi hopes to create an open financial system that anyone in the world can access. Government tokens usually serve two purposes. First, projects use them to decentralize decision-making. Unsurprisingly, the more people involved, the less likely it is that a single person will attack or abuse.
In order to achieve the first goal, tokens should also generally serve to encourage holders to participate and to make decisions that are advantageous for the DeFi protocol.. In this way, governance tokens can also be compared to the traditional system of corporate ownership, which is essential to the success of capitalism by creating incentives for shareholders to lend capital and to run a company out of sheer self-interest.
Since one of the goals is to decentralize the token holders, The concentration of governance tokens in the hands of a few holders is said to be an issue. However, this can be essential in the early stages of a project.
Centralized decision-making enables projects to be carried out faster and more efficiently. In the case of MakerDAO, for example, it was easier to vote on the introduction of new collateral when the Dai stablecoin was too far from its binding.
But in the long run When there is broad community participation in the progress of a project, a decentralized distribution of tokens is better, as whales can use governance in ways that benefit themselves and not everyone involved. In the extreme, we would call it an attack, but even in MakerDAO’s governance, we can see the big MKR owners voting against other interest groups. In addition, non-governance tokens also benefit from more holders, as they are given an incentive to work for the good of the project, only so that the price of the token increases in return. In the case of governance tokens, this mechanism works even more, as token holders can directly influence important product decisions, in addition to writing blog posts and promoting Altcoins (shillings) on Twitter.
Many projects are aware of this and take a progressive decentralization approach. Having a limited supply of governance tokens is good as it is more predictable that holders will have an idea of their eligibility to vote over time, and makes it harder for them to be exploited by potentially bad actors.
Putting yield into profitable agriculture
High-yield farming or liquidity depletion, It is a new way to get rewards with cryptocurrency holdings using the concept of permissionless liquidity protocolsand has multiplied in 2020 amid the DeFi boom.
Connected: Yield farming is a fad, but DeFi promises to change the way we handle money
Many government tokens are issued as income in these income plans. Decentralized exchanges benefit from income farming by capturing liquidity and even increasing project funds to use on a growth strategy. The user, on the other hand, Get performance in the form of the Governance Token.
The question is: How can that be sustainable? When users sell governance tokens, so do theyHow projects can maintain liquidity and create a broad base of governance token holders?
If we look at Uniswap, we notice that by the end of the government token issuance, liquidity was depleted to some extent. However, it was less than expected and is far from potentially harmful. One example is Uniswap’s distribution of UNI governance tokens to holders, which appears decentralized enough to be ready for long term governance..
Uniswap had no authority to govern before launching its UNI token a few months ago. At this point the protocol changes were only decided by the Uniswap team.
Governance can mean more autonomy, but is that the best option?
With so many examples of founders selling their governance tokens and abandoning projects, there is growing concern that governance tokens are another investment stream leaving project creators wealthy and users with empty pockets. As always, there are exceptions. After a long summer for DeFi We have seen decent projects and designs that show how decentralized governance can be successfully implemented. Uniswap is one example, but even its delicious antagonist SushiSwap seems to have found its niche.
Hence, as with most things, Doing your research before participating, understanding risk, and considering it when calculating investments is a good place to start.. It is similar to the reasons some institutions understand that there is a high risk of being hacked and therefore use risk-adjusted returns for their investment decisions.
Ultimately, decentralized governance works because we’ve seen a lot of open source software that succeeded, and We believe that a project can be successful if it involves collective wisdom.
In the case of DeFi, governance tokens can be the best way to harness collective wisdom and achieve decentralized governance. There is still a lot of research to be done and there are projects where governance is actually reputation based, which is also a promising approach.
The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Lucas Huang He is currently TokenLon’s growth leader. Before joining TokenLon, he worked for years at Kyber Network and Deloitte Consulting. He studied computer science at the University of Chicago and accounting information systems at Michigan State University.
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